SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to
Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the
Commission Only
(as permitted by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
HI-SHEAR INDUSTRIES INC.
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / 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:
N/A
2) Aggregate number of securities to which transaction applies:
N/A
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):
Cash purchase price of $46 million
4) Proposed maximum aggregate value of transaction:
$46 million
5) Total Fee paid:
$9,200
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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[HI-SHEAR INDUSTRIES INC. COMPANY LOGO]
3333 NEW HYDE PARK ROAD
NORTH HILLS, N.Y. 11042
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JANUARY 30, 1996
To the Stockholders of
HI-SHEAR INDUSTRIES INC.
The Annual Meeting of Stockholders of Hi-Shear Industries Inc. (the
"Company") will be held at the Garden City Hotel, Garden City, New York, on
Tuesday, January 30, 1996 at 11:00 a.m., Eastern Standard Time, to consider and
act upon the following matters:
(1) The approval of the sale of all of the outstanding capital stock of
the Company's wholly-owned subsidiary, Hi-Shear Corporation, to GFI
Industries S.A. of Belfort Cedex, France for $46 million in cash, subject to
adjustment.
(2) The approval of amendments to the Certificate of Incorporation and
By-Laws of the Company to eliminate the classified board of directors and to
provide that all of the Company's directors will be elected annually upon
the expiration of their current terms.
(3) The election of two directors.
(4) The ratification of the appointment of Coopers & Lybrand L.L.P. as
auditors for the 1996 fiscal year.
(5) Such other business as may properly come before the meeting or any
adjournment thereof.
December 28, 1995 has been fixed as the record date for the determination of
stockholders entitled to vote at the meeting, and only stockholders of record at
the close of business on that day will be entitled to vote. A complete list of
stockholders entitled to vote may be inspected at the meeting, and for a period
of ten days prior to the meeting will be open to examination at the Company's
office shown above.
By Order of the Board of Directors,
Harold L. Bernstein
Secretary
North Hills, New York
January 8, 1996
You are urged to sign, fill in, and return the enclosed proxy, which is
solicited by the Board of Directors. The proxy is revocable and will not affect
your right to vote in person in the event you attend the meeting.
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[HI-SHEAR INDUSTRIES INC. Company Logo]
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON TUESDAY, JANUARY 30, 1996
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Hi-Shear Industries Inc., a Delaware
corporation (the "Company" or "Industries") for use at the Company's Annual
Meeting of Stockholders to be held at the Garden City Hotel, Garden City, New
York, on Tuesday, January 30, 1996 at 11:00 a.m., Eastern Standard Time, and at
any adjournments thereof.
This Proxy Statement and the enclosed form of proxy are first being sent or
given to Stockholders of the Company on or about January 8, 1996.
PURPOSES OF MEETING
The purposes of the meeting are to consider and act upon the following
matters:
i. The approval of the sale (the "GFI Sale") of all of the outstanding
capital stock of the Company's wholly-owned subsidiary Hi-Shear Corporation
and its subsidiaries (collectively, "HSC") to GFI Industries S.A. of Belfort
Cedex, France ("GFI") for $46 million in cash, subject to adjustment.
ii. The approval of amendments to the Certificate of Incorporation and
By-Laws of the Company to eliminate the classified board of directors and to
provide that all of the Company's directors will be elected annually upon
the expiration of their current terms.
iii. The election of two directors.
iv. The ratification of the appointment of Coopers & Lybrand L.L.P. as
auditors for the 1996 fiscal year.
v. Such other business as may properly come before the meeting or any
adjournment thereof.
RECORD DATE; PROXY; VOTE REQUIRED; RECOMMENDATION; SOLICITATION
Only holders of record of the Company's common stock at the close of
business on December 28, 1995 are entitled to notice of, and to vote at, the
meeting or any adjournment thereof. The only outstanding class of the voting
security of the Company is the common stock, each share of which entitles the
holder thereof to one vote. As of December 28, 1995, there were 5,854,618 shares
of common stock outstanding. The presence at the meeting, in person or by proxy,
of the
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holders of the majority of the outstanding shares of the common stock entitled
to vote is necessary to constitute a quorum.
Proxies in the accompanying form are solicited on behalf and at the
direction of the Board of Directors. All shares of common stock represented by
properly executed proxies will be voted at the meeting in accordance with the
instructions made on the proxies, unless such proxies have previously been
revoked. If authority to vote a proxy has not been withheld and no instruction
is indicated, the shares will be voted FOR approval of the GFI Sale, FOR the
proposed amendments to the Company's Certificate of Incorporation and By-Laws,
FOR the election of the Board of Directors' nominees for directors and FOR
ratification of the appointment of Coopers & Lybrand L.L.P. as auditors for the
1996 fiscal year. If any other matters are properly presented at the meeting for
action, including a question of adjourning the meeting from time to time, the
persons named in the proxies and acting thereunder will have discretion to vote
on such matters in accordance with their best judgement.
A stockholder executing and returning a proxy has the power to revoke it
before it is exercised. A stockholder who wishes to revoke a proxy can do so by
delivering a subsequently signed and dated proxy or other written notice to the
Secretary of the Company at any time prior to the vote at the meeting or by
appearing at the meeting and voting in person the shares to which the proxy
relates. Any written notice revoking a proxy should be sent to the Company,
attention: Harold L. Bernstein, Secretary. The Company's executive offices are
located at 3333 New Hyde Park Road, North Hills, New York 11042.
Approval of the GFI Sale will require the affirmative vote of the holders of
a majority of the outstanding shares of common stock. Approval of the proposed
amendments to the Company's Certificate of Incorporation and By-Laws will
require the affirmative vote of the holders of 80% of the outstanding shares of
common stock. Directors will be elected by a plurality of the votes cast at the
meeting. Approval of any other matter will require the affirmative vote of the
holders of a majority of the shares of common stock present in person or
represented by proxy at the meeting. Any shares not voted (whether by
abstention, broker non-vote or otherwise) will have the effect of a negative
vote with respect to the approval of the GFI Sale and the proposed amendments to
the Company's Certificate of Incorporation and By-Laws, but will have no impact
on the vote for the election of directors. Abstentions, but not broker
non-votes, will have the effect of a negative vote with respect to any other
matter.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT ALL
STOCKHOLDERS VOTE FOR APPROVAL OF THE GFI SALE, FOR THE PROPOSED AMENDMENTS TO
THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS, FOR ELECTION OF THE
BOARD OF DIRECTORS' NOMINEES FOR DIRECTORS AND FOR RATIFICATION OF THE
APPOINTMENT OF COOPERS & LYBRAND L.L.P. AS AUDITORS FOR THE 1996 FISCAL YEAR.
David A. Wingate, the Chairman of the Board and Chief Executive Officer of
the Company, Philip M. Slonim, a director of the Company, and certain affiliated
stockholders have entered into a Stockholders Agreement with GFI pursuant to
which they have agreed to vote all shares of common stock of the Company which
they beneficially own (an aggregate of 1,777,561 shares, or 30.36% of the
outstanding shares of common stock of the Company) for the GFI Sale.
After the initial mailing of this Proxy Statement, proxies may be solicited
by telephone, telegram or personally by directors, officers and other employees
of the Company (who will not receive any additional compensation therefore). All
expenses with respect to this solicitation of proxies, including printing and
postage costs will be paid by the Company. Arrangements will be made with
brokers and other custodians, nominees and fiduciaries to send proxies and the
proxy
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material to their principals, and the Company will, upon request, reimburse them
for their reasonable expenses in doing so. The Company may engage an outside
proxy soliciting firm to assist in the solicitation of proxies. The Company will
pay reasonable fees and out-of-pocket costs and expenses if it elects to engage
such a firm.
PROPOSAL NO. 1:
APPROVAL OF GFI SALE
On October 9, 1995, the Company entered into a definitive stock purchase
agreement with GFI (the "Stock Purchase Agreement") pursuant to which the
Company agreed to sell the outstanding capital stock of HSC to GFI for $46
million in cash (subject to adjustment based on the closing date net worth of
HSC). The Company currently intends to distribute approximately one-half of the
net proceeds from the GFI Sale to stockholders. The GFI Sale constitutes the
sale of the Company's last remaining operating business. Following consummation
of the GFI Sale, the Company will continue to prosecute its claims against the
U.S. Navy. The Board of Directors of the Company currently anticipates that upon
final resolution of those claims, the Company would distribute its remaining
assets to its stockholders and seek stockholder approval to dissolve the
Company.
BACKGROUND OF THE GFI SALE
The Company is currently engaged in the manufacture and sale of high
technology aerospace fastening systems products through its wholly-owned
subsidiary HSC. The Company, through other subsidiaries, was also previously
engaged in designing, developing, assembling, testing and marketing electronic
and explosive devices and systems, pyrotechnics and propellants for military
applications and in commercial space programs. These other operations have been
terminated or divested with the termination of operations of the Company's
wholly-owned subsidiary Defense Systems Corporation ("Defense Systems") in March
1991 and the sale of another wholly-owned subsidiary, Hi-Shear Technology Corp.,
in June 1993.
Since 1992, HSC has experienced a decline in the level of commercial
aircraft order activity. The economic downturn has prompted the world's airlines
to curtail orders of commercial aircraft. The Company expects that the depressed
rate of new orders is likely to continue into the 1996 calendar year. The
Company's revenues from HSC's operations increased slightly to $58.6 million in
fiscal 1995 after having declined 21% to $56.5 million in fiscal 1994 and 19% to
$71.5 million in fiscal 1993. The increase in fiscal 1995 is due to a
stabilization in build rates experienced in the commercial airframe
manufacturing industry after several years of substantial reduction in both
order levels and build rates. Over the past several years, this reduced order
activity has led to excess capacity and severe pricing pressures within the
aircraft fastener market. The Company instituted a cost reduction program in
fiscal 1995 which resulted in cost savings of approximately $1.8 million, and it
expects that an intensive manufacturing reorganization effort that is currently
under way, together with additional cost savings, should stabilize operations
and lead to acceptable operating profit margins. Nonetheless, the Company
believes that many of its competitors with a greater share of the fastener
market than the Company and with broader bases of operations than those of the
Company are better able than the Company to withstand the current market and
competitive pressures and that financial and other resources considerably
greater than those the Company now possesses will be needed to successfully
compete in the aircraft fastener market in the coming years.
Discussions with Various Potential Purchasers. The Company has in the past
explored various possible business combinations with other parties as well as
sales of the Company to others. During the past three years, the Company has had
discussions with two different entities that had expressed interest in
purchasing the Company, although neither of such discussions progressed
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beyond the preliminary stages. During such time period, the Company also made an
unsuccessful attempt to acquire an aerospace nut manufacturer whose parent
corporation was then in bankruptcy.
In May 1994, GFI (which has a subsidiary that is a licensee under certain of
HSC's patents) and the Company commenced discussions concerning a possible joint
venture involving GFI and the Company's European operations, although after
several months of negotiations the parties did not reach agreement on such a
transaction. In July 1994, SPS Technologies, Inc. of Jenkintown, Pennsylvania
("SPS"), a competitor of the Company and also a licensee under certain of HSC's
patents, indicated interest in purchasing only HSC's U.K. subsidiary, which the
Company declined to sell. In early 1995, another competitor of the Company
contacted the Company to discuss a possible combination of its and the Company's
fastener businesses, although that entity has taken no further actions with
respect to its proposal.
In early 1995, the Company was approached by GFI, which expressed interest
in purchasing all of HSC's operations. The Company entered into a
confidentiality agreement with GFI dated March 6, 1995, following which the
Company provided GFI with access to information about HSC and its business.
The Company entered into confidentiality agreements in the Spring of 1995
with two other competitors and one other party. Each of such parties conducted
limited due diligence of HSC but none of them has made a proposal or expressed
any further interest in purchasing the Company or HSC.
In July 1995, SPS indicated its interest in purchasing HSC as an entirety.
The Company provided SPS with access to information about HSC and HSC's business
following the execution of confidentiality agreements between the Company and
SPS and between the Company and an affiliate of SPS in July 1995.
The Company retained Lazard Freres & Co. LLC ("Lazard") in August 1995 to
assist it in evaluating any potential transactions.
The GFI Offer. GFI conducted due diligence of HSC in May and June of 1995,
and in July 1995, it indicated to the Company that it would make a firm offer to
purchase HSC. On September 22, 1995, GFI offered to purchase the outstanding
capital stock of HSC for a price of $46 million in cash on a debt-free basis.
Currently, HSC has approximately $12.5 million outstanding under its credit
facilities (including $1.3 million outstanding under a facility maintained by
its UK subsidiary), all of which is secured by liens on the assets of HSC and
its UK subsidiary and guaranteed by the Company.
After further negotiations concerning the terms of GFI's offer and the terms
of the acquisition, the Company entered into the Stock Purchase Agreement with
GFI on October 9, 1995. See "--Description of Stock Purchase Agreement" below.
After payment of outstanding debt, transaction expenses, taxes and a purchase
price adjustment, the Company currently estimates that the net value of GFI's
$46 million purchase price will be approximately $5.20 per share of the
Company's common stock. See "--Proposed Disposition of Proceeds; Impact of the
GFI Sale on the Company" below.
The waiting period with respect to the GFI Sale under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), has expired, and
the Committee on Foreign Investment in the United States ("CFIUS") has
determined that no investigation of the GFI Sale under the Exon-Florio Amendment
is necessary. See "--Regulatory Approvals" below.
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The Initial SPS Offers. SPS conducted due diligence concerning HSC in August
1995. On August 31, 1995, representatives of SPS met with representatives of the
Company and Lazard and presented an oral proposal under which (i) SPS would
purchase all of the outstanding common stock of Industries in a tender offer or
a merger for a price approximating $8 per share and (ii) management of
Industries would form a new company which would conduct a rights offering to
Industries' existing stockholders and with the proceeds thereof would buy from
Industries for approximately $12 million the stock of Defense Systems, a
subsidiary of the Company whose business has been terminated and whose remaining
asset consists of claims against the U.S. Navy. This proposal presented a number
of issues, including the expense, delay and contingencies incident to conducting
an underwritten, registered rights offering, questions surrounding the
availability to Defense Systems of net operating losses for federal income tax
purposes and the Company's uncertainty as to whether and when SPS would be
willing to sign a firm purchase commitment. The Company viewed this proposal as
too complex, too contingent and potentially too costly. SPS subsequently made
other proposals pertaining to the purchase of HSC only.
On September 26, 1995, SPS presented an oral offer to the Company to
purchase the outstanding capital stock of HSC for $35.1 million, subject to
existing debt (which the Company believes SPS thought was only approximately $11
million at that time). SPS's offer was predicated upon its obtaining financing,
and SPS orally indicated that it might require the Company to make significant
expenditures or adjust the purchase price for potential costs for certain
environmental remedial actions at HSC's Torrance, California facility which SPS
believed could be required after it became the owner of HSC. SPS indicated that
it expected such expenditures or price adjustment to be between $3 million and
$5 million.
On October 6, 1995, a representative of SPS presented a revised written
proposal whereby SPS would purchase the outstanding capital stock of HSC for
$48.4 million in cash on a debt-free basis. The offer was subject to approval by
the Company's stockholders, clearance under the HSR Act, the absence of material
adverse changes, continuing operation of the HSC business in the ordinary course
and SPS's lender's reasonable satisfaction with the transaction terms. The SPS
representative also stated that the offer was subject to the satisfactory
completion by SPS and its lender of additional due diligence with respect to
HSC, which due diligence SPS expected to take up to four weeks to complete.
Board of Directors Approval of GFI Sale. After carefully considering the
terms of the agreement the Company had negotiated with GFI and the offer from
SPS contained in its October 6, 1995 letter to the Company, the Board of
Directors of the Company concluded that the GFI offer was preferable for the
Company and its stockholders for the following reasons (without assigning
relative weights thereto):
(i) GFI had represented that it already had funds available to complete
the purchase of HSC so its offer was not subject to financing as the SPS
offer was;
(ii) GFI had completed its due diligence, whereas SPS and its lender
wished to conduct further due diligence, which would potentially take
several weeks with no certainty that SPS and its lender would be willing to
proceed with a transaction upon the completion thereof;
(iii) GFI had agreed to exclude certain inventory, contract and
environmental matters from the Company's indemnification obligations,
whereas SPS had at one point indicated that the Company should expend
between $3 million and $5 million or reduce the proposed purchase price for
potential costs for certain environmental remedial actions at HSC's
Torrance, California facility which SPS believed could be required after it
became the owner of HSC;
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(iv) GFI and the Company had completed negotiations of a definitive
purchase agreement, whereas that process had not begun with SPS and the
Company could not predict what additional issues might arise during
negotiations with SPS;
(v) GFI currently has no operations in the United States and SPS is a
significant participant in the U.S. fastener industry which could lead to
heightened scrutiny of an SPS transaction from the U.S. antitrust
authorities, and although a GFI transaction, but not an SPS transaction,
would need to be reviewed under the Exon-Florio Amendment, the Board of
Directors did not foresee any difficulties with GFI obtaining the necessary
clearance to complete the transaction on a timely basis;
(vi) the view of the Board of Directors that current management and
employees of HSC could interpret the statement in SPS's October 6 offer
letter that a combined SPS and HSC could achieve "significant economies and
synergies" as affecting their continued employment by HSC which, when
coupled with the uncertainties and delays inherent in pursuing SPS's offer,
could lead to the departure of key employees, which could disrupt the
operations of HSC's business prior to the closing and would significantly
disadvantage HSC in the event the transaction was not consummated for any
reason; and
(vii) the Board of Directors had received an opinion from Lazard dated
October 7, 1995 that, as of such date, the consideration to be paid to the
Company in the GFI Sale is fair to the Company from a financial point of
view (see "--Fairness Opinion of Lazard" below). (Lazard was not requested
to, and did not, provide a valuation of any of the SPS proposals.)
The Company and GFI entered into the Stock Purchase Agreement on October 9,
1995, and a public announcement of that agreement was made that day.
Subsequent SPS Offer. On October 12, 1995, the Company received a letter
from SPS increasing its proposed purchase price to $50 million, subject to the
terms of a definitive purchase agreement to be approved by the boards of
directors of the Company and SPS following SPS's completion of due diligence and
review of disclosure schedules. The letter also stated that SPS expected to
enter into a purchase agreement with the Company on terms "substantially
similar" to those in the GFI Stock Purchase Agreement. The Board of Directors of
the Company required further information and clarification to determine whether
SPS's revised proposal was in fact superior to the terms of the GFI Sale. The
Company notified GFI, pursuant to the provisions of the Stock Purchase
Agreement, of its intention to pursue discussions with SPS. See "--Description
of Stock Purchase Agreement--Non-Solicitation" below.
The Company responded to SPS's revised proposal with a letter from the
Company's counsel dated October 17 requesting further information from SPS,
including clarification of the terms of its proposal, specification of the
changes SPS would require in the terms of the GFI Stock Purchase Agreement,
information regarding the availability, sources and terms of the financing which
would be necessary for SPS to complete its proposed transaction and
specification of the further due diligence SPS wished to perform and its
timetable for doing so.
In a letter dated October 25, SPS outlined generally some further due
diligence it wished to conduct but did not respond to any of the other
inquiries, except to indicate that SPS would expect the $1.3 million termination
fee payable by the Company to GFI in the event the Company terminated the GFI
Stock Purchase Agreement to enter into an agreement with SPS (see "--Description
of Stock Purchase Agreement--Termination Fee" below) would be funded out of the
SPS purchase price, which would be payable only if a transaction with SPS
closed. The Company, by a letter dated October 26, agreed to permit SPS to
conduct further additional due diligence and reiterated its need for responses
to the other questions raised in the October 17
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letter. In early November, SPS again indicated its interest in HSC but, despite
a further request from the Company, it did not provide the additional
information the Company had previously requested.
FAIRNESS OPINION OF LAZARD
The Company has retained Lazard to act as its exclusive financial advisor
with respect to the GFI Sale and related matters. On October 7, 1995, Lazard
delivered its oral opinion to the Board of Directors of the Company that, based
upon and subject to various considerations set forth in such opinion and such
other factors as it deemed relevant, as of that date, the consideration to be
paid to the Company in the GFI Sale is fair to the Company from a financial
point of view. Lazard subsequently delivered its written opinion to the
Company's Board to such effect dated as of October 7, 1995.
A COPY OF THE FULL TEXT OF THE OPINION OF LAZARD DATED AS OF OCTOBER 7,
1995, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS
ON THE REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ANNEXED AS APPENDIX
B TO THIS PROXY STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. THIS SUMMARY
OF THE OPINION OF LAZARD IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF THE OPINION. THE OPINION OF LAZARD IS NOT INTENDED TO BE, AND DOES NOT
CONSTITUTE, A RECOMMENDATION TO ANY STOCKHOLDER OF THE COMPANY AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE ANNUAL MEETING. STOCKHOLDERS OF THE COMPANY ARE
URGED TO, AND SHOULD, READ THE OPINION OF LAZARD IN ITS ENTIRETY.
In rendering its opinion, Lazard, among other things: (i) reviewed the
financial terms and conditions of a current draft of the Stock Purchase
Agreement; (ii) analyzed certain historical business and financial information
relating to HSC and the Company; (iii) reviewed various financial forecasts and
other data provided to Lazard by the Company relating to the Company's and HSC's
businesses, including actual operating results through August 1995; (iv) held
discussions with members of the senior management of the Company with respect to
the businesses and prospects of HSC and the Company; (v) reviewed public
information with respect to certain other companies in lines of businesses
Lazard believed to be generally comparable to the businesses of HSC; (vi)
reviewed the financial terms of certain business combinations involving
companies in lines of business Lazard believed to be generally comparable to
those of HSC, and in other industries generally (see "--Selected Recent
Transactions Analysis" below); (vii) reviewed the historical stock prices and
trading volumes of the Company's common stock; (viii) relied on the advice of
the Company that no substantial corporate level federal or potential state
income or capital gains taxes will be payable in connection with the GFI Sale by
the Company or HSC by reason of the availability of net operating losses; and
(ix) conducted such other financial studies, analyses and investigations as
Lazard deemed appropriate. The Company has subsequently advised Lazard that
state income and federal alternative minimum tax liabilities of approximately
$500,000 will be payable in connection with the GFI Sale, and Lazard has
indicated that this would not cause it to change its opinion.
In connection with its review, Lazard relied upon the accuracy and
completeness of the financial and other information provided to it by the
Company and did not assume any responsibility for any independent verification
of such information or any independent valuation or appraisal of any of the
assets or liabilities of HSC or the Company. With respect to financial
forecasts, Lazard assumed that they had been reasonably prepared on bases
reflecting the best currently available estimates and judgments of management of
the Company as to the future financial performance of the Company. Lazard
assumed no responsibility for and expressed no view as to such forecasts or the
assumptions on which they were based and noted that no projections were made
available to it beyond those for the fiscal year ending May 31, 1996, and that
they were told that no such
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projections exist. Lazard's opinion is necessarily based on economic, monetary,
market and other conditions as in effect on, and the information made available
to it as of, the date of such opinion.
In rendering its opinion, Lazard assumed that the GFI Sale would be
consummated on the terms described in the Stock Purchase Agreement, without any
waiver of any material terms or conditions by the Company and that completion of
the GFI Sale will not have any impact on certain pending litigation between the
Company and the U.S. Navy (see "--Business of the Company Excluding HSC" below).
Lazard noted that it had not been authorized to solicit potential purchasers of
HSC or the Company but that it or the Company had discussions with certain
potentially interested parties suggested by the Company. These parties consisted
of Fairchild Corporation, Cherry Textron and Allfast Fastening Systems, Inc. In
that regard, Lazard noted that it had also reviewed a letter dated October 6,
1995 from, and had discussions with, SPS which proposed, subject to certain
conditions, including the negotiation and execution of definitive agreements to
be approved by the Company's and SPS's boards of directors, to acquire HSC for
$48.4 million in cash (without the assumption of debt). See "--Background of the
GFI Sale--The SPS Offers" above. Lazard was not asked to, and did not, render an
opinion on the proposal contained in the October 6, 1995 letter.
The following is a summary of the presentation made by Lazard in connection
with its opinion to the Board of Directors of the Company. Lazard notes that it
did not attribute any particular weight to any analysis or factor considered by
it in reaching its opinion.
Summary Financial Information. Lazard reviewed certain historical business
and financial information relating to the Company and HSC. In addition, based
upon projections and forecasts provided to it by the Company and revised as of
August 1995, Lazard reviewed a projected pro forma income statement for HSC for
the fiscal year ending May 31, 1996. This review took into account the Company's
estimated fiscal 1996 revenues and earnings.
Pro Forma Analysis at Various Prices. Based upon the financial information
it received from the Company, Lazard calculated a range of enterprise values for
HSC. In conducting this analysis, Lazard considered enterprise value as a
multiple of pro forma revenues, pro forma earnings before interest, taxes,
depreciation and amortization ("EBITDA") and pro forma earnings before interest
and taxes ("EBIT") (excluding for purposes of EBITDA and EBIT calculations
corporate overhead of $2.7 million and $0.2 million of non-operating income).
This analysis indicated that an enterprise value (equity value plus net debt of
$12.5 million) ranging from $40.0 million to $50.0 million would represent (i) a
multiple of HSC's pro forma 1995 revenues of 0.7x to 0.9x and a multiple of
HSC's estimated pro forma 1996 revenues of 0.6x to 0.8x; (ii) a multiple of
HSC's pro forma 1995 EBITDA of 7.2x to 9.0x and a multiple of HSC's estimated
pro forma 1996 EBITDA of 6.6x to 8.2x; and (iii) a multiple of HSC's pro forma
1995 EBIT of 11.3x to 14.2x and a multiple of HSC's estimated pro forma 1996
EBIT of 12.6x to 15.7x.
Lazard also considered equity value as a multiple of pro forma net income
(assuming EBIT, as adjusted, historical interest rates of 10.4% on HSC's United
States debt and 8.6% on HSC's assumed United Kingdom debt and a pro forma tax
rate of 38%) and pro forma book value at August 31, 1995. This analysis
indicated that, assuming an enterprise value ranging from $40.0 million to $50.0
million, a corresponding equity value (enterprise value minus net debt of $12.5
million) ranging from $27.5 million to $37.5 million would represent a multiple
of (i) HSC's pro forma 1995 net income ranging from 19.7x to 26.9x and HSC's
estimated pro forma 1996 net income ranging from 23.2x to 31.7x; and (ii) HSC's
pro forma book value at August 31, 1995 ranging from 0.7x to 1.0x.
Lazard further concluded that (i) an enterprise value of $46.0 million would
represent a multiple of (A) 0.8x pro forma 1995 revenues and 0.7x estimated pro
forma 1996 revenues; (B) 8.3x pro forma 1995 EBITDA and 7.6x estimated pro forma
1996 EBITDA; and (C) 13.0x pro forma 1995 EBIT and 14.4x estimated pro forma
1996 EBIT; and (ii) an equity value of $33.5 million would represent a multiple
of (A) 24.0x pro forma 1995 net income and 28.3x estimated pro forma 1996 net
income; and (B) 0.9x pro forma book value at August 31, 1995.
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Comparable Public Companies Analysis. Lazard believed that there were no
companies with precisely the same mix of businesses and financial condition as
HSC. However, Lazard reviewed and analyzed the transaction in terms of certain
financial, operating and stock market information of seven fastener and
industrial companies which Lazard believed to be potentially comparable to HSC
(the "Comparable Companies"). The Comparable Companies consisted of Danaher
Corp. ("DHR"), Eaton Corp. ("ETN"), Fairchild Corp. ("FA"), GFI Industries
("GFI"), Illinois Tool Works ("ITW"), SPS Industries ("ST") and Thiokol Corp.
("TKC"). Lazard's analysis indicated that the total capitalization (stock market
value plus net debt) of the Comparable Companies as of September 22, 1995
represented a multiple of (A) 1995 revenues ranging from 0.5x (GFI) to 1.7x
(ITW) with an average of 1.0x and estimated 1996 revenues ranging from 0.4x
(GFI) to 1.6x (ITW) with an average of 1.0x; (B) 1995 EBITDA ranging from 3.1x
(GFI) to 12.1x (DHR) with an average of 8.0x and estimated 1996 EBITDA ranging
from 2.2x (GFI) to 9.6x (FA) with an average of 6.3x; (C) 1995 EBIT ranging from
5.5x (GFI) to 54.9x (FA) with an average of 17.0x and estimated 1996 EBIT
ranging from 3.3x (GFI) to 22.9x (FA) with an average of 10.6x. Lazard's
analysis also indicated that the market price of the Comparable Companies
represented a multiple of (A) 1995 earnings per share ("EPS") ranging from 10.5x
(ETN) to 26.0x (DHR) with an average of 16.8x and estimated 1996 EPS ranging
from 9.3x (GFI) to 18.8x (DHR) with an average of 13.9x; and (B) book value
ranging from 1.2x (GFI) to 4.0x (ITW) with an average of 2.3x.
Lazard compared these multiples for the Comparable Companies to the
corresponding multiples implied by the purchase price offered by GFI. Lazard's
analysis indicated that the proposed purchase price of $46.0 million for HSC
represented a multiple of (A) 0.8x pro forma 1995 revenues and 0.7x estimated
pro forma 1996 revenues; (B) 8.3x pro forma 1995 EBITDA and 7.6x estimated pro
forma 1996 EBITDA; and (C) 13.0x pro forma 1995 EBIT and 14.4x estimated pro
forma 1996 EBIT. Lazard's analysis also indicated that the proposed purchase
price for HSC's equity represented a multiple of (A) 24.0x pro forma 1995 net
income and 28.3x estimated pro forma 1996 net income; and (B) 0.9x pro forma
book value at August 31, 1995.
Lazard's analysis indicated that the enterprise value (market value plus net
debt) of the Company as of September 22, 1995, represented a multiple of (A)
0.9x 1995 revenues and 0.9x estimated 1996 revenues; (B) 18.1x 1995 EBITDA and
8.8x estimated 1996 EBITDA; and (C) 55.9x 1995 EBIT and 16.8x 1996 EBIT.
Lazard's analysis also indicated that the market value of the Company as of
September 22, 1995, represented a multiple of (A) NMx 1995 net income (net
income for such period is less than zero) and 13.9x estimated 1996 net income;
and (B) 1.6x book value at August 31, 1995.
Selected Recent Transactions Analysis. Lazard reviewed and analyzed selected
financial, operating and stock market information relating to 32 transactions
since 1990 in the fastener/industrial components industry (the "Selected Recent
Transactions"). The Selected Recent Transactions consisted of Johnstown America
Industries Inc./Truck Components Inc., Harvard Industries Inc./Doehler-Jarvis
Inc., Khulman Corp./Schwitzer Inc., Precision Castparts Corp./Quamco Inc.
(Columbus II Limited Partnership), Echlin Inc./Preferred Technical Group
International Inc., Precision Gear Inc. (Boeing Co.)/Litton Precision Gear
(Litton Systems Inc.), Lear Seating Corporation/Fiat SpA (seating business),
Castle Harlan Partners II, L.P./Truck Components Inc., SPX Corp./Sealed Power
Technologies Ltd. Partnership (Riken Corp.), FKI Plc/SPX Corp. (truth division),
ITT Automotive Corp. (ITT Corp.)/General Motors (motors and actuators business),
Wyman-Gordon Co./Cameron Forged Products (Cooper Industries Inc.), Lear Seating
Corporation/Ford Motor Co. (seating and trim operations), Williams Controls
Inc./Kenco Engineering Division of Sparkomatic Corp., Tyco Laboratories
Inc./Suter Plc (industrial valves division), Automotive Industries Holding
Inc./ASAA International Inc., T&N plc/Goetze AG, Cooper Industries, Inc./Moog
Automotive Group, Inc. (IFINT S.A.), Echlin Inc./Sprague Devices, Inc., Watts
Industries Inc./Henry Pratt Co., SPX Corp./Triangle Corp. (special tools
business), Clark Equipment Company/Hurth Axle S.p.A., Tomkins PLC/Philips
Industries Inc., H.H. Robertson Company/Ceco
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Industries, Inc., BTR plc/Global Automotive Sealing Systems Group (United
Technologies Corp.), Varity Corporation/Kelsey-Hayes Canada Limited, T&N
plc/J.P. Industries, Inc., Vickers PLC/Cosworth Holdings Limited (Carlton
Communications Plc), Staveley Industries plc/Howe Richardson Inc., Wyman-Gordon
Co./Arwood Corp. (Interlake Corp.), Health-Mor Inc./Bliss Manufacturing Company,
and Onex Corporation (North American auto parts operation)/Tate & Lyle PLC.
However, Lazard noted that the reasons for, and the circumstances of, each of
the transactions analyzed were diverse and the characteristics of the companies
involved were not directly comparable to HSC or GFI.
Lazard's analysis indicated that (i) price per share as a multiple of (A)
LTM EPS ranged from 3.7x (Automotive Industries Holding Inc./ASAA International
Inc.) to 44.7x (Clark Equipment Company/Hurth Axle S.p.A.) with a median of
14.6x and a mean of 17.0x; and (B) book value ranged from 1.1x (Wyman-Gordon
Co./Arwood Corp. (Interlake Corp.)) to 17.6x (Lear Seating Corporation/Fiat SpA
(seating business)) with a median of 2.8x and a mean of 4.4x and (ii) enterprise
value as multiple of (A) LTM EBIT ranged from 2.9x (Health-Mor Inc./Bliss
Manufacturing Company) to 23.8x (Clark Equipment Company/Hurth Axle S.p.A.) with
a median of 9.2x and a mean of 9.5x; (B) LTM earnings before interest, taxes and
depreciation ranged from 2.6x (Health-Mor Inc./Bliss Manufacturing Company) to
14.6x (Clark Equipment Company/Hurth Axle S.p.A.) with a median of 5.5x and a
mean of 6.1x; and (C) LTM sales ranged from 0.3x (H.H. Robertson Company/Ceco
Industries, Inc.) to 2.7x (Vickers PLC/Cosworth Holdings Limited (Carlton
Communications Plc)) with a median of 0.8x and a mean of 0.9x. This analysis
also indicated that the premium of the proposed purchase price per share over
the average trading price one month prior to the announcement of the Selected
Recent Transactions ranged from (2.5)% (Varity Corporation/Kelsey-Hayes Canada
Limited) to 70.4% (Staveley Industries plc/Howe Richardson Inc.) with a median
of 34.0% and a mean of 28.8%. Lazard believed that it was not meaningful to
compare the proposed purchase price offered by GFI to the market price of the
Company's equity in terms of the premiums paid in Selected Recent Transactions
primarily because HSC is a wholly-owned, nonpublicly traded subsidiary of the
Company and Lazard was not in a position to quantify the value of the assets of
the Company (principally, the U.S. Navy Claim) that are being retained by the
Company.
Lazard compared these multiples for the Selected Recent Transactions to the
corresponding multiples implied by the purchase price offered by GFI. Lazard's
analysis indicated that the proposed purchase price of $46.0 million for HSC
represented a multiple of (A) 0.8x pro forma 1995 sales and 0.7x estimated pro
forma 1996 sales; (B) 8.3x pro forma 1995 EBITDA and 7.6x estimated pro forma
1996 EBITDA; and (C) 13.0x pro forma 1995 EBIT and 14.4x estimated pro forma
1996 EBIT. Lazard's analysis also indicated that the equity value of the
proposed transaction represented with respect to HSC, a multiple of (A) 24.0x
pro forma 1995 net income and 28.3x estimated pro forma 1996 net income; and (B)
0.9x pro forma book value at August 31, 1995.
Other Analysis. Lazard also reviewed information relating to the historical
price and trading volume for the Company's stock.
Special Considerations. The Company does not make, as a matter of course,
public forecasts or projections as to future performance or earnings. However,
in connection with their ongoing budgetary and financing activities, management
of the Company periodically prepares certain projections of results of
operations for the current fiscal year. Certain of such projections were
provided to Lazard for its due diligence review in connection with the GFI Sale
and related transactions. SUCH PROJECTIONS WERE NOT PREPARED IN ACCORDANCE WITH
PUBLISHED GUIDELINES OF THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
OR THE SECURITIES AND EXCHANGE COMMISSION REGARDING PROJECTIONS AND FORECASTS,
NOR HAVE SUCH PROJECTIONS BEEN AUDITED, EXAMINED OR OTHERWISE REVIEWED BY
INDEPENDENT AUDITORS OF THE COMPANY OR ITS AFFILIATES. In addition, such
projections are based
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upon many estimates and are inherently subject to significant economic and
competitive uncertainties and contingencies, many of which are beyond the
control of management of the Company. Accordingly, actual results may be
materially higher or lower than those projected. The inclusion of such
projections herein should not be regarded as a representation of the Company or
any other person that the projections will prove to be correct. Neither Lazard
nor any other party to whom any of these projections were provided assumes any
responsibility for the accuracy of such information and, in connection with its
review, Lazard assumed that these projections were reasonably prepared on bases
reflecting the best currently available estimates and judgments of management of
the Company. The Company has not prepared a five year plan and did not provide
Lazard with projections beyond the fiscal year ending May 31, 1996, nor has the
Company prepared any such projections.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above without considering
the analyses as a whole could create an incomplete or misleading view of the
process underlying the opinion of Lazard. No company or transaction used in the
above analysis as a comparison is identical to the Company or GFI or the
transaction contemplated by the Stock Purchase Agreement. The analyses were
prepared solely for purposes of Lazard providing its opinion as to the fairness
of the consideration to be paid to the Company in the GFI Sale from a financial
point of view and do not purport to be appraisals or to necessarily reflect the
prices at which businesses or securities actually may be sold, which may be
significantly more or less favorable than as set forth in these analyses.
Similarly, any estimate of values or forecast of future results contained in the
analyses is not necessarily indicative of actual values or actual future
results, which may be significantly more or less favorable than those suggested
by such analyses.
In performing its analyses, Lazard made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters. Such analyses are inherently subject to uncertainty, being based upon
numerous factors or events beyond the control of the parties or their respective
advisors. Future results or actual values may be materially different from those
forecasts or estimates contained in the analyses. As described above, Lazard's
opinion was one of several factors taken into consideration by the Board of
Directors of the Company in making its determination to approve the Stock
Purchase Agreement. While the foregoing summary covers the material aspects of
the analyses performed by Lazard, the foregoing summary does not purport to be a
complete description of such analyses and is qualified in its entirety by
reference to the written opinion of Lazard set forth in Appendix B.
Lazard is an internationally recognized investment banking firm and is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements, leveraged
buyouts, and valuations for estate, corporate and other purposes. The Board of
Directors of the Company selected Lazard to act as its exclusive financial
advisor on the basis of Lazard's expertise and its reputation in investment
banking and mergers and acquisitions.
In connection with Lazard's services as financial advisor to the Company,
the Company has agreed to pay Lazard a fee, payable upon consummation of the GFI
Sale, of $800,000. The Company has also agreed to reimburse Lazard for its
reasonable out-of-pocket expenses, including, but not limited to, fees and
expenses of its counsel. The Company has agreed to indemnify Lazard and certain
related parties against certain liabilities, including liabilities arising under
the federal securities laws.
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DESCRIPTION OF STOCK PURCHASE AGREEMENT
General. The material terms and provisions of the Stock Purchase Agreement
are summarized below. However, such summary does not purport to be complete and
is qualified in its entirety by the terms of the Stock Purchase Agreement which
is annexed as Appendix A to this Proxy Statement.
Purchase Price and Closing. The cash purchase price for the outstanding
capital stock of HSC payable by GFI at the closing is $46 million; provided,
however, that such purchase price is subject to increase or decrease on a
dollar-for-dollar basis to the extent that the consolidated net worth (subject
to certain adjustments) of HSC (including its subsidiaries) as of the closing
date exceeds or is less than $38 million, based upon a review to be performed by
Coopers & Lybrand L.L.P. as of the closing date. The following adjustments are
to be made in determining the consolidated net worth of HSC as of the closing
date: (i) any intercompany payables or receivables between HSC (including its
subsidiaries), on the one hand, and the Company and its other subsidiaries, on
the other hand, are to be deemed satisfied in full on the closing date, (ii)
appropriate adjustments are to be made to transfer certain pension and
retirement plans' liabilities, assets and related insurance policies from the
Company to HSC, (iii) net deferred tax assets are not to exceed $500,000, (iv)
the amount of inventory is to be calculated consistent with HSC's current
practice, (v) HSC's liability with respect to its retirement plans is to be
$4.028 million and the current value of the assets of such plans is to be
determined in a manner consistent with HSC's and the Company's usual practice
and (vi) no liability or reserve is to be reflected for certain matters
specifically excluded from the Company's indemnification obligations under the
Stock Purchase Agreement. Assuming the GFI Sale had been consummated as of
August 31, 1995, the adjusted consolidated net worth of HSC (including its
subsidiaries) would have been $37,113,000, requiring a payment from the Company
to GFI of $887,000. (See "--Proposed Disposition of Proceeds; Impact of the GFI
Sale on the Company" below.) In the event that the Company and GFI have any
disagreement regarding the closing date balance sheet which they are unable to
resolve, such disagreement will be referred to a "Big Six" firm of independent
public accountants jointly selected by the Company and GFI, which firm shall
resolve the disagreement and determine the consolidated net worth of HSC as of
the closing date.
The closing of the GFI Sale is expected to occur within five business days
of the satisfaction or waiver of all closing conditions, which are described
below.
Representations and Warranties. In the Stock Purchase Agreement the Company
makes customary representations and warranties to GFI including, without
limitation, representations and warranties regarding HSC's capital stock,
financial statements, liabilities, actions since May 31, 1995, properties,
litigation, contracts and agreements, employee benefit plans, assets, taxes,
intellectual property and environmental compliance. GFI also makes customary
representations and warranties to the Company, including, without limitation, a
representation that GFI has funds available to complete the purchase of HSC.
Additional Covenants. The Company has agreed that from the date of the Stock
Purchase Agreement until the closing, HSC will conduct its business in the
ordinary course substantially in the manner carried on prior to the date of the
Stock Purchase Agreement, and that HSC will not engage in any activity or enter
into any agreement other than in the ordinary course of its business as
previously conducted. In addition, the Company agreed that HSC will not take
certain specified actions without GFI's prior written approval, including
engaging in any activity or transaction or entering into any agreement or
commitment other than in the ordinary course of HSC's business, paying any
dividend, incurring any long-term debt, incurring any short-term debt other than
in the ordinary course of business or paying any claims, liabilities or
obligations other than in the ordinary course of business.
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On or prior to the closing date, the Company will cancel or contribute to
the capital of HSC, the net amount of all inter-company debt between the Company
and HSC. On or prior to the closing date, the Company will also cause all
indebtedness of HSC for borrowed money to be repaid. As of August 31, 1995, the
net amount of all intercompany debt between the Company and HSC was
approximately $3.8 million, and the amount of indebtedness of HSC for borrowed
money was approximately $12.5 million.
Closing Conditions. The obligation of the Company to consummate the GFI Sale
is subject to the satisfaction or waiver of certain conditions, including (i)
approval of the GFI Sale by the Company's Stockholders, (ii) receipt of all
necessary regulatory consents and approvals, including the expiration or
termination of the waiting period under the HSR Act and either a determination
by CFIUS not to investigate the GFI Sale under the Exon-Florio Amendment or the
completion of any such investigation or the determination by the President not
to take any action with respect thereto, (iii) the truth and correctness on the
closing date of the representations and warranties of GFI contained in the Stock
Purchase Agreement and (iv) performance or compliance by GFI in all material
respects with all agreements and covenants required by the Stock Purchase
Agreement to be performed or complied with by it on or prior to the closing
date.
The obligation of GFI to consummate the GFI Sale is subject to the
satisfaction or waiver of certain conditions, including, (i) receipt of all
necessary regulatory consents and approvals, including the expiration or
termination of the waiting period under the HSR Act and either a determination
by CFIUS not to investigate the GFI Sale under the Exon-Florio Amendment or the
completion of any such investigation or the determination by the President of
the United States not to take any action with respect thereto, (ii) the truth
and correctness on the closing date of the representations and warranties of the
Company contained in the Stock Purchase Agreement and (iii) performance or
compliance by the Company in all material respects with all agreements and
covenants required by the Stock Purchase Agreement to be performed or complied
with by it on or prior to the closing date.
Indemnification. The representations and warranties of the Company and of
GFI contained in the Stock Purchase Agreement survive the closing and expire on
March 31, 1997, and any indemnification claims with respect to a breach of any
representation and warranty must be made on or prior to such date.
Subject to a $250,000 deductible with respect to breaches of representations
and warranties and an overall limitation in an amount equal to the purchase
price, the Company has agreed to indemnify GFI for any damages incurred by GFI
as a result of a breach or violation of any covenant or agreement of the Company
contained in the Stock Purchase Agreement or any breach of a representation or
warranty of the Company contained therein, except to the extent the same are
reflected on the closing date balance sheet. Notwithstanding the foregoing, the
Company has no obligation to indemnify GFI for any damages arising from (i)
certain inventory related matters other than any increase in the amounts shown
on a schedule attached to the Stock Purchase Agreement, (ii) potential economic
effects of two particular sales contracts or (iii) certain specified
environmental issues concerning HSC's facility located in Torrance, California.
The Company has agreed that it shall retain and not distribute to its
stockholders at least $3 million of the proceeds of the purchase price until at
least March 31, 1997. The Company may, in its discretion, retain more than this
amount, and it initially intends to retain approximately $15 million of the
proceeds of the purchase price. See "--Proposed Disposition of Proceeds; Impact
of the GFI Sale on the Company" below.
GFI has agreed to indemnify the Company for any damages incurred by the
Company as a result of a breach or violation of any covenant or agreement of GFI
contained in the Stock Purchase Agreement or any breach of a representation or
warranty of GFI contained therein. There are no limitations on GFI's
indemnification obligations.
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Non-Solicitation. The Company agreed that it will not, directly or
indirectly, solicit any inquiry or the making of any proposal which constitutes,
or may be reasonably expected to lead to, a Competing Transaction (as defined
below) or participate in any discussions or negotiations, or provide third
parties with any non-public information, relating to such inquiry or proposals;
provided, however, that the Company is entitled to furnish information to, or
enter into discussions or negotiations with, any person or entity that makes a
bona fide written proposal for a Competing Transaction if (i) the Board of
Directors of the Company determines in good faith that such Competing
Transaction is economically superior to the transactions contemplated by the
Stock Purchase Agreement and that such action is necessary or required for the
Board of Directors of the Company to comply with its fiduciary duties to the
Company's stockholders, (ii) the Company advises GFI that it is furnishing
information to, or entering into negotiations with, such person or entity prior
to doing so and (iii) the Company enters into a confidentiality agreement with
such person or entity prior to furnishing any information to them. A "Competing
Transaction" means any of, or a proposal to effect any of, the following (other
than the transactions contemplated by the Stock Purchase Agreement): (i) any
merger, consolidation, business combination or other similar transaction with
respect to Company or HSC, (ii) any sale, transfer or other disposition of the
capital stock of HSC or (iii) any tender offer or exchange offer for all of the
outstanding capital stock of the Company.
Termination. The Stock Purchase Agreement may be terminated at any time (i)
by mutual written consent of the Company and GFI; (ii) by either the Company or
GFI if (A) there has been a breach of any representation, warranty, covenant or
agreement on the part of the other set forth in the Stock Purchase Agreement
which breach has not been cured within five business days following receipt by
the breaching party of notice of such breach or (B) if any permanent injunction
or other order of a court or any competent authority preventing the consummation
of the transactions contemplated by the Stock Purchase Agreement shall have
become final and nonappealable; (iii) by either the Company or GFI if, for any
reason, the closing shall not have occurred on or before May 31, 1996, provided,
however, that the right to terminate under this provision is not available to
any party whose failure to fulfill its obligations under the Stock Purchase
Agreement has been the cause of or resulted in the failure of the closing to
have occurred on or prior to such date; (iv) by either the Company or GFI if the
approval of the stockholders of the Company of the GFI Sale has not been
obtained by reason of the failure to obtain the required affirmative vote of the
stockholders; (v) by the Company if the Board of Directors of the Company shall
have recommended a Competing Transaction to the stockholders and shall have
determined that such Competing Transaction is economically superior to the GFI
Sale and that such action is necessary or required for the Board of Directors to
comply with its fiduciary duties to the Company's stockholders; or (vi) by GFI
if (A) the Board of Directors of the Company withdraws, modifies or changes its
recommendation of the GFI Sale in a manner adverse to GFI or shall have resolved
to do so, (B) the Board of Directors of the Company shall have recommended to
the stockholders of the Company any Competing Transaction or resolved to do so
or (C) a tender offer or exchange offer for all of the outstanding shares of
capital stock of the Company is commenced and the Board of Directors of the
Company either fails to recommend against acceptance of such tender or exchange
offer by its stockholders or takes no position with respect thereto.
Termination Fee. The Company agrees that it will pay to GFI a termination
fee in an amount equal to $1.3 million if the Stock Purchase Agreement is
terminated for any of the following reasons: (i) if the Company shall have
terminated the Stock Purchase Agreement pursuant to clause (v) of the preceding
paragraph; (ii) if the Company or GFI shall terminate the Stock Purchase
Agreement pursuant to clause (iv) of the preceding paragraph due to the failure
of the Company's stockholders to approve the GFI Sale and (A) at the time of
such failure to so approve the GFI Sale there shall exist or have been proposed
a Competing Transaction and (B) within one year following such termination, the
Company or any of its subsidiaries shall have consummated a
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Competing Transaction; (iii) if the Company or GFI shall terminate the Stock
Purchase Agreement pursuant to clause (iii) of the preceding paragraph, a vote
of the stockholders of the Company at a duly held meeting with respect to the
GFI Sale shall not have occurred and been certified prior to such termination
and (A) at the time of such termination there shall exist or shall have been
proposed a Competing Transaction and (B) within one year following such
termination, the Company or any of its subsidiaries shall have consummated a
Competing Transaction; or (iv) if GFI terminates the Stock Purchase Agreement
pursuant to clause (vi) (A) or (B) of the preceding paragraph.
Fees and Expenses. The Company and GFI are each responsible for the fees and
expenses incurred by them in connection with the Stock Purchase Agreement.
Dispute Resolution. The Stock Purchase Agreement is governed by the laws of
the State of New York. Any disputes which arise under the Stock Purchase
Agreement which the parties are unable to resolve will be settled by arbitration
held in New York, New York in accordance with the Arbitration Rules of the
International Chamber of Commerce.
REGULATORY APPROVALS
The Company and GFI have each filed the notification required by the HSR Act
with the Federal Trade Commission and the U.S. Department of Justice. The
waiting period under the HSR Act during which the GFI Sale may not be
consummated while the Federal Trade Commission and the Department of Justice
consider the applicability of the antitrust laws to the GFI Sale expired on
November 19, 1995.
The Company and GFI have each filed the voluntary notification required by
the Exon-Florio Amendment with CFIUS. By letter dated November 24, 1995, CFIUS
advised the Company that since there are no issues of national security
sufficient to warrant an investigation, action under the Exon-Florio Amendment
with respect to the GFI Sale was concluded.
STOCKHOLDER APPROVAL
The GFI Sale must be approved by the holders of the majority of the
outstanding common stock of the Company since it constitutes the sale of
substantially all of the assets of the Company.
In connection with the Stock Purchase Agreement, GFI entered into a
Stockholders Agreement dated as of October 9, 1995, with The Wingate Family
Trust of 1980, The Shoshanna L. Wingate Revocable Trust, The David A. &
Shoshanna Wingate Foundation Inc. and Philip M. Slonim. Pursuant to this
Agreement, such stockholders, who together are the beneficial owners of
1,777,561 shares, or 30.36% of the outstanding shares of common stock of the
Company, have agreed to vote all shares of the Company's common stock which they
beneficially own (i) in favor of the GFI Sale, (ii) against any action or
agreement that would (A) result in a breach of any covenant, representation or
warranty or any other obligation or agreement of the Company under the Stock
Purchase Agreement or of such stockholders under the Stockholders Agreement or
(B) impede or interfere with, delay, postpone or adversely affect the Stock
Purchase Agreement or the transactions contemplated thereby and by the
Stockholders Agreement; and (iii) except as otherwise agreed to in writing in
advance by GFI, against the following actions (other than the GFI Sale): (A) any
extraordinary corporate transaction, such as a merger, consolidation or other
business combination involving the Company or any of its subsidiaries; (B) any
sale, lease or transfer of a substantial portion of the assets or business of
the Company or its subsidiaries, or reorganization, restructuring,
recapitalization, special dividend, dissolution or liquidation of the Company or
its subsidiaries; or (C) any change in the present capitalization of the Company
including any proposal to sell a
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substantial equity interest in the Company or its subsidiaries. Such
stockholders have given to GFI an irrevocable proxy concerning the matters
specified in the previous sentence.
The Stockholders Agreement also provides that none of the stockholders who
are party thereto will transfer any of their shares of common stock of the
Company to any other person until after the termination of the Stockholders
Agreement, which will occur upon the earlier of the consummation of the
transactions contemplated by the Stock Purchase Agreement and the termination of
the Stock Purchase Agreement in accordance with its terms.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE COMPANY'S BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE GFI
SALE IS FAIR TO THE COMPANY AND IN THE BEST INTERESTS OF THE COMPANY'S
STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE GFI SALE.
NO RIGHTS OF APPRAISAL
Dissenting stockholders will not have any rights of appraisal upon approval
or consummation of the GFI Sale.
ACCOUNTING TREATMENT
The GFI Sale will be treated as a sale of stock for accounting purposes. As
a result, the Company will recognize a gain in its statement of operations
currently estimated to be approximately $8 million, and the related balance
sheet accounts of HSC will be removed from the Company's consolidated balance
sheet. See "Unaudited Pro Forma Consolidated Financial Statements" below.
PROPOSED DISPOSITION OF PROCEEDS; IMPACT OF THE GFI SALE ON THE COMPANY
The Company will use approximately $12.5 million of the proceeds from the
GFI Sale to repay existing indebtedness. After repayment of debt, transaction
expenses, taxes and a purchase price adjustment, the GFI Sale is expected to
result in net proceeds to the Company of approximately $30 million. The Company
currently intends to distribute approximately one-half of such net proceeds to
stockholders. The balance of the proceeds will be used by the Company for
working capital purposes, for the prosecution of the Company's claims against
the U.S. Navy and to enable the Company to satisfy claims totaling $11.2 million
plus interest made against it by the U.S. Navy in the event of an adverse
outcome in that matter. See "--Business of the Company Excluding HSC--U.S. Navy
Claims" below.
The following table sets forth, in aggregate and on a per share basis, the
gross proceeds from the GFI Sale and the application of such proceeds, including
the amounts the Company currently intends to distribute to stockholders and the
amount it currently intends to retain for working capital purposes and for the
prosecution of its claims against the U.S. Navy. Such amounts are approximate
and are based on the Company's current estimates. The amounts shown for
repayment of debt and the purchase price adjustment assume the GFI Sale had been
consummated as of August 31, 1995. There can be no assurance that such amounts
will actually be realized.
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ESTIMATED PROCEEDS FROM THE GFI SALE
AGGREGATE
(IN THOUSANDS) PER SHARE
-------------- ---------
Gross proceeds from the GFI Sale................. $ 46,000 $ 7.86
Adjustments:
Repayment of debt.............................. (12,534) (2.14)
Transaction expenses and taxes................. (2,150) (.37)
Purchase price adjustment...................... (887) (.15)
-------------- ---------
Net proceeds from the GFI Sale................... 30,429 5.20
Estimated distribution to stockholders........... (15,214) (2.60)
-------------- ---------
Retained by the Company.......................... $ 15,215 $ 2.60
-------------- ---------
-------------- ---------
Because the Company's only operating business is conducted through HSC, the
sale of HSC to GFI will have a significant impact on the Company. See "Unaudited
Pro Forma Consolidated Financial Statements" below. Upon consummation of the GFI
Sale, the business of the Company will consist primarily of pursuing its claims
against the U.S. Navy in the respect of the termination of certain contracts.
See "--Business of the Company Excluding HSC--U.S. Navy Claims" below.
The Board of Directors currently anticipates that upon final resolution of
the Company's claims against the U.S. Navy, the Company would complete the
distribution of the Company's assets to its stockholders and would seek
stockholder approval to dissolve the Company.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes certain United States federal income tax
consequences to the Company and its stockholders of the GFI Sale and certain
United Stated federal income tax consequences to U.S. Stockholders (as defined
below) of a distribution of a portion of the net proceeds from the GFI Sale (the
"Distribution") to stockholders of the Company, which it is the current
intention of the Company to make. The discussion is based upon the provisions of
the United States Internal Revenue Code of 1986, as amended (the "Code"), and
regulations, rulings and judicial decisions thereunder as of the date hereof;
any such authority may be repealed, revoked or modified, perhaps with
retroactive effect, so as to result in federal income tax consequences different
from those discussed below.
STOCKHOLDERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE UNITED
STATES OR OTHER TAX CONSEQUENCES OF THE GFI SALE AND THE DISTRIBUTION, INCLUDING
THE EFFECT OF ANY STATE OR LOCAL TAX LAWS.
Consequences of the GFI Sale. The Company and GFI have agreed to elect,
under section 338(h)(10) of the Code, to treat the GFI Sale as a sale of assets
of HSC for federal income tax purposes. The agreement to make a section
338(h)(10) election, which was a negotiated term of the GFI Sale, will enable
GFI to obtain a "stepped-up" basis in the assets of HSC. The election will not
have a material impact on the Company's federal income tax liability on the GFI
Sale. The Company anticipates that the consolidated net operating loss
carryforwards ("NOLs") of the Company and its subsidiaries (currently projected
to be in excess of $18 million immediately prior to the GFI Sale) will offset
the gain resulting from the GFI Sale and as a result that the GFI Sale will not
result in significant current federal income tax liability for the Company. The
gain offset by the Company's NOLs will significantly reduce the NOLs available
to offset any subsequent income of the Company, however, including any income
that may result from a favorable resolution of the Navy claims. It is currently
projected that the Company and its subsidiaries, following the GFI Sale, will
have approximately $10 million in NOLs available to offset such subsequent
income. Thus, were the Company to recover more than approximately $10 million on
the Navy claims, such excess would
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not be offset by the NOLs and (unless offset by other losses, credits and
deductions) would be subject to federal income tax. In addition, the Company
will be subject to federal alternative minimum tax and California franchise tax
of approximately $500,000 in the aggregate as a result of the GFI Sale.
The Company believes that the portion of net proceeds from the GFI Sale that
it currently plans to retain and not distribute to stockholders as part of the
Distribution reasonably reflects the working capital and reserve needs of the
Company following the GFI Sale. The Internal Revenue Service (the "IRS") could
assert, however, that the amount so retained is excessive, and attempt to impose
an "accumulated earnings tax" of 39.6% on all or part of the net proceeds
retained by the Company. While the Company believes that the IRS should not
prevail in any such assertion, the application of the accumulated earnings tax
is an inherently factual matter, and no assurance can be given that the IRS
would not prevail, were it to assert that such tax should apply to the Company.
If the stock ownership of the Company were to become more concentrated following
the GFI Sale, so that five or fewer individuals directly or indirectly owned
more than 50% by value of the Company's stock (the Company estimates that, at
present, approximately 30% of its stock is directly or indirectly owned by five
or fewer individuals), and if thereafter 60% or more of the Company's adjusted
gross income for any year were passive income, such as interest, dividends, and
royalties, "personal holding company" tax of 39.6% also would be imposed on the
undistributed taxable income (subject to certain adjustments) of the Company.
The GFI Sale will not have any federal income tax consequences for holders
of the Company's common stock.
Consequences of the Distribution. The following summary deals only with the
receipt of a Distribution by a U.S. Stockholder (as defined below) that holds
its Company common stock as a capital asset and does not deal with stockholders
that are subject to special tax rules, such as tax-exempt entities, dealers in
securities or currencies, financial institutions, life insurance companies,
persons holding Company stock as a part of a hedging or conversion transaction
or a straddle or persons whose "functional currency" is not the U.S. dollar. As
used herein, a "U.S. Stockholder" means a holder of the Company's common stock
who is a citizen or resident of the United States, a corporation, partnership or
other entity created in or under the laws of the United States or any political
subdivision thereof, or an estate or trust the income of which is subject to
United States income taxation regardless of its source.
The Company believes that the Distribution, together with subsequent
distributions to stockholders of any remaining assets of the Company following
the resolution of the Navy claims, should qualify, for federal income tax
purposes, as distributions in complete liquidation of the Company. As discussed
below, the determination whether the Distribution is to be treated as part of a
series of distributions in complete liquidation of the Company is inherently
factual, however, and the IRS may dispute this characterization and assert that
the Distribution should be treated as a non-liquidating distribution that is
taxable as a dividend to the extent of the Company's accumulated or current
"earnings and profits" (including the Company's gain on the GFI Sale).
Assuming the Distribution is respected as part of a series of distributions
in complete liquidation of the Company, a U.S. Stockholder will recognize gain
or loss with respect to each block of stock (i.e., a group of shares purchased
in the same transaction) of the Company's stock held by it, measured by the
difference between the U.S. Stockholder's cost or other basis in that block of
stock and the total amount of all liquidating distributions made with respect to
the block of stock. Such gain or loss will be capital gain or loss if the
Company's stock is held as a capital asset by the U.S. Stockholder. The time at
which a U.S. Stockholder will recognize gain or loss, the
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method for calculating the amount of such gain or loss, and characterization of
such gain or loss as short-term or long-term will be as follows:
(i) Gain or loss will be determined separately with respect to each
block of stock held by the stockholder.
(ii) Each liquidating distribution will be allocated proportionately to
each share of stock held by the stockholder.
(iii) Gain, if any, with respect to each block of stock held by the
stockholder will be recognized by the stockholder at the time of the receipt
of a distribution, in an amount equal to the excess of (a) the amount of the
distribution that is allocable to that block of stock over (b) the
stockholder's basis in that block of stock (as reduced by the aggregate
amount of the portions of previous liquidating distributions allocable to
that block of stock).
(iv) Loss, if any, with respect to each block of stock held by the
stockholder will be recognized by the stockholder only after the Navy claims
are resolved and the Company completes the distribution of its remaining
assets (other than assets retained for the payment of liabilities and
expenses) to the stockholders.
(v) The holding period for determining whether gain or loss is
short-term or long-term will end on the day on which the gain or loss is
recognized. Gain or loss will be long-term if the holding period is more
than one year.
The determination whether the Distribution, together with subsequent
distributions, qualify as a series of distributions in complete liquidation for
federal income tax purposes is inherently factual. In general terms, for
distributions to qualify as part of a complete liquidation, (i) there must be a
manifest intention to liquidate; (ii) there must be a continuing purpose to
terminate corporate affairs; and (iii) the corporation's activities must be
directed to such termination. The adoption of a formal plan of liquidation is
not required, and there is no set time within which the liquidation must be
completed, although adoption of a plan of liquidation and the speed with which a
liquidation is completed are both indicia of an intent to liquidate. The Company
believes that there are strong factual indicia supporting the treatment of the
Distribution, for federal income tax purposes, as part of a series of
distributions in complete liquidation, including: (x) that the Distribution will
be of substantially all of the assets of the Company not needed as working
capital or reserves in connection with the Navy claims; (y) that the Company
will not be engaged in any business activities other than resolution of the Navy
claims and ministerial attention to its other assets following the GFI Sale; and
(z) that the Board of Directors currently intends to seek stockholder approval
for the distribution of the Company's remaining assets and the dissolution of
the Company upon final resolution of the Navy claims. Because the determination
is inherently factual and dependent in part on future events, however, there can
be no assurance that the IRS would not prevail in asserting that the
Distribution is not part of a complete liquidation and instead should be treated
as a non-liquidating distribution.
Assuming that the Distribution is treated as part of a series of
distributions in complete liquidation of the Company, a U.S. Stockholder would
be subject to federal income tax at a maximum marginal rate of 28% for
individuals, and 35% for corporations, on any resulting capital gains.
Were the Distribution treated as a non-liquidating distribution, a U.S.
Stockholder would recognize ordinary income to the extent that the distribution
is paid out of accumulated or current year "earnings and profits" of the Company
(including the Company's gain on the GFI Sale), with such income subject to
federal income tax at a maximum marginal rate of 39.6% for individuals, and 35%
for corporations. In general, a U.S. Stockholder that is a corporation would be
entitled to a
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"dividends received deduction" of 70% (80% if the stockholder owns 20% or more
of the Company's stock) of the amount of such ordinary income. To the extent
that a distribution to a U.S. Stockholder exceeds such earnings and profits, it
would be applied first to reduce such U.S. Stockholder's tax basis in its
Company stock, and to the extent that the distribution exceeds the stockholder's
basis, would result in capital gain for the stockholder. Special rules may apply
under section 1059 of the Code to reduce the tax basis (and therefore increase
the gain on distribution, liquidation or sale) of stock owned by U.S.
Stockholders that are corporations and that purchased their stock within two
years of the Distribution.
Proposed tax legislation that would reduce the maximum marginal capital
gains rate for individuals and for corporations was approved by the United
States Congress, but vetoed by President Clinton, late in 1995. There can be no
assurance that any such reduction in the capital gains rate will be reintroduced
in Congress or will become law, or as to the effective date of any such
reduction.
FINANCIAL INFORMATION
For selected financial data of the Company and unaudited pro forma
consolidated financial statements showing the effect of the consummation of the
GFI Sale, see "Selected Financial Data" and "Unaudited Pro Forma Consolidated
Financial Statements" below.
BUSINESS OF THE COMPANY EXCLUDING HSC
Upon consummation of the sale of HSC to GFI, the business of the Company
will consist primarily of pursuing its claims against the U.S. Navy in respect
of the termination of certain contracts. The Company also owns, through its
wholly-owned subsidiary HSI Properties, Inc., 16 acres of land in Saugus,
California, with incidental structures (2,700 square feet), which is currently
being leased to a former subsidiary, Hi-Shear Technology Corp., for $90,000 per
year.
U.S. Navy Claims. The Company and its subsidiary Defense Systems are
currently engaged in litigation with the U.S. Navy with respect to the
termination of two contracts between Defense Systems and the Navy. On May 24,
1995, in a decision which addressed only entitlement and not damages, the Armed
Services Board of Contract Appeals found in favor of Defense Systems, converting
the default terminations of the two contracts into terminations for the
convenience of the Government. The Department of Justice has appealed that
decision.
On November 18, 1987, the Navy awarded Hi-Shear Technology Corporation, a
former subsidiary of the Company and the predecessor of Defense Systems
(hereinafter referred to as its successor, Defense Systems), a contract to
supply 7,787 Mark 214 MOD O Sea GNAT cartridges (the "MK 214") to the Navy. On
July 5, 1988, the Navy awarded Defense Systems a contract to supply 3,700 MK 216
MOD O Radio Frequency Distraction Cartridges (the "MK 216") to the Navy. Both
contracts called for first article samples, which would be subjected to
extensive testing. Each production lot would also be subjected to extensive
testing. The first article samples and each production lot would pass the
testing requirements only if there were zero defects in the items tested; if
there was one defect, the sample or lot failed.
The MK 214s and the MK 216s were to be produced in accordance with the
specifications supplied by the Navy. There were, however, a number of design
defects in and other technical problems with the Navy's specifications. The Navy
did not advise Defense Systems of the defects and other problems with the
specifications that other contractors had encountered and told Defense Systems
that the problems it was having producing the cartridges were caused by poor
workmanship rather than the specifications.
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Although production of the MK 214s was to be completed by January 11, 1989
and delivery of the MK 216s to have commenced on September 28, 1989, by February
27, 1991, only two lots of MK 214s and only first article samples of MK 216s had
been delivered, all of which were rejected for failure to meet the stringent
fail/pass criterion.
On February 27, 1991, Defense Systems wrote to the Navy's contracting
officers for both the MK 214 and the MK 216 contracts stating that there were
significant defects in the contract specifications and that Defense Systems
needed compensation for the development efforts it had expended to overcome the
defective specifications. The Navy denied responsibility for the problems
Defense Systems had encountered in performing the contracts.
On March 29, 1991, not having received a satisfactory response from the Navy
and having reached the end of its line of credit with no prospect of a new loan,
the Company terminated the operations of Defense Systems. The Navy viewed the
shutdown of Defense Systems' operations as a repudiation and terminated the two
contracts for default. The contract price at the time of termination was
$9,829,145 for the MK 214 and $14,438,932 for the MK 216, and Defense Systems
had received $11,183,776 in progress payments under the two contracts. Defense
Systems, however, had spent $19,885,534 on the MK 214 and $18,685,422 on the MK
216 trying to perform under the contracts.
The Armed Services Board of Contract Appeals found that the Navy's stringent
fail/pass criterion was in part responsible for Defense System's inability to
perform under the two contracts, that the Navy admitted to over 30 defects in
its specifications for the MK 214 and MK 216, that none of the Navy's other
contractors were able to meet the delivery schedules and performance
requirements of the MK 214 and MK 216 contracts and that cartridges produced by
such other contractors were accepted only after the Navy waived either the
required performance tests or the results of such tests. The Board also found
that the Navy's own information showed that following the contract
specifications would result in an MK 214 cartridge that functions reliably only
91% of the time and an MK 216 cartridge that functions reliably only 88% of the
time, but that these reliability factors were not mentioned in the contracts.
Rather, the Board found that the contracts contained an implied warranty that
the cartridges could be built and meet the zero defect performance requirements
if the specifications were followed. Given the reliability factors, it would
statistically require presentment of 100 lots of MK 216s to get three lots
accepted or 100 lots of MK 214s to get six lots accepted. The Board concluded
that Defense Systems did not understand, and it questioned whether the Navy
understood, the statistical significance of the zero defect acceptance criterion
when contracts were awarded. The Board determined that to require such an extent
of unanticipated effort in a production type contract to gain an acceptable lot
represents a commercial impracticability and a material breach by the Navy.
Furthermore, the Board found no basis for the Navy's claims that there were
other grounds existing at the time which would support a termination of the
contracts for default.
The Armed Services Board of Contract Appeals concluded that the Navy's
terminations of the two contracts for default were improper because of
commercial impracticability, and it converted the terminations for default into
terminations for the convenience of the Government.
The Department of Justice has filed notice of its intention to appeal the
decision of the Armed Services Board of Contract Appeals, and it has until
February 2, 1996 to file a brief stating the basis for its appeal. In the event
the Department of Justice is successful in such appeal, the Company and Defense
Systems potentially could be liable for the $11,183,776 progress payments it
received under the contracts, plus interest.
The Company and Defense Systems are currently preparing their claims for
reimbursement of costs incurred by them in attempting to perform the two
contracts, related costs incurred in connection with the termination of Defense
Systems' operations, profits and interest. However, the
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Company and Defense Systems can not pursue their reimbursement claims until the
Navy's appeal of the decision of the Armed Services Board of Contract Appeals
has been resolved. The Company is unable to determine at this time when the
appeal and the claims for reimbursement will be resolved.
BUSINESS OF HSC
General. HSC designs, manufactures and markets a wide variety of high
performance fasteners for use in the aerospace industry. HSC is a leading
designer and manufacturer of advanced structural aerospace fasteners and
installation tools which have been chosen and designed into commercial and
military aircraft manufactured by The Boeing Company, Airbus Industries,
McDonnell Douglas Corp., Lockheed Corp., Northrop Grumman Corporation, LTV
Corporation and other major aircraft manufacturers. HSC's proprietary and
non-proprietary products include threaded pins, torque-installed collars,
internally and externally wrenched bolts, nuts, blind bolts and installation
tools. The fasteners are made from titanium and various other alloys to exacting
specifications in order to withstand temperature extremes, high tensile loads
and vibration stresses. HSC's fasteners are employed to join major structural
components and in other high performance applications. Specialized engineering,
metallurgical and production skills are utilized to meet these specifications
and the rigid quality controls they demand.
The principal proprietary fastener lines developed by HSC include the
following items:
Hi-Lite(R)--The Hi-Lite(R) system, which was introduced into the
marketplace in fiscal 1985, offers substantial weight savings and improved
performance characteristics while offering the customer a wide choice of
collars which may be used with a common pin. The Hi-Lite(R) system is
qualified at major airframe manufacturers and has gained widespread usage
and acceptance by HSC's customers.
Hi-Lok(R)/Hi-Tigue(R)--The Hi-Lok(R) fastening system, designed and
introduced by HSC in 1957, is by far the largest selling structural
fastening system in the industry. It ensures the proper and safe assembly of
aircraft components by making it extremely difficult to over or under
tighten the fasteners during the installation process. The product is a
threaded fastener system which incorporates the best features of a rivet and
a bolt, in combination with a highly developed and automated installation
process. Hi-Lok(R) collars are designed to separate into sections when the
proper torsional stress is applied to the collar during installation. The
Hi-Tigue(R) incorporates the features of the Hi-Lok(R) pin and frangible
collar to control preload. In addition, the Hi-Tigue(R) pin is designed with
a special shape which makes the concept ideally suited for cases where the
pin must be forced into the hole. Upon installation, the Hi-Tigue(R)
pre-stresses the material of the structure surrounding the pin, providing
increased fatigue life for the joint.
HSC, through its wholly-owned subsidiary Hi-Shear Automotive Corp., also
produces proprietary brake cable tension adjusters and wheel bearing retainer
nuts for the automotive and light truck industry.
Marketing and Customers. HSC's marketing organization consists of sales
engineers who work with prime contractors and government agencies and their
design and process engineers, production employees and procurement personnel;
successful marketing of HSC's products requires close and constant contact with
customers.
HSC's aircraft fastener products are marketed as complete systems which
include both fasteners and installation tooling. Generally, a fastener system is
selected based on technical performance, weight and installed cost. Frequently,
the system's ability to be installed in limited access areas of the structure
dictates systems selection. Marketing efforts are initially focused on
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design-level acceptance of a fastening system without a particular program. The
process of acquiring approval for a fastening system at this level may require
several years. After a system has been specified for use in a particular
program, marketing emphasis shifts to normal sales calls and order requests. HSC
employs a direct sales force of fifteen individuals, with eleven sales engineers
deployed in the field, three located in its Torrance, California office and one
located in Rugby, England. In addition to direct sales and customer service, HSC
maintains relationships with nine official distributors who specialize in
aerospace components supplies. HSC's marketing and sales activities worldwide
are under the direction of the Torrance, California office. Original equipment
manufacturers (e.g., The Boeing Company, McDonnell Douglas Corp., etc.) and the
United States Government represent approximately 36% of annual fastener sales,
while distributors represent the remainder.
Approximately 33% of the Company's consolidated net sales for the year ended
May 31, 1995 were to airframe manufacturers for use in various aircraft
programs, 5% directly to, or to prime contractors directly for, the United
States Government, 21% to commercial non-aerospace customers and the remaining
41% to various airframe subcontractors and other customers. Sales during the
year ended May 31, 1995 represented approximately 700 accounts and approximately
44% of consolidated net sales were to the Company's five largest customers.
Approximately 17%, 11% and 6% of consolidated net sales during the fiscal year
were to purchasing entities of The Boeing Company, British Aerospace, and Wesco
Aircraft, respectively.
Competition. There are two basic aircraft fastening systems in HSC's primary
market, each represented by several manufacturers which are in direct
competition. HSC's concepts (Hi-Lok(R)/Hi-Tigue(R)/Hi-Lite(R)) depend on
threaded pins and collars while the second basic system incorporates a grooved
pin with a cylindrical collar which is swaged (pressed) into the pin grooves
during the installation. Both systems have been approved at the design level and
there are multiple sources for each system. The Hi-Lok(R)/Hi-Lite(R) systems
developed by HSC remain the more broadly used of the two concepts because the
parts are more easily installed in areas of limited access.
Manufacturers in the industry compete on the basis of price (particularly on
large titanium orders), quality, delivery and system design. Competition within
the aerospace fasteners market is mainly concentrated among less than a dozen
manufacturers.
Patents and Licenses. HSC presently owns or controls many United States and
foreign patents and has filed applications for additional patents which relate
with varying degrees of significance to products manufactured or employed in
aerospace and automotive fastening systems. In addition, it produces certain
products under licenses from others. While it is believed that the existing
patents and applications are of material value, it is also believed that
technical knowledge, experience, skill in development and production, and the
specialized machinery required for production of sophisticated fasteners and
tools are of material significance in maintaining a competitive position.
Patents relating to Hi-Lok(R) expired in 1985 and Hi-Tigue(R) systems expired in
1988. However, due to the success of the Hi-Lite(R) system, management does not
expect the Company to be significantly affected by patent expirations in the
near future.
Historically, the aerospace fastener market has supported two basic classes
of fastener systems, proprietary and standard systems. HSC has developed many
proprietary products and there are various licenses with other companies under
some or all of the HSC patents, technical know-how and Hi-Lok(R) and Hi-Tigue(R)
trademarks to manufacture, use and sell fasteners; HSC recorded approximately
$1.2 million in royalty income under these licenses during the year ended May
31, 1995 compared with $1.1 million in the prior fiscal year. Unless terminated
earlier, the technical know-how and trademark licenses continue to pay
royalties, but the patent licenses and related royalties expire with respective
patents. In addition, the Hi-Lite(R) system is covered by
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two issued patents and one divisional patent which is pending. The Hi-Lite(R)
patent will continue beyond the year 2000.
Manufacturing and Production. Fastener production requires the use of
various machine tools, including hot and cold headers, trimmers, pointers,
presses, thread rollers, screw machines, lathes and precision grinders. The
production process includes various cleaning, plating and heat treating
operations and numerous quality assurance inspections. Aerospace fasteners are
manufactured from a variety of materials including stainless, carbon and alloy
steels, aluminum, titanium, nickel base and other high temperature alloys. A
constant desire to reduce aircraft weight and improve operating performance has
increased the demand for titanium fasteners. All raw materials are readily
available from multiple sources and are usually purchased domestically. HSC has
not experienced any significant disruption of its operations as a result of
energy or material shortage, although no representation can be made as to the
possible impact of shortages of this nature which may arise in the future as
well as the possible impact of government controls such as allocation, rationing
or import restrictions.
Engineering and Product Development. These activities include development
engineering, product engineering and sales support and a continuing engagement
in the development of new fastening systems, new applications for existing
products and problem solving capability in the highly technical aspects of
separation, initiation and actuation systems. At present, almost all of HSC's
products have been conceived and developed in-house by their respective
engineering departments. Expenditures for these activities which are expensed by
the Company as incurred amounted to $1.2 million, $1.0 million, and $1.3
million, for the years ended May 31, 1995, 1994 and 1993, respectively.
Foreign Operations. HSC manufactures its principal product line and markets
its full line of fastening systems in Europe through its wholly-owned
subsidiary, Hi-Shear Fasteners Europe Limited, located in Rugby, England.
Certain products are manufactured by HSC in the United States and exported from
the United States to foreign customers; the dollar value of goods exported from
the United States to foreign customers was $8.3 million, $7.2 million and $14.6
million, for the years ended May 31, 1995, 1994 and 1993, respectively. Revenues
of Hi-Shear Fasteners Europe Limited to unaffiliated customers were $12.1
million, $10.3 million and $13.4 million, for the years ended May 31, 1995, 1994
and 1993, respectively.
Backlog. Backlog, consisting of unfilled purchase orders with scheduled
delivery dates and therefore believed to be firm and excluding backlog that is
not reasonably expected to be filled within the subsequent year, for continuing
operations was approximately $23.5 million at May 31, 1995, $23.8 million at May
31, 1994 and $32.5 million at May 31, 1993.
Business Fluctuations. HSC's businesses are not seasonal in nature. However,
the aerospace fastening systems segment is cyclical in nature as it depends on
the rate of the new aircraft production for both commercial and military
applications. The rate of commercial aircraft production, which was severely
depressed during the period 1974 to early 1977, began to improve during late
1977 and continued to increase during 1978 through 1980. Commercial aircraft
production decreased during 1981 through mid-1984 due to reduced orders and
cancellations related to losses incurred by domestic and international airlines
as well as the emergence of newer fuel efficient designs and the extended
building period required to attain full production capabilities. The effects of
the 1981-1984 decline in commercial aircraft production were somewhat moderated
by increased military expenditures in both segments of the Company's business.
There was a significant improvement in the number of commercial jet transport
orders from 1985 to 1991 which resulted in additional increases in the
production of commercial jet aircraft.
At present, the Company is experiencing a decline in the level of commercial
aircraft order activity. The economic downturn has prompted the world's airlines
to curtail orders of commercial
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aircraft. The depressed rate of new orders is expected to continue through
calendar 1995 and most likely into 1996. U.S. and foreign airlines are
forecasted to experience 5 to 6 percent growth rates in passenger travel over
the next 15 to 20 years.
Working Capital Practices. HSC generates the most significant part of its
sales from production against firm orders, rather than from inventory stock,
although there are, at certain times, standard items that are produced for
inventory. Sales terms to its customers are consistent with industry practices.
Environment/Energy/Government Regulation. Compliance with federal, state and
local laws and regulations pertaining to the discharge of materials into the
environment or otherwise relating to the protection of the environment has not
had and is not anticipated to have any material effect on the capital
expenditures, earnings or competitive position of HSC. Additional information
regarding these matters is provided in the Commitments and Contingencies
footnote in the Notes to Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1995,
which accompanies this Proxy Statement.
HSC, as is common with many manufacturers, has expended, and can be expected
to expend in the future, modest amounts for investigation of environmental
conditions and installation of environmental control facilities, remediation of
environmental conditions and other similar matters.
HSC has not experienced any significant disruption of its operations as a
result of any energy or material shortages although no representation can be
made as to the possible impact of shortages of this nature which may arise in
the future as well as the possible impact of governmental controls such as
allocation, rationing or import restrictions.
Employees. Approximately 625 persons are employed by HSC, none of whom are
covered by a collective bargaining agreement. Management believes that, in
general, wages, bonuses, fringe benefits and other conditions of employment
offered throughout HSC are equivalent to those found elsewhere in similar
business operations.
Properties. HSC's fastener operations are conducted at a number of buildings
in Torrance, California (288,000 square feet) located on approximately 26 acres
of land leased from the City of Torrance, under leases expiring in 2004 at an
annual rental rate of $8,800. Approximately 6 acres of the land are surplus and
can be used for future expansion. Title to this land was acquired by the City of
Torrance from the United States under a deed containing certain conditions which
could result in reversion of the property. However, it is believed that there is
no likelihood of this occurring during the period of occupancy. At expiration or
termination of the lease, all interest in the buildings located on the leased
premises will terminate.
HSC's European facility is located in Rugby, England. The facility consists
of a 56,300 sq. ft. building leased for approximately $266,000 per year. The
lease will expire in 2004.
CERTAIN INFORMATION CONCERNING GFI
GFI is a publicly held French company engaged in the production of
industrial fasteners and fastening systems (which account for 90% of GFI's
consolidated revenue) and perfume and cosmetics packaging (which accounts for
10% of GFI's consolidated revenue). GFI ranks third in the European market in
the industrial fastener and fastening system sector, and it manufactures screws,
nuts, bolts, axles, rivets, pins and other mechanical components for the
aeronautic and aerospace industries, the auto and original equipment sectors and
the standard fastener markets, notably the construction, carpentry, mechanics,
maintenance services and do-it-yourself segments. In the perfume and cosmetics
packaging area, GFI manufactures an extensive range of highly diverse aluminum
parts for the most famous names in the beauty industry (including Dior, L'Oreal
and Yves Saint Laurent). GFI does not currently have any operations in the
United States.
GFI's fiscal 1994 consolidated revenue was FF 1,448 million ($290 million),
and its fiscal 1994 net profit was FF 63.6 million ($12.7 million).
25
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial information of the Company
and its subsidiaries for the five years ended May 31, 1995, derived from the
Company's audited consolidated financial statements for such periods, and for
the three months ended August 31, 1995, derived from the Company's unaudited
consolidated financial statement for such period. This selected financial
information should be read in conjunction with the Company's audited and
unaudited Consolidated Financial Statements and Notes thereto and Management's
Discussion and Analysis of Results of Operations and Financial Condition which
are included in the Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1995 and its Quarterly Report on Form 10-Q for the fiscal quarter
ended August 31, 1995, which accompany this Proxy Statement.
<TABLE>
<CAPTION>
FOR THE
THREE
MONTHS
ENDED FOR THE FISCAL YEAR ENDED MAY 31,
AUGUST 31, ------------------------------------------------
1995 1995 1994 1993 1992 1991
---------- ------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Selected Statement of Operations Data:
Revenues from continuing operations.... $ 14,877 $58,639 $56,465 $71,519 $88,113 $104,873
---------- ------- ------- ------- ------- --------
---------- ------- ------- ------- ------- --------
Earnings (loss) from continuing
operations............................. $ (475) $ (545) $(2,974) $ (943) $ 1,666 $ 8,034
Earnings (loss) from discontinued
operations (A)......................... -- -- (2,616) (7,312) 442 (25,667)
Earnings from extraordinary item (B)... -- -- -- -- 240 --
---------- ------- ------- ------- ------- --------
Net earnings (loss).................... $ (475) $ (545) $(5,590) $(8,255) $ 2,348 $(17,633)
---------- ------- ------- ------- ------- --------
---------- ------- ------- ------- ------- --------
Weighted Average Shares Outstanding.... 5,855 5,855 5,855 5,855 5,855 5,855
---------- ------- ------- ------- ------- --------
---------- ------- ------- ------- ------- --------
Per Common Share Data:
Earnings (loss) from continuing
operations............................. $ (.08) $ (.09) $ (.51) $ (.16) $ .28 $ 1.37
Earnings (loss) from discontinued
operations (A)......................... -- -- (.45) (1.25) .08 (4.38)
Earnings from extraordinary item (B)... -- -- -- -- .04 --
---------- ------- ------- ------- ------- --------
Net earnings (loss).................... $ (.08) $ (.09) $ (.96) $ (1.41) $ .40 $ (3.01)
---------- ------- ------- ------- ------- --------
Dividends per Common Share............. -- -- -- -- -- $ .055
---------- ------- ------- ------- ------- --------
---------- ------- ------- ------- ------- --------
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF MAY 31,
AUGUST 31, -----------------------------------------------
1995 1995 1994 1993 1992 1991
---------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Selected Balance Sheet Data:
Current assets.......................... $ 35,222 $34,846 $35,659 $44,324 $54,253 $62,447
Current liabilities..................... 13,468 12,563 12,013 24,025 14,282 14,713
Working capital......................... 21,754 22,283 23,646 20,299 39,971 47,734
Total assets............................ 49,955 49,514 49,115 58,826 71,225 74,453
Long-term debt.......................... 10,108 9,872 9,953 -- 12,662 16,530
Stockholders' equity.................... 26,379 27,079 27,149 34,801 44,171 41,598
Book value per share.................... 4.51 4.62 4.64 5.94 7.54 7.10
</TABLE>
- ------------
(A) The loss from discontinued operations in fiscal 1994 includes additional
expenses, legal costs and an unexpected shortfall in amounts realized in the
sale of material and equipment of a discontinued operation. In fiscal 1993
and 1991 the loss from discontinued operations includes an after-tax
provision of $6.2 million ($1.05 per share) and $22.4 million ($3.83 per
share) respectively, to write down the net assets of the discontinued
businesses to their estimated realizable values, record estimated
transaction costs and report operating results during the phaseout period.
(B) Extraordinary item represents the income tax benefit from the utilization of
an operating loss carryforward.
26
<PAGE>
UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated condensed financial
statements reflect the financial position of the Company as of August 31, 1995
and the results of its operations for the fiscal year ended May 31, 1995 and the
three months ended August 31, 1995, both historically and on a pro forma basis
giving effect to the GFI Sale as if it had been consummated as of August 31,
1995, in the case of the balance sheet, and as of June 1, 1994, in the case of
the statements of operations. No pro forma adjustments have been made to reflect
any interest income that may be earned on the approximately $30 million in
estimated net proceeds to be received from the GFI Sale. The pro forma financial
information does not purport to be indicative of the results which would
actually have been obtained had the GFI Sale been consummated as of the date and
for the periods presented or which may be obtained in the future.
Consolidated historical data used to prepare the pro forma financial
information were derived from the Company's audited consolidated financial
statements for the year ended May 31, 1995 and the unaudited consolidated
financial statements for the three month period ended August 31, 1995, which are
included in the Company's Annual Report on Form 10-K for the fiscal year ended
May 31, 1995 and its Quarterly Report on Form 10-Q for the quarter ended August
31, 1995, which accompany this Proxy Statement. The pro forma financial
information should be read in conjunction with Management's Discussion and
Analysis of Results of Operations and Financial Condition contained in the
Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1995, and
its Quarterly Report on Form 10-Q for the quarter ended August 31, 1995.
27
<PAGE>
HI-SHEAR INDUSTRIES INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AUGUST 31, 1995
<TABLE>
<CAPTION>
ELIMINATION PRO FORMA
CONSOLIDATED OF HSC(1) ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and equivalents.................... $ 942 $ 32,580 (2) $31,872
(1,650)(3)
Accounts receivable..................... 10,302 $ (10,302) 0
Inventories............................. 22,015 (22,015) 0
Other................................... 1,963 (1,383) 580
------------ ----------- ----------- ---------
Total current assets.................. 35,222 (33,700) 30,930 32,452
Net assets of HSC......................... 37,113 (37,113)(2) 0
Property, plant and equipment, net........ 11,130 (11,021) 109
Other assets.............................. 3,603 (2,439) (140)(3) 1,024
------------ ----------- ----------- ---------
Total assets.............................. $ 49,955 $ (10,047) $ (6,323) $33,585
------------ ----------- ----------- ---------
------------ ----------- ----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable........................... $ 2,426 $ (2,426)(2) $ 0
Accounts Payable........................ 3,295 $ (3,295) 0
Accrued income taxes.................... 295 (128) 500 (3) 667
Accrued salaries and wages.............. 1,801 (1,801) 0
Other accrued expenses.................. 5,651 (4,823) 828
------------ ----------- ----------- ---------
Total current liabilities............. 13,468 (10,047) (1,926) 1,495
Long-term debt............................ 10,108 (10,108)(2) 0
Stockholders' equity...................... 26,379 8,001 (2) 32,090
(2,290)
------------ ----------- ----------- ---------
Total liabilities and stockholders' $ 49,955 $ (10,047) $ (6,323) $33,585
equity....................................
------------ ----------- ----------- ---------
------------ ----------- ----------- ---------
</TABLE>
See notes to unaudited pro forma consolidated financial statements.
28
<PAGE>
HI-SHEAR INDUSTRIES INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED MAY 31, 1995
<TABLE>
<CAPTION>
ELIMINATION PRO FORMA
CONSOLIDATED OF HSC(4) ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Net Sales.................................. $ 57,484 $ (57,484) $ 0
Other...................................... 1,155 (1,155) 0
------------ ----------- ---------
58,639 (58,639) 0
Cost of goods sold........................... 46,855 (46,855) 0
Selling, general and administrative
expense...................................... 10,826 (8,210) $ (500)(5) 2,116
------------ ----------- ----------- ---------
57,681 (55,065) (500) 2,126
------------ ----------- ----------- ---------
Operating income (loss).................... 958 3,574 500 (2,116)
Interest expense............................. 1,292 (66) (1,223)(6) 3
------------ ----------- ----------- ---------
Loss before income taxes................... (334) 3,508 1,723 (2,119)
Provision for income taxes................... 211 (164) 47
------------ ----------- ----------- ---------
Net loss................................... $ (545) $ 3,344 $ 1,723 $(2,166)
------------ ----------- ----------- ---------
------------ ----------- ----------- ---------
Weighted average shares outstanding.......... 5,855 5,855
------------ ---------
------------ ---------
Net loss per share........................... $ (0.09) $ (0.37)
------------ ---------
------------ ---------
</TABLE>
See notes to unaudited pro forma consolidated financial statements.
29
<PAGE>
HI-SHEAR INDUSTRIES INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED AUGUST 31, 1995
<TABLE>
<CAPTION>
ELIMINATION PRO FORMA
CONSOLIDATED OF HSC(4) ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Net Sales................................. $ 14,489 $ (14,489) $ 0
Other..................................... 388 (388) 0
------------ ----------- ---------
14,877 (14,877) 0
Cost of goods sold.......................... 12,552 (12,552) 0
Selling, general and administrative
expense..................................... 2,470 (1,820) $(109)(5) 541
------------ ----------- ----------- ---------
15,022 (14,372) (109) 541
------------ ----------- ----------- ---------
Operating income (loss)..................... (145) 505 109 (541)
Interest expense............................ 342 (30) (312)(6) 0
------------ ----------- ----------- ---------
Loss before income taxes.................. (487) 475 421 (541)
Provision for income taxes.................. (12) (12) 0
------------ ----------- ----------- ---------
Net loss.................................... $ (475) $ 487 $ 421 $ (541)
------------ ----------- ----------- ---------
------------ ----------- ----------- ---------
Weighted average shares outstanding......... 5,855 5,855
------------ ---------
------------ ---------
Net loss per share.......................... $ (0.08) $ (0.09)
------------ ---------
------------ ---------
</TABLE>
See notes to unaudited pro forma consolidated financial statements.
30
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEET ADJUSTMENTS
1. To deconsolidate the assets, liabilities and stockholders equity of HSC
and include the net amount as "Net assets of HSC" in the unaudited pro forma
consolidated balance sheet at August 31, 1995.
2. To reflect the sale of HSC for $45,113,000 (the purchase price of
$46,000,000 reduced by the shortfall which would have occurred in the
consolidated net worth of HSC from the consolidated net worth threshold of
$38,000,000 specified in the GFI Stock Purchase Agreement, assuming the GFI Sale
had been consummated as of August 31, 1995). Concurrent with the sale, cash
proceeds are used to prepay the specified debt obligations.
3. To reflect the estimated transaction costs, including scheduled
prepayment premium and loan origination costs of $290,000 and estimated tax
liability of $500,000 from the gain on the sale.
INCOME STATEMENT ADJUSTMENTS
4. To eliminate the operating results of HSC from the unaudited consolidated
condensed statement of operations.
5. To reflect a decrease in selling, general and administrative expense for
(i) the amortization of loan origination and other finance costs relating to the
Company's line of credit which will be eliminated upon the completion of the
transaction and (ii) certain pension costs which will be assumed by HSC upon the
completion of the GFI Sale.
6. To reflect a decrease in interest expense resulting from the prepayment
of debt obligations from the loan proceeds.
31
<PAGE>
MARKET FOR THE COMPANY'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "HSI." The following table sets forth the high and low prices
per share of the Company's common stock, as reported on the NYSE Composite Tape
for the periods indicated.
PER COMMON SHARE
MARKET PRICE
-----------------
HIGH LOW
----- -----
Quarter Ended:
August 31, 1995................................ $8.13 $6.63
Quarter Ended:
August 31, 1994................................ 6.75 5.63
November 30, 1994.............................. 6.00 4.88
February 28, 1995.............................. 5.00 3.88
May 31, 1995................................... 5.75 3.88
Fiscal Year Ended May 31, 1995................... $6.75 $3.88
Quarter Ended:
August 31, 1993................................ $5.88 $4.88
November 30, 1993.............................. 5.75 4.38
February 28, 1994.............................. 5.38 3.75
May 31, 1994................................... 6.63 4.63
Fiscal Year Ended May 31, 1994................... $6.63 $3.75
The Company has not paid a dividend on its common stock since August 1990.
As of December 15, 1995 there were approximately 900 holders of record of
the Company's common stock.
On October 9, 1995, immediately prior to the first announcement by the
Company of the proposed GFI Sale, the high, low and closing prices of the
Company's common stock on the NYSE were each $7.125 per share.
As of December 29, 1995, the high, low and closing prices of the Company's
common stock on the NYSE were $7.375 per share, $7.25 per share and $7.25 per
share, respectively.
There can be no assurance that the Company's common stock will continue to
meet the criteria to maintain its listing on the NYSE after consummation of the
GFI Sale and the distribution to the Company's stockholders of approximately
one-half of the net proceeds of the GFI Sale, as is currently intended (see
"Proposal No. 1: Approval of GFI Sale--Proposed Disposition of Proceeds; Impact
of the GFI Sale on the Company" above). Such criteria include having an
aggregate market value of outstanding shares of at least $8 million and of
publicly held shares (i.e., shares held by persons other than directors,
officers, their immediate families and other concentrated holdings of 10% or
more) of at least $5 million; net tangible assets available to the common stock
of at least $8 million; and average net income after taxes for the past three
years of at least $600,000. In the event the NYSE advises the Company that its
common stock can no longer be listed for trading on the NYSE, the Company will
explore a possible listing of its common stock on another national securities
exchange or NASDAQ. The trading market for the Company's common stock may be
less active in the event it is traded in the over-the-counter market rather than
on a securities exchange.
32
<PAGE>
PROPOSAL NO. 2:
AMENDMENT OF THE COMPANY'S
CERTIFICATE OF INCORPORATION AND
BY-LAWS TO ELIMINATE THE CLASSIFIED BOARD
The Company's Certificate of Incorporation and By-Laws currently provide for
a classified board of directors, with each director serving a three-year term.
The provisions of the Certificate of Incorporation and By-Laws establishing the
classified board and governing the election of directors may only be amended,
altered, changed or repealed by the affirmative vote of the holders of 80% or
more of the outstanding shares of common stock of the Company.
The Company's Board of Directors believes that it is in the best interest of
the Company and its stockholders to eliminate the classified board of directors
to permit the stockholders to elect all directors annually. The Board of
Directors believes that this will insure that all directors will be more
accountable to all stockholders each year.
The resolutions to be considered by the stockholders in connection with this
proposal, which resolutions have been adopted by the Board of Directors, are
annexed as Appendix C to this Proxy Statement. If the proposed amendments to the
Company's Certificate of Incorporation and By-Laws are approved by the
affirmative vote of the holders of 80% or more of the outstanding shares of
common stock of the Company, they shall become effective immediately upon the
filing of all necessary documents with the Secretary of State of the State of
Delaware. If the proposed amendments are approved, the Company intends to make
such filings promptly after the stockholder vote regarding this proposal.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR
THE PROPOSED AMENDMENTS TO THE COMPANY'S CERTIFICATE OF INCORPORATION AND
BY-LAWS.
If the proposed amendments to the Company's Certificate of Incorporation and
By-Laws are approved, they will determine the manner in which directors are to
be elected in connection with Proposal No. 3. Approval of the proposed
amendments will not terminate or shorten the current term of office of any
director. However, if the proposed amendments are approved, the two current
Class C directors whose terms expire with the forthcoming Annual Meeting will be
elected to serve until the 1996 Annual Meeting, rather than for a three-year
term. Directors will be elected for one-year terms at the 1996 Annual Meeting of
Stockholders to fill those two directorships as well as those of the two Class A
directors whose current terms expire with the 1996 Annual Meeting. Furthermore,
Philip Slonim, the only Class B director whose current term expires with the
1997 Annual Meeting of Stockholders, has indicated his intention to resign and
stand for reelection at the 1996 Annual Meeting, in which case all five
directors will be elected at the 1996 Annual Meeting and at each Annual Meeting
thereafter.
33
<PAGE>
PROPOSAL NO. 3:
ELECTION OF DIRECTORS
The term of office of the Company's two Class C directors expires with the
forthcoming Annual Meeting or at such time as their successors shall have been
elected and qualified. Based on recommendations of the Nominating Committee, the
Board of Directors of the Company proposes the reelection of Harold L. Bernstein
and Victor J. Galgano as directors of the Company. If the proposed amendments to
the Company's Certificate of Incorporation and By-Laws (described above under
"Proposal No.2: Amendment of the Company's Certificate of Incorporation and By-
Laws to Eliminate Classified Board") are approved, Mr. Bernstein and Mr. Galgano
are nominated for reelection as directors for a one-year term expiring with the
1996 Annual Meeting of Stockholders. If the proposed amendments are not
approved, Mr. Bernstein and Mr. Galgano are nominated for reelection as Class C
directors to serve for a full three-year term expiring with the 1998 Annual
Meeting of Stockholders.
The following table sets forth certain information relating to the nominees
and the directors whose terms of office will continue after this Annual Meeting.
Unless otherwise instructed, the proxy holders will vote the proxies received by
them for the above named nominees, who have consented to serve if elected. If a
nominee is unable to serve as a director, an event not now anticipated, the
proxies will be voted by the proxy holders for a substitute nominee.
<TABLE>
<CAPTION>
SHARES AND % OF
SERVED AS COMMON STOCK
PRINCIPAL DIRECTOR YEAR IN WHICH TERM BENEFICIALLY OWNED
NAME OCCUPATION AGE SINCE WILL EXPIRE AS OF 12/28/95
- ----------------------- ------------------- --- --------- --------------------- ------------------
<S> <C> <C> <C> <C> <C>
NOMINEES
Harold L. Bernstein.... Lawyer. Secretary 74 1970(1) 1996/Class C 1998(2) 46,701(3)
(& Vice President (.80%)
until 1986) of the
Company since 1977.
Director of
Pressure Piping
Components, Inc.
(until 1985 a
manufacturer of
industrial
products).
Victor J. Galgano...... Vice President and 52 1989 1996/Class C 1998(2) 1,195
Chief Financial (.02%)
Officer of the
Company since 1989.
Director of
Pressure Piping
Components, Inc.
OTHER DIRECTORS
David A. Wingate....... Chairman of the 74 1959(1) Class A 1996 1,181,494(4)
Board, Chief (20.18%)
Executive Officer
and President
(except 1983-1987)
of the Company
since 1977.
Director of
Pressure Piping
Components, Inc.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
SHARES AND % OF
SERVED AS COMMON STOCK
PRINCIPAL DIRECTOR YEAR IN WHICH TERM BENEFICIALLY OWNED
NAME OCCUPATION AGE SINCE WILL EXPIRE AS OF 12/28/95
- ----------------------- ------------------- --- --------- --------------------- ------------------
<S> <C> <C> <C> <C> <C>
Arthur M. Winston...... Investment Manager, 51 1991 Class A 1996 -0-
Glickenhaus & Co.
(1991 to present);
Vice-President,
Goldman Sachs & Co.
(1989 to 1991).
Director of
LeaRonal, Inc. (a
processor of
chemical
specialties for the
electronics and
metal finishing
industries).
Director of
Pressure Piping
Components, Inc.
Philip M. Slonim....... Private investor 75 1967(1) Class B 1997(2) 446,067(5)
for more than five (7.62%)
years. Chairman of
Pressure Piping
Components, Inc.
</TABLE>
- ------------
(1) Includes period of service as director of one of the predecessor
corporations merged to form the Company in 1977.
(2) The terms of Mr. Bernstein and Mr. Galgano will expire in 1996 if the
proposed amendments to the Company's Certificate of Incorporation and
By-Laws are approved (see "Proposal No. 2: Amendment of the Company's
Certificate of Incorporation and By-Laws to Eliminate Classified Board"
above) and in 1998 if such proposed amendments are not approved. Mr. Slonim
has indicated his intention to resign and stand for reelection at the 1996
Annual Meeting if such proposed amendments are approved.
(3) Includes shares owned by Mr. Bernstein's spouse.
(4) Includes shares held by Mr. Wingate as the sole trustee of The Wingate
Family Trust of 1980 and shares held by Mr. Wingate's spouse as the sole
trustee of a revocable trust. Does not include 150,000 shares owned by The
David A. & Shoshanna Wingate Foundation Inc. of which Mr. Wingate is one of
four directors.
(5) Mr. Slonim and spouse hold these shares as trustees of a revocable trust.
Each of the persons listed is now serving as a director of the Company and
was previously elected as a director by the stockholders. Messrs. Wingate and
Slonim are brothers-in-law. Mr. Wingate, Mr. Slonim and certain affiliated
stockholders have entered into a Stockholders Agreement with GFI pursuant to
which they have agreed to vote all shares of common stock of the Company which
they beneficially own for the GFI Sale. See "Proposal No. 1: Approval of GFI
Sale--Stockholder Approval" above.
COMPENSATION OF DIRECTORS
Full-time employees of the Company are not paid any fees or remuneration for
their services as members of the Board or any Board Committee. All other
directors are paid fees at the annual rate of $10,000. In addition, Mr.
Bernstein receives a monthly stipend of $2,000 for serving as corporate
secretary.
MEETINGS OF THE BOARD AND ITS COMMITTEES
The Company's Board of Directors has standing Audit and Finance,
Compensation and Nominating Committees. The Audit and Finance Committee is
presently composed of Mr. Winston and Mr. Slonim, neither of whom is an employee
of the Company. This Committee met once during the 1995 fiscal year. Its
activities include recommendation of the appointment of independent accountants
and review of the financial statements, the activities of the independent
accountants,
35
<PAGE>
the scope of the audit, the accountants' report on internal controls, the
operations of the internal auditors, and the audit fee.
The Compensation Committee, presently composed of Mr. Slonim and Mr.
Winston, met three times during the past fiscal year. In discharging its
assigned duties, the Compensation Committee determines the remuneration of
executive officers and management personnel whose base salary is $100,000 or
more, approves contingent compensation agreements, awards discretionary bonus
payments to key employees pursuant to the Company's incentive compensation
program, recommends the grant of options pursuant to the Company's stock option
plan, and reviews generally the various employee benefit plans of the Company
and its subsidiaries.
The Nominating Committee, presently composed of Mr. Wingate and Mr. Winston,
met once during the past fiscal year. This Committee's responsibilities are to
review and recommend to the full Board nominees for election as directors at the
annual meeting of stockholders and nominees for filling vacancies in the Board.
It will also consider timely recommendations by stockholders, which should be
submitted in writing to the Secretary of the Company and should include a
statement as to the qualifications and willingness of the candidate to serve on
the Board of Directors.
In the 1995 fiscal year there were three meetings of the Board of Directors.
Each director attended more than 75% of the meetings of the Board and the
Committees on which he served.
36
<PAGE>
OWNERSHIP OF COMMON STOCK BY CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 15, 1995, certain information
concerning the persons known to management to be the beneficial owners of more
than 5% of the Company's common stock, and for all of the Company's officers and
directors as a group. Except as otherwise indicated, the persons listed have
sole voting and investment power with respect to shares beneficially owned by
them.
NAME AND ADDRESS OF AMOUNT PERCENT OF
BENEFICIAL OWNER BENEFICIALLY OWNED COMMON STOCK
- ----------------- ------------------ ------------
GAMCO Investors, Inc....................... 2,252,990(1)(2) 38.48%
655 Third Avenue
New York, NY 10017
David A. Wingate........................... 1,181,494(3) 20.18%
3333 New Hyde Park Road
North Hills, NY 10042
Philip M. Slonim........................... 446,067(4) 7.62%
P.O. Box 27835
San Diego, CA 92128
Dimensional Fund Advisors Inc.............. 418,300(5) 7.14%
1299 Ocean Avenue
Suite 650
Santa Monica, CA 90401
All directors and officers as a group...... 1,675,457 28.62%
- ------------
(1) Firm and related entities have investment discretion regarding this
aggregate number of shares, which are beneficially owned by many investment
clients.
(2) Share ownership is based upon information in Amendment No. 34 to Schedule
13D filed with the Securities and Exchange Commission.
(3) Includes shares held by Mr. Wingate as the sole trustee of The Wingate
Family Trust of 1980 and shares held by Mr. Wingate's spouse as the sole
trustee of a revocable trust. Does not include 150,000 shares owned by The
David A. & Shoshanna Wingate Foundation Inc. of which Mr. Wingate is one of
four directors.
(4) Mr. Slonim and spouse hold these shares as trustees of a revocable trust.
(5) Share ownership is based upon information in Amendment No. 6 to Schedule 13G
filed with the Securities and Exchange Commission; the firm certifies that
the shares were not acquired for the purpose of changing or influencing
control of the Company. Shares are held in portfolios of DFA Investment
Dimensions Group Inc., a registered open-end investment company, or the DFA
Group Trust, an investment vehicle for qualified employee benefit plans,
both of which Dimensional Fund Advisors Inc. serves as investment manager.
Dimensional disclaims beneficial ownership of all such shares.
SECTION 16(A) REPORTS
Mr. Victor J. Galgano failed to file timely a Form 5 with the Securities and
Exchange Commission reporting the purchase of 500 shares of the Company's common
stock in the open market.
37
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation for services rendered
to the Company and its subsidiaries during the fiscal years 1995, 1994 and 1993,
paid to or accrued for those persons who were, at May 31, 1995, the Company's
Chief Executive and all of the other executive officers of the Company and
subsidiaries whose total annual salary and bonus exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
----------------
NAME AND SALARY BONUS
PRINCIPAL POSITION YEAR ($) ($)
- ------------------ ---- ------- -----
<S> <C> <C> <C>
David A. Wingate................................................... 1995 458,000 0
Chairman, President and Chief Executive 1994 458,000 0
1993 458,000 0
Robert A. Schell................................................... 1995 175,000 0
Vice President and Chief Operating Officer/Space and Defense 1994 175,000 0
1993 175,000 0
Patrick Meade...................................................... 1995 160,000 0
President of HSC 1994 160,000 0
1993 129,000 0
Victor J. Galgano.................................................. 1995 150,000 0
Vice President and Chief Financial Officer 1994 150,000 0
1993 150,000 0
</TABLE>
Certain incidental personal benefits to executive officers of the Company
(not otherwise disclosed in this proxy statement) may result from expenses
incurred by the Company or its subsidiaries in the interest of attracting and
retaining qualified personnel. The incremental cost to the Company and its
subsidiaries of providing such incidental personal benefits did not, for the
1995 fiscal year, exceed $25,000 for any individual named in the cash
compensation table or, with respect to all executive officers as a group, the
amount of $25,000 multiplied by the number of persons in the group.
CONTINGENT COMPENSATION AGREEMENTS
The Company currently has an arrangement with Robert A. Schell, Vice
President and Chief Operating Officer/Space and Defense of the Company and
Acting President of Defense Systems, whereby the Company is obligated, in the
event of a change in control of the Company, to pay a minimum amount of $200,000
plus additional contingent compensation dependent upon the fair market value of
the Company's common stock exceeding a specified value upon the change of
control as well as the attainment of specific levels of operating income of the
operation with which the executive is concerned.
EMPLOYEE BENEFIT PLANS
All of the domestic employees of the Company's primary subsidiary, HSC, have
been covered by a defined benefit retirement plan that provides a monthly
retirement benefit equal to $12.50 times the number of years of credited
service. Effective February 28, 1991, accrued benefits under this defined
benefit pension plan were frozen and active participants became fully vested.
The Company also has contractual arrangements with certain key employees of HSC
which provide additional benefits under a non-qualified supplementary retirement
plan. Such arrangements were made available under a one-time grant in 1991 to
approximately ten senior management employees of HSC at that time and were
designed to increase their total retirement benefits, for a period of ten
38
<PAGE>
years following their retirement, to approximately 60% of their estimated salary
in the year prior to retirement. The right to such additional benefits vested
after a five-year period from the date of the grant. The Stock Purchase
Agreement provides for the Company to assign to HSC, and for HSC to assume, at
or prior to the consummation of the GFI Sale, all of the assets and liabilities
related to this supplementary retirement plan. Accordingly, following the GFI
Sale, the Company will have no further liability or obligation with respect to
this plan.
The Company and its domestic subsidiaries have adopted the Hi-Shear Tax
Deferred Investment/Profit-Sharing Plan (a Section 401(k) plan) administered by
one of the subsidiaries for the benefit of all eligible employees. Under this
plan each eligible employee may contribute up to 15% of base salary, subject to
plan limitations. The Company currently contributes 50% of the first 5%
contributed by the participating employee. In addition, the Company may
contribute an amount equal to 1% of the base salary of every eligible employee.
Pension coverage for employees of the Company's foreign subsidiary is
provided through a separate plan.
STOCK OPTIONS
The 1982 Stock Option Incentive Plan of the Company (the "Plan") has been
approved by the stockholders and became effective as of July 30, 1982.
Initially, there were reserved for issuance upon exercise of options granted
under the Plan 225,000 shares of the Company's common stock, $.10 par value. As
a result of the cumulative effect of adjustments occasioned by the public
distribution of the stock of a subsidiary in 1984 and a five-for-four stock
split in April 1986, the maximum number of shares that could be optioned and
sold under the Plan increased to 307,612 shares. An amendment to the Plan was
approved by the stockholders of the Company at the 1986 Annual Meeting, which
amendment increased by an additional 300,000 shares the total number of shares
of common stock reserved under the Plan. In July 1992, the Board of Directors
extended the term of the Plan for five years, so that now the period in which
options may be granted will expire July 29, 1997; no stockholder action was
required for this amendment.
The Plan is administered by the Compensation Committee of the Board of
Directors. The Committee is specifically empowered to determine the persons to
whom options will be granted and the number of shares subject to each option as
well as the exercise price and other terms and conditions of the options.
Options may be granted to key employees (including officers and directors who
are also employees) of the Company and its subsidiaries. Although both incentive
stock options (ISO), as defined in Section 422A of the Internal Revenue Code,
and non-qualified stock options, are authorized, only non-qualified options have
been granted. There is no limitation on the number of shares of stock which may
be granted by non-qualified stock options to any single optionee.
The price at which shares of common stock may be purchased upon exercise of
options granted under the Plan is determined by the Committee at the time of the
grant, but in fact have not been less than the market value of the stock on the
date the option was granted. The purchase price of the shares purchased upon the
exercise of options will be paid in cash, or by delivery of common stock of the
Company already owned having a fair market value equal to the option price, or a
combination of cash and stock. If options granted under the Plan expire or are
terminated without having been exercised in full, the unpurchased shares
theretofore subject to such options shall be added to the shares otherwise
available for options which may thereafter be granted. Shares purchased upon
exercise of options may be authorized but unissued shares or may be reacquired
shares.
Options may be granted for a term not exceeding ten years, shall not be
assignable during the optionee's lifetime, and may be exercised in installments.
Although shares issued on exercise of
39
<PAGE>
the options are subject to restrictions precluding their transfer without
registration under the Securities Act of 1933, the Company has provided for
registration under such Act of all shares acquired under the Plan. In the event
of termination of employment, each option shall terminate at the earlier of the
expiration date specified in the option or three months following the date of
termination, except that if an optionee dies during that period, or dies during
employment, the option will terminate not later than one year following the date
of the optionee's death.
At the 1987 Annual Meeting, an amendment to the Plan was approved by the
stockholders. This amendment permits the Company, at the sole discretion of the
Compensation Committee, in the event of a merger or tender offer for or
acquisition of the Company or substantially all of its business or assets, to
require the surrender of previously granted options. Any optionee who surrenders
an option in such event shall receive cash equal to the difference between (i)
the amount per share of the Company's common stock to be paid to the Company's
stockholders and (ii) the exercise price of the options surrendered, multiplied
by the number of shares of common stock for which the options are surrendered.
Upon exercise of a non-qualified stock option, the excess over the exercise
price of the fair market value of the stock at the date of recognition of income
in respect of exercise, is taxable to a participant as ordinary (personal
service) income; this amount is deductible by the Company as compensation. Upon
a sale of stock acquired under the Plan, the participant realizes long or short
term capital gain or loss. The Company receives no further deduction with
respect to appreciation following exercise.
No options were granted or exercised during the 1995 fiscal year, and there
were no unexercised options held by any executive officers as of December 28,
1995.
THE FOLLOWING REPORT OF THE COMPENSATION COMMITTEE AND THE PERFORMANCE GRAPH
THAT APPEARS IMMEDIATELY AFTER SUCH REPORT SHALL NOT BE DEEMED TO BE SOLICITING
MATERIAL OR TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934 OR INCORPORATED BY
REFERENCE IN ANY DOCUMENT SO FILED.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee is responsible for reviewing and recommending
compensation levels of persons designated as executive officers by the Board of
Directors and reviewing and recommending stock options and other related
compensation matters pertaining to the executive officers.
The compensation policy of the Company, which is endorsed by the Committee,
is that the annual compensation of each executive officer should take into
consideration the performance of the Company and the contribution to that
performance made by that executive officer.
Mr. Wingate's base salary for fiscal year 1995, as set by the Compensation
Committee with the concurrence of the full Board of Directors, was $458,000,
which was the same as his prior year base salary and was related to the
decreased operating results of the Company.
The Company and the Committee do not endorse employment contracts and
therefore neither Mr. Wingate nor any other executive officer of the Company and
its subsidiaries is party to an employment contract.
Bonuses are determined on a discretionary basis if specific goals
established by the Company's senior management are met. Such goals are
established year to year and include the attainment of specified profit levels
as well as the successful completion of specific projects at the
40
<PAGE>
managerial level. No goals were established and no bonuses were awarded to any
executive officer of the Company for fiscal 1995.
The 1995 base salaries of Messrs. Galgano, Meade and Schell are the same as
for the 1994 fiscal year. In the view of the Committee, the compensation of each
executive was appropriately tied to the pretax operating results of the entity
under his purview.
The Company does not offer a long-term incentive plan. The compensation of
executive officers consists principally of salary, bonus income and potential
gains from stock options. The perquisites and other benefits received by
executive officers are incidental to employment. The aggregate amount of such
benefits for each executive officer is below threshold reporting requirements.
The last stock options grant to any executive officer was in 1989; no
options were exercised during fiscal 1995.
The Committee has reviewed each element of compensation for each of the
executive officers for 1995. In the opinion of the Committee, the compensation
of each executive officer is reasonable in view of the Company's consolidated
performance and the contribution of each executive officer to that performance.
Mr. Slonim is a former employee and is currently an officer and a director
of a former subsidiary of the Company.
COMPENSATION COMMITTEE
Philip M. Slonim
Arthur M. Winston
May 22, 1995
COMPENSATION COMMITTEE INTERLOCKS
Mr. Slonim, a member of the Company's Compensation Committee, is a former
employee and is currently an officer and a director of Pressure Piping
Components, Inc., a former subsidiary of the Company. Mr. Slonim is also a
brother-in-law of Mr. Wingate.
41
<PAGE>
STOCK PERFORMANCE GRAPH AND TABLE
COMPARATIVE 5-YEAR CUMULATIVE TOTAL RETURNS*
HI-SHEAR INDUSTRIES INC.
S&P 500 INDEX AND PEER GROUP**
[GRAPH]
FISCAL YEAR ENDING
- --------------------------------------------------------------------------------
Company 1990 1991 1992 1993 1994 1995
- --------------------------------------------------------------------------------
Hi-Shear Ind. Inc. 100 114.22 61.68 45.49 58.25 52.54
S&P 500 100 111.79 122.81 137.10 142.94 171.80
Peer Group 100 104.05 100.14 121.20 151.91 199.19
- --------------------------------------------------------------------------------
** Peer Group consists of the Value Line Aerospace/Defense industry.
Assumes $100 invested at the close of trading on the last trading day preceding
the first day of the fifth preceding fiscal year in HSI common stock, S&P 500,
and Peer Group**.
* Cumulative total return assumes reinvestment of dividends.
Source: Media General Financial Services
42
<PAGE>
PROPOSAL NO. 4:
RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors has appointed the firm of Coopers & Lybrand L.L.P. to
examine the financial statements of the Company for the fiscal year ending May
31, 1996. The appointment was made upon the recommendation of the Audit and
Finance Committee, composed entirely of "outside directors" who are not officers
of the Company. Coopers & Lybrand L.L.P. has been acting as independent
accountants for the Company since March 1988, and by virtue of ability and
familiarity with the Company's affairs the firm is considered qualified to
perform this important function. Coopers & Lybrand L.L.P. has no interest,
financial or otherwise, direct or indirect, in the Company or any of its
subsidiaries.
Although this appointment is not required to be submitted to a vote by
shareholders of the Company, the Board believes it appropriate as a matter of
policy to request that the shareholders ratify the appointment of Coopers &
Lybrand L.L.P. for the 1996 fiscal year. If the shareholders do not approve this
appointment, the Audit and Finance Committee and the Board will reconsider the
appointment. Representatives of Coopers & Lybrand L.L.P. are expected to be
present at the shareholders meeting with the opportunity to make a statement if
they so desire and to respond to appropriate questions.
OTHER MATTERS
The Board of Directors of the Company does not intend to bring any other
matters before the meeting. It knows of no other matter which is likely to come
before the meeting. In the event any other matters properly come before the
meeting, the persons named in the accompanying proxy will vote the shares
represented by that proxy in accordance with their best judgment.
SHAREHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the 1996 Annual
Meeting must be received at the Company's principal executive offices on or
before April 30, 1996 for inclusion in the proxy statement and form of proxy
relating to that meeting. The Company shall not be required to include any
stockholder proposal which does not meet all of the requirements for inclusion
established by the Securities and Exchange Commission at that time in effect.
PROVISION OF CERTAIN ADDITIONAL INFORMATION
Attached to this Proxy Statement are the following appendices:
APPENDIX A Stock Purchase Agreement
APPENDIX B Lazard Fairness Opinion
APPENDIX C Proposed Amendments to the Company's Certificate of
Incorporation and By-Laws
In addition, the Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1995 and its Quarterly Report on Form 10-Q for the quarter ended
August 31, 1995 accompany this Proxy Statement.
43
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by the Company with the Securities
and Exchange Commission are incorporated herein by reference:
(1) The Company's Annual Report on Form 10-K for the year ended May 31,
1995;
(2) The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended August 31, 1995; and
(3) The Company's Current Report on Form 8-K dated October 9, 1995.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the date
hereof and prior to the date of the Annual Meeting to which this Proxy Statement
relates are deemed to be incorporated herein by reference, and shall be deemed a
part hereof from the date of filing of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein, or contained in this Proxy Statement, shall be
deemed to be modified or superseded for purposes of this Proxy Statement to the
extent that a statement contained herein or in any subsequently filed document
which also is deemed to be incorporated herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed to
constitute a part of this Proxy Statement, except as so modified or superseded.
THE COMPANY WILL FURNISH WITHOUT CHARGE COPIES OF ANY INFORMATION
INCORPORATED BY REFERENCE HEREIN, EXCLUDING THE EXHIBITS THERETO, TO INTERESTED
STOCKHOLDERS WHOSE PROXY IS BEING SOLICITED, UPON WRITTEN OR ORAL REQUEST OF
SUCH PERSON AND BY FIRST CLASS MAIL OR OTHER PROMPT MEANS WITHIN ONE BUSINESS
DAY OF RECEIPT OF SUCH REQUEST. THE COMPANY WILL FURNISH TO ANY SUCH PERSON ANY
EXHIBITS DESCRIBED IN SUCH REPORTS UPON PAYMENT OF REASONABLE FEES RELATING TO
THE COMPANY'S COST OF FURNISHING SUCH EXHIBITS. REQUESTS FOR COPIES SHOULD BE
DIRECTED TO MR. HAROLD L. BERNSTEIN, SECRETARY, HI-SHEAR INDUSTRIES INC., 3333
NEW HYDE PARK ROAD, NORTH HILLS, NY 11042; TELEPHONE (516) 627-8600.
The delivery of this Proxy Statement shall not, under any circumstances,
create any implication that there has been no change in the affairs of the
Company since the date of this Proxy Statement.
By Order of the Board of Directors
Harold L. Bernstein
Secretary
North Hills, New York
January 8, 1996
44
<PAGE>
APPENDIX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STOCK PURCHASE AGREEMENT
BETWEEN
HI-SHEAR INDUSTRIES INC.
AND
GFI INDUSTRIES S.A.
DATED AS OF
OCTOBER 9, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A-1
<PAGE>
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT, dated as of October 9, 1995, between HI-SHEAR
INDUSTRIES INC., a Delaware corporation (the "Seller"), and GFI INDUSTRIES S.A.,
a societe anonyme organized under the laws of the Republic of France (the
"Purchaser").
W I T N E S S E T H:
WHEREAS, the Seller desires to sell and transfer to the Purchaser and the
Purchaser desires to purchase from the Seller, all of the issued and outstanding
shares of capital stock (the "Shares") of HI-SHEAR CORPORATION, a Delaware
corporation and a wholly owned subsidiary of the Seller (the "Company"), all as
more specifically provided herein,
WHEREAS, simultaneously with the execution and delivery hereof, the
Purchaser and certain significant stockholders of Seller are entering into a
stockholders agreement (the "Stockholders Agreement"),
NOW, THEREFORE, in consideration of the mutual covenants and undertakings
contained herein, and subject to and on the terms and conditions herein set
forth, the parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF THE SHARES
1.1 Purchase and Sale of the Shares. The Purchaser agrees to purchase from
the Seller, and the Seller agrees to sell to the Purchaser, the Shares, which
constitute all of the issued and outstanding shares of capital stock of the
Company, for the consideration specified in Section 1.2 hereof.
1.2 Purchase Price. (a) The initial purchase price for the Shares is the sum
of U.S. $46 million (the "Initial Purchase Price") which the Purchaser will pay
to the Seller at the Closing (as defined in Section 1.3 hereof), as provided in
Section 1.3.
(b) Immediately after the Closing, Seller shall prepare, and thereupon cause
its independent accountants to commence reviewing at Seller's expense, a
consolidated balance sheet of the Company and the Subsidiaries (as defined in
Section 2.1(A) hereof) as at the Closing Date. Such balance sheet shall be
prepared in accordance with generally accepted accounting principles in the
United States ("GAAP") consistently applied, except as noted below and in
Section 1.2(b) of the Seller's Disclosure Schedule delivered herewith, and shall
reflect all liabilities of the Company and the Subsidiaries required to be
reflected on a balance sheet prepared in accordance with GAAP so applied. Such
balance sheet (i) shall reflect the fact that the amount of any intercompany
payables or receivables between the Company or any Subsidiary, on the one hand,
and the Seller or any subsidiary of the Seller (other than the Company or any
Subsidiary), on the other hand, shall be satisfied in full as of the Closing
Date, (ii) shall reflect the adjustments listed in Section 1.2(b) of the
Seller's Disclosure Schedule delivered herewith, (iii) shall determine the
amount of inventory as of the Closing Date in the manner described in Section
1.2(b) of the Seller's Disclosure Schedule, (iv) shall reflect $4.028 million
(which is the amount shown on the Company's consolidated, adjusted May 1995
balance sheet previously delivered to the Purchaser) as the amount of the
Company's liability with respect to its retirement plans, and shall reflect the
current value of the assets of the SERPs (as defined in Section 3.13 below)
determined in a manner consistent with the Company's usual practice (including
recognizing the net cash surrender value of related life insurance policies not
recognized for FASB 87 presentations) and (v) shall not reflect as a liability
or a reserve any amount with respect to the matters described in Section
5.2(a)(ii)
A-2
<PAGE>
and (iii) hereof. Representatives of the Purchaser and/or the Purchaser's
auditors shall be entitled to accompany the Seller's representatives during any
inventory count conducted in connection with, and to review the work papers,
schedules, memoranda and other documents used by the Seller in, the preparation
of such balance sheet.
The Seller shall deliver to the Purchaser such balance sheet and the report
of the independent accountants with respect thereto, and thereafter the
Purchaser shall have ten (10) business days within which to deliver to the
Seller a letter setting forth in reasonable detail the Purchaser's proposed
adjustments, if any, to the balance sheet.
In the event that the Seller disagrees with any proposed adjustments set
forth in the Purchaser's letter, within ten (10) business days of the receipt of
such letter, the Seller shall deliver to the Purchaser a written statement in
reasonable detail of the Seller's objections. If the Purchaser and the Seller
cannot resolve any disputed items within ten (10) business days thereafter, a
"Big Six" firm of independent public accountants jointly selected by the
Purchaser and the Seller (other than the Seller's and the Purchaser's respective
regular accounting firms) shall resolve the dispute and determine the
consolidated net worth of the Company and the Subsidiaries as at the Closing
Date. The determination of such firm shall be binding on the Purchaser and the
Seller. The Purchaser and the Seller shall share equally the fees and expenses
of such firm of independent public accountants.
(c) If the consolidated net worth of the Company and the Subsidiaries as at
the Closing Date, as finally determined in accordance with clause (b) above, is
greater than $38 million, the Purchaser shall promptly pay to the Seller, by
wire transfer of immediately available funds to such account as the Seller shall
direct, an amount equal to the excess, with interest thereon from the Closing
Date to the date of payment of such excess at the prime rate of interest of
Citibank, N.A. as in effect from time to time during such period.
(d) If the consolidated net worth of the Company and the Subsidiaries as at
the Closing Date, as finally determined in accordance with clause (b) above, is
less than $38 million, the Seller shall promptly pay to the Purchaser, by wire
transfer of immediately available funds to such account as the Purchaser shall
direct, the shortfall, with interest thereon from the Closing Date to the date
of payment of such shortfall, at the rate of interest specified above.
(e) Following the Closing Date, the Purchaser shall cause the Company and
the Subsidiaries to afford the Seller and its accountants reasonable access
during normal business hours to the books, records, facilities and employees of
the Company and the Subsidiaries and shall cooperate reasonably with the Seller
and its accountants, to enable the Seller and its accountants to prepare the
consolidated balance sheet of the Company and the Subsidiaries as at the Closing
Date and to resolve any dispute with respect thereto between the Purchaser and
the Seller.
(f) The Initial Purchase Price as increased or decreased pursuant to
paragraph (c) or (d) above, as applicable, is hereinafter referred to as the
"Purchase Price".
1.3 Closing. The closing of the sale and purchase of the Shares contemplated
hereby (the "Closing") shall take place at the offices of Morgan, Lewis &
Bockius LLP, 101 Park Avenue, New York, New York 10178 beginning at 10:00 A.M.
on a date (the "Closing Date") to be specified by the parties, which shall be no
later than the fifth business day after satisfaction or waiver of the latest to
occur of the conditions set forth in Article IV of this Agreement. At the
Closing, the Seller shall deliver to the Purchaser certificates representing the
Shares (together with all rights then or thereafter attaching thereto), with
valid stock powers attached; and the Purchaser shall deliver the Initial
Purchase Price to the Seller by wire transfer of immediately available funds to
an account designated by the Seller at least two (2) business days in advance of
the Closing Date.
A-3
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 Representations and Warranties of the Seller. The Seller represents and
warrants to and agrees with the Purchaser that, except as set forth in the
Seller's Disclosure Schedule delivered herewith (which specifically references
in such Disclosure Schedule the lettered paragraph of this Section 2.1 to which
any such exceptions relate, it being understood and agreed that, with respect to
any particular exception, such exception shall be deemed disclosed only for
purposes of the paragraph or paragraphs so referenced and shall not be deemed
disclosed for purposes of any other paragraph (unless cross referenced to
another paragraph)):
(A) Organization of the Company and the Subsidiaries. Each of the Company
and Hi-Shear Automotive Corp., Hi-Shear Holdings Limited, and Hi-Shear Fasteners
Europe Limited, each a subsidiary of the Company (individually a "Subsidiary"
and collectively the "Subsidiaries"), is duly incorporated, validly existing
and, to the extent applicable, in good standing under the laws of the
jurisdiction of its incorporation, with the full corporate power and authority
to own its properties and assets and to carry on its business as currently
conducted, and is duly qualified to do business as a foreign corporation in each
jurisdiction in which the ownership of its property or the conduct of its
business requires such qualification, except such jurisdictions, if any, where
any failures to be so qualified would not, individually or in the aggregate,
have a material adverse effect on the business, financial condition or results
of operations of the Company and the Subsidiaries. The copies of the Company's
and each Subsidiary's certificate of incorporation and by-laws, or other charter
documents, previously delivered to the Purchaser are complete and correct.
Neither the Company nor any Subsidiary is in violation of any of the provisions
of its certificate of incorporation, by-laws or other charter documents.
(B) Organization and Authority of the Seller. The Seller has been duly
organized, is validly existing and is in good standing under the laws of the
State of Delaware, has the full corporate power and authority to enter into this
Agreement and to consummate the transactions herein contemplated and otherwise
to carry out its obligations hereunder. Except for the approval of the holders
of a majority of the outstanding shares of common stock of the Seller, this
Agreement has been duly authorized by all necessary corporate action on the part
of the Seller. This Agreement has been duly executed and delivered by the Seller
and constitutes a valid and legally binding agreement of the Seller, enforceable
against it in accordance with its terms. The Board of Directors of the Seller
has (i) determined that this Agreement and the transactions contemplated hereby
are in the best interests of the stockholders of the Seller, (ii) resolved,
subject to their fiduciary duties under applicable law, to recommend that the
stockholders of the Seller approve this Agreement and the transactions
contemplated hereby and (iii) taken all action necessary with respect to the
transactions contemplated hereby so as to render inapplicable to such
transactions, including, without limitation, the purchase of the Shares pursuant
hereto, the restrictions on business combinations contained in Section 203 of
the Delaware General Corporation Law and the supermajority voting requirements
contained in Section 13 of Seller's Certificate of Incorporation. Lazard Freres
& Co. LLC has delivered to the Board of Directors of the Seller its opinion
dated October 7, 1995 to the effect that, as of the date of such opinion, the
Purchase Price is fair to Seller from a financial point of view.
(C) Capital Stock; Subsidiaries. The authorized, issued and outstanding
capital stock of the Company and each of the Subsidiaries is set forth in the
Seller's Disclosure Schedule. The Shares are the only issued and outstanding
capital stock of the Company. The Shares and all of the issued and outstanding
shares of capital stock of the Subsidiaries are duly authorized, validly issued,
fully paid and nonassessable. Neither the Company nor any Subsidiary has any
authorized, issued or outstanding shares of preferred stock. There are no
existing options, calls or commitments of any character relating
A-4
<PAGE>
to the authorized and unissued capital stock of the Company or any Subsidiary or
to any securities or obligations convertible into or exchangeable for, or giving
any person any right to subscribe for or acquire, any shares of capital stock of
the Company or any Subsidiary, and no such convertible or exchangeable
securities or obligations are outstanding. All of the Shares are owned by the
Seller, and all of the issued and outstanding shares of capital stock of the
Subsidiaries are owned by the Company or a Subsidiary, in each case beneficially
and of record, free and clear of all liens, pledges, voting agreements,
restrictions, encumbrances or claims. The Company has no subsidiaries, other
than the Subsidiaries.
(D) Financial Statements; SEC Reports. The consolidated balance sheet of the
Company and the Subsidiaries as of May 1995 and 1994, and the consolidated
statement of income for the twelve months ended May 28, 1995, May 27, 1994 and
May 30, 1993 relating thereto (for purposes of this Agreement, all references to
such balance sheets and statements of income shall include, with respect to
financial statements as of or for the twelve months ended May 28, 1995, May 29,
1994 and May 30, 1993, reference to the notes thereto), copies of which have
been delivered by the Seller to the Purchaser, have been prepared in conformity
with GAAP consistently applied and fairly present in all material respects the
consolidated financial position of the Company and the Subsidiaries at such
dates and the results of their operations for such periods in accordance with
GAAP. The consolidated balance sheet of the Company and the Subsidiaries as of
August 1995, and the related consolidated and consolidating statement of income
for the three-month period ended August 27, 1995, together with the notes
thereto, copies of which have been delivered by the Seller to the Purchaser,
have been prepared (except for normal year-end closing and audit adjustments) in
conformity with GAAP consistently applied and fairly present in all material
respects the consolidated financial position of the Company and the Subsidiaries
at such date and the results of their operations for such period in accordance
with GAAP. The Seller has filed with the Securities and Exchange Commission (the
"SEC") all forms, reports and documents required to be so filed since May 31,
1993. The Seller has made available to the Purchaser, in the form filed with the
SEC, copies of (i) the Seller's Annual Reports on Form 10-K for the fiscal years
ended May 31, 1995, 1994 and 1993, (ii) all proxy statements relating to
meetings of the Seller's stockholders which have been held since May 31, 1993,
in the form distributed to the Seller's stockholders and (iii) all other reports
or registration statements filed by the Seller with the SEC since May 31, 1993
(collectively, the "SEC Reports"). The SEC Reports were prepared, in all
material respects, in accordance with all applicable requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). As of the respective
dates of the SEC Reports, none of the SEC Reports contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(E) Absence of Undisclosed Liabilities. Except as disclosed in the
consolidated balance sheet of the Company and the Subsidiaries as of August
1995, there are no debts, liabilities or obligations (absolute, accrued,
contingent or otherwise) of the Company or the Subsidiaries of a kind required
by GAAP to be reflected in a consolidated balance sheet of the Company and the
Subsidiaries, other than debts, liabilities and obligations which arose after
May 31, 1995 in the ordinary course of the business consistent with past
practice of the Company and the Subsidiaries or which would not, individually or
in the aggregate, have a material adverse effect on the business, financial
condition or results of operations of the Company and the Subsidiaries.
(F) Absence of Certain Changes or Events. Since May 31, 1995, each of the
Company and the Subsidiaries has conducted its business in the ordinary course,
and there has not been (i) any amendment to its charter or by-laws, (ii) any
issuance or sale of any shares of capital stock of the Company or any
Subsidiary, or securities convertible into, or options with respect to, or
warrants to purchase or rights to subscribe to, any such shares, or any
agreements obligating the Company or any Subsidiary to do any of the foregoing,
(iii) any dividends (whether in cash or property) declared, set
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aside, paid or made with respect to the capital stock of the Company, (iv) any
material adverse change in the business, financial condition or results of
operations of the Company and the Subsidiaries, other than any change related to
or caused by the Purchaser's actions in connection with this Agreement or the
transactions contemplated hereby, (v) any damage, destruction or other casualty
loss (whether or not covered by insurance) materially adverse to the business,
financial condition, or results of operations of the Company and the
Subsidiaries, (vi) any increase in the compensation payable or to become payable
by the Company or any Subsidiary to any of its officers, employees or directors
or any increase in any bonus, insurance, pension or other employee benefit plan,
agreement, payment or arrangement made by the Company or any Subsidiary for or
with any such officers, directors or employees, except for increases in the
ordinary course of business consistent with past practice, (vii) any labor
dispute affecting the Company and the Subsidiaries, other than routine labor
matters, (viii) any transaction between the Company or any Subsidiary on the one
hand, and the Seller or any affiliate of the Seller (other than the Company and
the Subsidiaries), on the other hand, other than transactions in the ordinary
course of business consistent with past practice, (ix) any commitment or
transaction entered into by the Company or any Subsidiary other than in the
ordinary course of its business consistent with past practice, (x) any change by
the Company or the Subsidiaries in accounting principles or methods, except
insofar as may be required by a change in GAAP, or (xi) any other event or
condition of any character which materially adversely affects the business,
financial condition or results of operations of the Company and the
Subsidiaries.
(G) Title to Properties; Absence of Liens and Encumbrances, etc. Each of the
Company and the Subsidiaries has good, valid and marketable title to all of the
real and personal property owned by it, free and clear of any liens, charges and
encumbrances (except for liens in respect of taxes not yet due and payable, and
immaterial title defects and encumbrances that do not interfere with the use of
the property subject thereto or affected thereby). All material leases under
which the Company or any Subsidiary is the lessee of real property are listed in
the Seller's Disclosure Schedule and, to the knowledge of the Seller, are valid,
subsisting and enforceable leases. There is no material default by the Company
or any Subsidiary or, to the Seller's knowledge, any landlord, under any such
lease. Neither the Company nor any Subsidiary has received any notice of any
proposed condemnation of any such property.
(H) Litigation. There are no actions, suits, proceedings or investigations
(including those related to product liability claims) pending or, to the
Seller's knowledge, threatened (i) against the Company or any Subsidiary at law,
in equity or otherwise, in, before, or by, any court or governmental agency or
authority which, if decided adversely to the Company or any such Subsidiary,
would have a material adverse effect on their business, financial condition or
results of operations or (ii) as of the date hereof, against the Seller, the
Company or any Subsidiary which seeks to question, delay or prevent the
consummation of the transactions contemplated hereby. There are no unsatisfied
judgments or material outstanding injunctions, decrees, or awards against the
Company or any Subsidiary or against any of their assets, business or
properties.
(I) Compliance with Law. The businesses of the Company and the Subsidiaries
are not being and have not been conducted in violation of any law or regulation
of any federal, state, local or foreign governmental entity or of any
governmental approvals, permits, registrations and licenses necessary to the
conduct of their businesses, except for any violations which would not,
individually or in the aggregate, have a material adverse effect on the
business, financial condition or results of operations of the Company and the
Subsidiaries. The representation and warranty contained in this Section 2.1(I)
do not apply to any law or regulation regulating pollution or protection of the
environment or to occupational health and safety.
(J) Contracts and Leases. Neither the Company nor any Subsidiary is as of
October 5, 1995 a party to, or bound by, any contract to be performed after the
Closing Date pursuant to which the
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Company or such Subsidiary is obligated to expend more than $100,000 in any
twelve-month period and which is not subject to cancellation by it, on not more
than 30 days' notice without penalty or increased cost. Neither the Company nor
any Subsidiary is a party to or bound by any agreement, contract or lease that
was entered into outside the ordinary course of its business or which restricts
the ability of the Company or any Subsidiary to compete with any person or in
any geographic area. There is no default by the Company or any such Subsidiary
to any agreement, contract or lease, or to the Seller's knowledge, any other
party thereto, which defaults could, individually or in the aggregate,
materially adversely affect their business, financial condition or results of
operations. Neither the Company nor any Subsidiary is a party to any collective
bargaining agreement or similar agreement with any labor organization or any
employment contract or severance agreement with any employee.
(K) Insurance. All property and casualty insurance policies which currently
insure the Company and the Subsidiaries are listed in the Seller's Disclosure
Schedule and, by their terms, will remain in full force and effect at least up
to the Closing Date.
(L) Employee Benefit Plans. The Seller's Disclosure Schedule contains an
accurate and complete list of each bonus, deferred compensation, incentive
compensation, stock purchase, stock option, severance or termination pay,
hospitalization or other medical, life or other insurance, supplemental
unemployment benefits, profit-sharing, savings, stock bonus, pension, or
retirement plan, program, agreement or arrangement, and each other employee
benefit plan, program, agreement or arrangement, sponsored, maintained or
contributed to or required to be contributed to by the Company or by any trade
or business, whether or not incorporated (an "ERISA Affiliate"), that together
with the Company would be deemed a "single employer" within the meaning of
Section 4001(b) of the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations promulgated thereunder ("ERISA"), for the
benefit of any employee, director, former employee or former director of the
Company (the "Benefit Plans"). The Seller's Disclosure Schedule identifies each
of the Benefit Plans that is an "employee welfare benefit plan" or an "employee
pension benefit plan" as such terms are defined in Sections 3(1) and 3(2) of
ERISA, respectively, (such plans being hereinafter referred to collectively as
the "ERISA Plans") and subject to ERISA. Neither the Company nor any ERISA
Affiliate has any formal plan or commitment to create any additional Benefit
Plan or modify or change any existing Benefit Plan that would affect any
employee, director, former employee or former director of the Company or any
ERISA Affiliate. Copies of all such written Benefit Plans have been delivered or
made available to the Purchaser. With respect to the Benefit Plans: (i) each
Benefit Plan is and has been in material compliance with all applicable laws,
and, if intended to be qualified under Section 401(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), has received or timely applied for, a
favorable determination letter from the Internal Revenue Service, (ii) no
Benefit Plan is a multiemployer plan, as defined in Section 3(37) of ERISA and
neither the Company nor any ERISA Affiliate has contributed to, or has been
obligated to contribute to, a multiemployer plan during the six year period
ending on the date hereof, (iii) no Benefit Plan provides medical, health,
dental or life insurance coverage beyond termination of employment except as
required by Section 4980B of the Code, (iv) to the knowledge of the Company, no
event has occurred with respect to a Benefit Plan or trust which would subject
the Company, any ERISA Affiliate, any Benefit Plan, or any trustee or
administrator thereof to a material civil penalty assessed pursuant to Sections
409 or 502(i) of ERISA or a material tax under Sections 4975, 4976 or 4980B of
the Code, (v) all employee benefit plans or programs covering foreign employees
have been maintained in material compliance with applicable laws and are
adequately funded in accordance with their respective terms and applicable laws,
(vi) no material liability under Title IV of ERISA has been incurred by the
Company or any ERISA Affiliate since the effective date of ERISA that has not
been satisfied in full, and to the knowledge of the Seller, no condition exists
that presents a material risk to the Company or an ERISA Affiliate of incurring
a material liability under such Title, other than liability for premiums due the
Pension Benefit Guaranty Corporation ("PBGC"), which payments have been or will
be made when due, (vii) the PBGC has not instituted proceedings to terminate any
of the ERISA Plans and, to the knowledge of the Seller, no
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condition exists that presents a material risk that such proceedings will be
instituted, and (viii) with respect to each of the ERISA Plans that is subject
to Title IV of ERISA, the present value of accrued benefits under such ERISA
Plan, based upon the actuarial assumptions used for funding purposes in the most
recent actuarial report prepared by such ERISA Plan's actuary with respect to
such ERISA Plan, did not, as of its latest valuation date, exceed the then
current value of the assets of such plan allocable to such accrued benefits.
Full payment has been made, or will be made in accordance with Section 404(a)(6)
of the Code, of all amounts that the Company or any ERISA Affiliate is required
to pay under the terms of each of the ERISA Plans and Section 412 of the Code,
and all such amounts due and properly accrued through the Closing Date with
respect to the current plan year thereof will be paid by the Company or the
Seller on or prior to the Closing Date; and none of the ERISA Plans or any trust
established thereunder has incurred any "accumulated funding deficiency" (as
defined in Section 302 of ERISA and Section 412 of the Code), whether or not
waived, as of the last day of the most recent fiscal year of each of the ERISA
Plans ended prior to the date hereof. No lien imposed under the Code or ERISA
exists on account of any ERISA Plan. No amounts payable under the Benefit Plans
or any other agreement or arrangement to any employee, director, former employee
or former director of the Company in effect as of the Closing will, as a result
of the transaction contemplated hereby, fail to be deductible for federal income
tax purposes by virtue of Section 280G of the Code.
(M) Completeness of Assets. The assets and properties owned by the Company
and the Subsidiaries are, in accordance with past practice, suitable and
sufficient for the conduct of their businesses as heretofore conducted and will
provide the Purchaser with the capability to manufacture, use and sell the
products and conduct the businesses of the Company and the Subsidiaries in
substantially the same manner as they have been conducted heretofore.
(N) Related Party Interests. As of the date hereof neither the Seller nor
any subsidiary of the Seller (other than the Company or a Subsidiary):
(i) has any cause of action or other claim against the Company or any
Subsidiary or the assets or properties of the Company or any Subsidiary, or
owes any material amount to, or is owed any material amount by, any of them;
(ii) is a party to any material contract, lease, agreement, arrangement
or commitment used in or related to the business of the Company or any
Subsidiary;
(iii) receives from or furnishes to the Company or any Subsidiary, any
goods or services (with or without consideration), other than managerial
assistance and supervision; or
(iv) owns, directly or indirectly, any debt, equity or other interest or
investment in any corporation, firm or other entity which is a material
competitor, lessor, lessee, customer or supplier of the Company, except
securities of any publicly-held corporation which do not exceed five percent
(5%) of the outstanding voting securities of such corporation.
(O) Warranties, etc. (i) All products manufactured or sold by the Company
have been in substantial conformity with the applicable contractual commitments
and specifications.
(ii) There are no recalls of products produced by the Company or any
Subsidiary pending or threatened and, to the Seller's knowledge, there is no
basis for any material recall of any such products.
(P) Illegal Payments. No payment or contribution has been made by or on
behalf of the Company or any Subsidiary which is in violation of any applicable
federal, state or foreign law.
(Q) Non-Contravention. The execution and delivery of this Agreement by the
Seller and the consummation of the sale of the Shares contemplated hereby will
not (i) violate any provision of the
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Certificate of Incorporation or By-Laws of the Seller, or (ii) violate any
provision of, or result in the acceleration of or entitle any party to
accelerate (whether after the filing of notice or lapse of time or both) any
obligation under, or constitute (with or without due notice or the lapse of time
or both) a default under, or give rise to any right of termination, cancellation
or amendment under, or result in the creation or imposition of any lien, charge,
pledge, security interest or other encumbrance upon the assets and properties of
the Company and the Subsidiaries pursuant to any provision of, any agreement,
lease, mortgage or instrument, or (iii) violate any law, regulation, order,
arbitration award, judgment or decree to which the Seller, the Company or any
Subsidiary is a party or by which any of them is bound except, in case of the
preceding clauses (ii) and (iii), for such violations, accelerations, defaults,
terminations, cancellations, amendments, liens, charges, pledges, security
interests and encumbrances which would not, individually or in the aggregate,
have a material adverse effect on the business, financial condition or results
of operations of the Company and the Subsidiaries.
(R) Consents and Approvals. The only authorizations, consents, approvals of
or notices to or filings with any federal, state or foreign court, agency,
commission or other regulatory body or official required to be obtained or made
by the Seller in connection with the transactions contemplated hereby are (i)
the notification to the Federal Trade Commission (the "FTC") and the Antitrust
Division of the United States Department of Justice (the "Antitrust Division")
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules promulgated pursuant thereto (the "HSR Act"); (ii) the
notification to the Committee on Foreign Investment in the United States
("CFIUS") under the Exon-Florio Amendment ("Exon-Florio"); (iii) any required
filings or approvals under federal or state securities laws; and (iv)
authorizations, consents, approvals, notices and filings which, if not obtained
or made, would not, individually or in the aggregate, have a material adverse
effect on the business, financial condition or results of operations of the
Company and the Subsidiaries.
(S) Tax Matters. All (i) Tax Returns (as hereinafter defined) that are
required to be filed by or with respect to the Company, any Subsidiary or any
"affiliated group" (as defined in Section 1504(a) of the Code) (the "Affiliated
Group") of which the Company or any Subsidiary is or was a member have been duly
filed and all such Tax Returns are true, correct and complete in all material
respects, (ii) all Taxes (as hereinafter defined) shown to be due on such Tax
Returns have been paid, (iii) such Tax Returns have been examined by the
Internal Revenue Service or the appropriate state, local or foreign taxing
authority, or the period for assessment of the Taxes in respect of which such
Tax Returns were required to be filed has expired, (iv) all deficiencies
asserted or assessments made as a result of such examinations have been paid,
(v) no material issues that have been raised in writing by the relevant taxing
authority in connection with the examination of any Tax Returns are currently
pending, (vi) none of the Company or any Subsidiary is currently being audited
or examined by any taxing authority or has received notice of any such audit or
examination, (vii) no waivers of statutes of limitation have been given or
requested by or with respect to any Taxes of the Company, any Subsidiary or any
Affiliated Group of which the Company or any Subsidiary is or was a member,
(viii) all amounts that are required to be collected or withheld by the Company
or the Affiliated Group with respect to Taxes have been duly collected and
withheld, and all such amounts that are required to be remitted to any taxing
authority, including any applicable interest and penalties, have been remitted
on a timely basis, and (ix) the Company is a member of the Affiliated Group of
which the Seller is the parent.
For purposes of this Agreement, (i) "Taxes" shall mean all taxes, charges,
fees, levies or other assessments of any kind whatsoever, together with any
interest and any penalties, additions to tax or additional amounts imposed by
any taxing authority (domestic or foreign) and (ii) "Tax Return" shall mean any
return, report, information return or other document (including any related or
supporting information) with respect to Taxes, including, without limitation,
consolidated, combined and unitary returns.
(T) Trademarks and Patents. The Company and the Subsidiaries have, or have
rights to use, all material patents, patent applications, trademarks, trademark
applications, service marks, trade names,
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copyrights, licenses, computer software and rights (collectively, the
"Intellectual Property Rights") which are necessary for use in connection with
their businesses. The Seller's Disclosure Schedule contains a list of all
material patents, patent applications, trademarks, trademark applications and
trade names owned by or licensed to the Company or any Subsidiary (and any
material licenses thereof from the Company or any such Subsidiary) and a
description of the Company's practice regarding copyrights. To the Seller's
knowledge, (i) the use of the Intellectual Property Rights by the Company and
the Subsidiaries does not conflict with the intellectual property rights of any
other person and no other person's operations conflict with the use and
registration of the Intellectual Property Rights and (ii) each material patent
and application therefor owned by the Company or any Subsidiary is in proper
form, not disclaimed and has been duly maintained. There are no suits pending
or, to the Seller's knowledge, threatened against or by the Company or any
Subsidiary claiming a conflict by the Company or any such Subsidiary with any
intellectual property rights of any other person or a conflict by any other
person with any of the Intellectual Property Rights.
(U) Environmental Liability. The Company and the Subsidiaries are in
compliance with all Environmental Laws, except for any failures to so comply
that would not, individually or in the aggregate, have a material adverse effect
on the business, financial condition or results of operations of the Company and
the Subsidiaries. To the Seller's knowledge, no events have occurred and no
conditions exist that reasonably could be expected to give rise to liability for
the use, handling, generation, treatment, storage, disposal or transportation of
Hazardous Substances, which individually or in the aggregate would have a
material adverse effect on the business, financial condition or results of
operations of the Company and the Subsidiaries. The Company and the Subsidiaries
have obtained, hold and are in compliance with all registrations, permits,
licenses and approvals required under any Environmental Law necessary for the
operations of the Company and the Subsidiaries as currently conducted, except
for any failures to so obtain, hold or comply that would not, individually or in
the aggregate, have a material adverse effect on the business, financial
condition or results of operations of the Company and the Subsidiaries.
As used in this Section 2.1(U), (i) the term "Environmental Laws" shall mean
all applicable federal, state, or local laws, statutes, rules, regulations or
ordinances in effect at the date hereof that govern (a) hazardous or toxic
materials, substances or wastes, (b) emissions to the air, land, surface water
or ground water, or (c) the protection of the environment; and (ii) the term
"Hazardous Substances" shall mean any hazardous or toxic materials, substances
or wastes as defined in any applicable Environmental Law.
(V) Proxy Statement. The proxy statement to be prepared by the Seller in
connection with the stockholders' meeting referred to in Section 3.11 hereof (or
any amendment thereof or supplement thereto) will, at the date mailed to such
stockholders and at the time of the meeting of such stockholders, not 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, except that no representation is made by the Seller with respect to
statements made therein based on information supplied by the Purchaser in
writing for inclusion in such proxy statement. Such proxy statement will comply
in all material respects with the provisions of the Exchange Act and the rules
and regulations thereunder.
2.2 Representations and Warranties with Respect to the Purchaser. The
Purchaser represents and warrants to and agrees with the Seller that:
(A) Organization and Authority of the Purchaser. The Purchaser has been
duly organized, is validly existing and is in good standing under the laws
of the Republic of France, has the full corporate power and authority to
enter into this Agreement and to consummate the transactions herein
contemplated and otherwise to carry out its obligations hereunder. This
Agreement has been duly authorized by all necessary corporate action on the
part of the Purchaser, has been duly
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executed and delivered by the Purchaser and constitutes a valid and legally
binding agreement of the Purchaser, enforceable against it in accordance
with its terms.
(B) Litigation. As of the date hereof, no action, suit, proceeding or
investigation is pending or, to the knowledge of the management of the
Purchaser, threatened against the Purchaser which seeks to question, delay
or prevent the consummation of the transactions contemplated hereby.
(C) Non-Contravention. The execution and delivery of this Agreement by
the Purchaser and the consummation of the purchase of the Shares
contemplated hereby will not (i) violate any provision of the charter
documents of the Purchaser, or (ii) violate any provision of, or result in
the acceleration of or entitle any party to accelerate (whether after the
filing of notice or lapse of time or both) any obligation under, or
constitute (with or without due notice or the lapse of time or both) a
default under, or give rise to any right of termination, cancellation or
amendment under, or result in the creation or imposition of any lien,
charge, pledge, security interest or other encumbrance upon the assets and
properties of the Purchaser pursuant to any provision of, any agreement,
lease, mortgage or instrument, or (iii) violate any law, regulation, order,
arbitration award, judgment or decree to which the Purchaser is a party or
by which it is bound except, in case of the preceding clauses (ii) and
(iii), for such violations, accelerations, defaults, terminations,
cancellations, amendments, liens, charges, pledges, security interests and
encumbrances which would not, individually or in the aggregate, prevent the
Purchaser from purchasing the Shares pursuant hereto.
(D) Consents and Approvals. The only authorizations, consents or
approvals of or notices to or filings with any federal, state or foreign
court, agency, commission or other regulatory body or official required to
be obtained or made by the Purchaser in connection with the transactions
contemplated hereby are (i) the notification to the FTC and the Antitrust
Division pursuant to the HSR Act; (ii) the notification to CFIUS under
Exon-Florio; (iii) any required filings or approvals under federal or state
securities laws; and (iv) authorizations, consents, approvals, notices and
filings which, if not obtained or made, would not, individually or in the
aggregate, prevent the Purchaser from purchasing the Shares pursuant hereto.
(E) Securities Act of 1933. The Purchaser is acquiring the Shares solely
for its own account, for the purpose of investment only and not with a view
to, or for sale in connection with, any distribution thereof.
(F) Availability of Financing. The Purchaser has and will have
sufficient financing to pay the Purchase Price in accordance with the terms
of this Agreement and all fees and expenses incurred in connection with the
transaction contemplated hereby for which the Purchaser is responsible.
(G) Purchaser Not an "Interested Stockholder". Except to the extent that
they may be deemed such by virtue of this Agreement and the Stockholders
Agreement, neither the Purchaser nor any of its affiliates is an "interested
stockholder" of the Seller within the meaning of Section 203 of the Delaware
General Corporation Law.
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ARTICLE III
ADDITIONAL AGREEMENTS OF THE PARTIES
3.1 Ordinary Course of Business. Prior to the Closing Date, and except as
otherwise expressly contemplated by this Agreement or as set forth in Section
3.1 of the Seller's Disclosure Schedule, or approved in writing by the
Purchaser, the Seller covenants and agrees that:
(A) The Company and each of the Subsidiaries will maintain itself at all
times as a corporation duly organized and validly existing under the laws of
the jurisdiction under which it is incorporated;
(B) The Company and each of the Subsidiaries will carry on its
respective business in the ordinary course substantially in the manner
carried on as of the date hereof, and neither the Company nor any Subsidiary
will engage in any activity or transaction or enter into any agreement or
commitment other than in the ordinary course of its business as heretofore
conducted;
(C) Neither the Company nor any Subsidiary will declare, authorize or
pay any distribution or dividend or redeem, purchase or otherwise acquire,
or agree to redeem, purchase or otherwise acquire, any shares of its stock
or issue, sell, pledge, dispose of or encumber any additional shares of, or
securities convertible into or exchangeable for, or options, warrants,
calls, commitments or rights of any kind to acquire, any share of its
capital stock;
(D) Other than as may be provided in any of the Company's or any
Subsidiary's existing Benefit Plans, employment contracts or arrangements,
neither the Company nor any Subsidiary will pay or obligate itself to pay
any compensation, commission, severance or retirement payment or bonus to
any current or former director, officer or employee, other than in the
ordinary course of business consistent with past practice;
(E) The Company and each of the Subsidiaries will use its reasonable
efforts to preserve its business organization intact, to keep available to
the Purchaser the services of its employees and to preserve for the
Purchaser its relationships with suppliers, licensees, distributors and
customers and others having business relationships with it;
(F) Neither the Company nor any Subsidiary will sell or otherwise
dispose of or pledge or otherwise encumber (unless resulting from actions
beyond the Company's or any such Subsidiary's control, of a governmental
authority or of another party to a contract to which the Company or any such
Subsidiary is a party) any of its assets except in the ordinary course of
its business;
(G) The Company and the Subsidiaries will maintain their facilities,
machinery and equipment as a whole in good operating condition and repair
consistent with past practice, subject only to ordinary wear and tear;
(H) Neither the Company nor any Subsidiary will amend its Certificate of
Incorporation or By-Laws or other charter documents;
(I) Neither the Company nor any Subsidiary will amend any of its
employment contracts;
(J) Without limiting the foregoing, the Seller will consult with the
Purchaser regarding all material developments, transactions and proposals
relating to the businesses of the Company and the Subsidiaries;
(K) Neither the Company nor any Subsidiary shall modify, amend or
terminate any of its material contracts or waive, release or assign any
material rights or claims, except in the ordinary course of business and
consistent with past practice;
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(L) Neither the Company nor any Subsidiary shall permit any material
insurance policy naming it as a beneficiary or a loss payable payee to be
cancelled or terminated without notice to the Purchaser, except in the
ordinary course of business and consistent with past practice;
(M) Neither the Company nor any Subsidiary shall: (i) incur or assume
any long-term debt, or except in the ordinary course of business, incur or
assume any short-term indebtedness in amounts not consistent with past
practice; (ii) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the
obligations of any other person, except in the ordinary course of business
and consistent with past practice; or (iii) make any loans, advances or
capital contributions to, or investments in, any other person (other than to
the Company or any Subsidiary of the Company or customary loans or advances
to employees in accordance with past practice);
(N) Neither the Company nor any Subsidiary shall pay, discharge or
satisfy any claims, liabilities or obligations (absolute, accrued, asserted
or unasserted, contingent or otherwise), other than the payment, discharge
or satisfaction of any such claims, liabilities or obligations, (i) in the
ordinary course of business and consistent with past practice, of claims,
liabilities or obligations reflected or reserved against in, or contemplated
by, the consolidated financial statements (or the notes thereto) of the
Company and the Subsidiaries, (ii) incurred in the ordinary course of
business and consistent with past practice or (iii) which are legally
required to be paid, discharged or satisfied;
(O) Neither the Company nor any Subsidiary will adopt a plan of complete
or partial liquidation, dissolution, merger, consolidation, restructuring,
recapitalization or other reorganization of the Company or any Subsidiary;
(P) Seller will not sell, assign, transfer or otherwise dispose of any
Shares, or subject any Shares to any liens, pledges, voting agreements,
restrictions, encumbrances or claims; and
(Q) None of the Seller, the Company or any Subsidiary will take, or
agree to commit to take, any action that is intended to make any
representation or warranty of the Seller contained herein inaccurate in any
respect at the Closing Date.
3.2 Purchaser's Actions. The Purchaser will not take, or agree to commit to
take, any action that is intended to make any representation or warranty of the
Purchaser contained herein inaccurate in any respect at the Closing Date.
3.3 Other Tax Matters.
(a) Section 338(h)(10)
(i) Election. The Seller and the Purchaser shall make a joint election
under Section 338(h)(10) of the Code with respect to the purchase of the
Shares and under any similar provisions of state, local or foreign law (the
"Election"). On the Closing Date or promptly thereafter, the Seller and the
Purchaser shall exchange completed and executed copies of Internal Revenue
Service Form 8023, required schedules thereto, and any similar state, local
and foreign forms. If any changes are required in these forms as a result of
information which is first available after the Closing Date, the parties
shall promptly agree on such changes.
(ii) Allocation of Purchase Price. In connection with the Election, the
Seller and the Purchaser, as soon as practicable and in any event prior to
the Closing Date, shall act together in good faith to agree on the Aggregate
Deemed Sales Price (as defined under applicable Treasury Regulations) and
the allocation of such Aggregate Deemed Sales Price among the assets of the
Company and the Subsidiaries.
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Such allocation of the Aggregate Deemed Sales Price shall be made in
accordance with Section 338(b) of the Code and any applicable Treasury
Regulations. As among the Seller, the Purchaser, the Company and the
Subsidiaries, the valuations of the Assets listed in such allocation shall be
conclusive and binding.
If the Purchaser and the Seller are not able to agree on such allocation,
such dispute shall be resolved by a "Big Six" firm of independent public
accountants jointly selected by the Purchaser and the Seller (other than the
Seller's and the Purchaser's respective regular accounting firms) whose fees and
expenses shall be paid equally by the Purchaser and the Seller. The Purchaser
and the Seller shall use the asset allocation for purposes of all reports and
returns with respect to Taxes, including Internal Revenue Service Form 8594 or
any equivalent statement, and shall take no position inconsistent with such
allocation in any tax return, any proceeding before any taxing authority or
otherwise. In the event that such allocation is disputed by any taxing
authority, the party receiving such notice shall promptly notify and consult
with the other party concerning resolution of such dispute.
(b) Liability for Taxes and Related Matters.
(i) Seller's Liability for Taxes. Notwithstanding anything in this
Agreement to the contrary, but subject to paragraph (c) of this Section 3.3,
the Seller shall be liable for and shall indemnify the Purchaser for all
Taxes not reflected on the balance sheet prepared in accordance with Section
1.2(b) hereof which are (a) imposed with respect to any taxable year or
period on any member of any Affiliated Group of which the Company or any
Subsidiary was a member for any taxable year or period ending on or before
the Closing Date (other than the Company or such Subsidiary), and (b)
imposed on the Company or any Subsidiary or for which the Company or such
Subsidiary may otherwise be liable for any taxable year or period that ends
on or before the Closing Date and, with respect to any taxable year or
period beginning on or before and ending after the Closing Date, the portion
of such taxable year ending on and including the Closing Date. Except as set
forth in clause (v) below, the Seller shall be entitled to any refund of
Taxes of the Company or any Subsidiary received for such periods.
(ii) Purchaser's Liability for Taxes. The Purchaser shall be liable for
and indemnify the Seller for the Taxes of the Company and the Subsidiaries
for any taxable year or period that begins after the Closing Date and, with
respect to any taxable year or period beginning on or before and ending
after the Closing Date, the portion of such taxable year or period beginning
after the Closing Date. The Purchaser shall be entitled to any refund of
Taxes of the Company or any Subsidiary received for such periods.
(iii) Taxes for Short Taxable Year. For purposes of paragraphs (b)(i)
and (b)(ii), whenever it is necessary to determine the liability for Taxes
of the Company or a Subsidiary for a portion of a taxable year or period
that begins on or before and ends after the Closing Date, the determination
of the Taxes of the Company or such Subsidiary for the portion of the year
or period ending on, and the portion of the year or period beginning after,
the Closing Date shall be determined (x) in the case of income, franchise,
sales and similar Taxes, pursuant to an interim closing of the books method
by assuming that the Company or such Subsidiary had a taxable year or period
which ended at the close of the Closing Date, except that exemptions,
allowances or deductions that are calculated on an annual basis, such as the
deduction for depreciation, shall be apportioned on a per diem basis and (y)
in the case of other Taxes, by prorating the Taxes owed for the taxable year
or period on a per diem basis.
(iv) Adjustment to Purchase Price. Any payment by the Purchaser or the
Seller under this Section will be an adjustment to the Purchase Price.
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(v) Refunds from Carrybacks. If the Seller becomes entitled to a refund
or credit of Taxes for any period for which it is liable under Section
3.3(b)(i) to indemnify the Purchaser and such Taxes are attributable solely
to the carryback of losses, credits or similar items from a taxable year or
period that begins after the Closing Date and attributable to the Company or
any Subsidiary, the Seller shall promptly pay to the Purchaser the amount of
such refund or credit together with any interest received thereon. In the
event that any refund or credit of Taxes for which a payment has been made
is subsequently reduced or disallowed, the Purchaser shall indemnify and
hold harmless the Seller for any tax liability, including interest and
penalties, assessed against the Seller by reason of the reduction or
disallowance.
(vi) Tax Returns. The Seller shall file or cause to be filed when due
all Tax Returns with respect to Taxes that are required to be filed by or
with respect to the Company and the Subsidiaries for taxable years or
periods of the Company and the Subsidiaries ending on or before the Closing
Date and shall pay any Taxes due in respect of such taxable years or
periods, and Purchaser shall file or cause to be filed when due all Tax
Returns with respect to Taxes that are required to be filed by or with
respect to the Company and the Subsidiaries for taxable years or periods
ending after the Closing Date and shall pay any Taxes due in respect of such
taxable years or periods. With respect to any such Tax Return for a taxable
period that begins on or before and ends after the Closing Date, the
Purchaser shall deliver a copy of such Tax Return to the Seller at least
forty-five (45) calendar days prior to the due date (giving effect to any
extension thereof), accompanied by an allocation between the pre-closing
period and the post-closing period of the Taxes shown to be due on such Tax
Return. Such Tax Return and allocation shall be final and binding on the
Seller, unless, within fifteen (15) calendar days after the date of receipt
by the Seller of such Tax Return and allocation, the Seller delivers to the
Company a written request for changes to such Tax Return or allocation. If
the Seller delivers such a request, then the Seller and the Purchaser shall
undertake in good faith to resolve the issues raised in such request prior
to the due date (including any extension thereof) for filing such Tax
Return. If the Seller and the Purchaser are unable to resolve any issue by
the earlier of (i) ten (10) calendar days after the date of receipt by the
Company of the request for changes, or (ii) ten (10) calendar days prior to
the due date (including any extension thereof) for filing of the Tax Return
in question, then Seller and the Purchaser shall engage jointly an
independent accounting firm to determine the correct treatment of the item
or items in dispute. Each of the Seller and the Purchaser shall bear and pay
one-half of the fees and other costs charged by the independent accounting
firm. The determination of the independent accounting firm shall be final
and binding on the parties hereto. The Seller shall pay the Purchaser the
Taxes for which the Seller is liable pursuant to Section 3.3(b)(i) but which
are payable with Tax Returns to be filed by the Purchaser pursuant to the
previous sentence within the later of (a) 10 calendar days prior to the due
date (including extensions thereof) for the filing of such Tax Returns or
(b) five calendar days of the resolution of any dispute regarding the
allocation of Taxes pursuant to the procedure described above.
(vii) Contest Provisions. Each Party shall promptly notify the other in
writing upon receipt by such party, or any of its affiliates of a notice of
any pending or threatened Tax audits, claims or assessments (a "Tax Claim")
which may affect the Tax liabilities of the Company or any Subsidiary for
which the receiving party would be required to indemnify the notifying party
pursuant to this Section 3.3(b)(i), provided that failure to comply with
this provision shall not affect the notifying party's right to
indemnification hereunder so long as the other party's position is not
actually and materially prejudiced thereby. With respect to any Tax Claim
which might result in an indemnity payment to the Purchaser pursuant to
Section 3.3(b)(i), the Seller shall have the sole right to represent the
Company's or any such Subsidiary's interests in any Tax audit or
administrative or court proceeding relating to taxable periods ending on or
before the Closing Date, and to employ counsel and accountants of its choice
at its expense. Notwithstanding the foregoing, the Seller shall not be
entitled to settle, either administratively or after the commencement of
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litigation, any claim for Taxes which would adversely affect the liability
for Taxes of the Purchaser, the Company or any Subsidiary for any period
after the Closing Date without the prior written consent of the Purchaser.
Such consent shall not be unreasonably withheld, and shall not be necessary
to the extent that the Seller has fully indemnified the Purchaser against
the effects of any such settlement.
The Seller shall be entitled to participate at its expense in the defense of
any Tax Claim for the portion of the year or period ending on the Closing Date
which may be the subject of indemnification by the Seller pursuant to Section
3.3(b)(i) and, with the written consent of the Purchaser, and at its sole
expense, may assume the entire defense of such Tax claim. Neither the Purchaser
nor the Company nor any Subsidiary may agree to settle any Tax claim for the
portion of the year or period ending on the Closing Date which may be the
subject of indemnification by the Seller under Section 3.3(b)(i) without the
prior written consent of Seller, which consent shall not be unreasonably
withheld.
(viii) Termination of Tax Allocation Agreements. Any tax allocation or
sharing agreement or arrangement, whether or not written, that may have been
entered into by the Seller, or any member of the affiliated group of which
the Seller is a member, and the Company and the Subsidiaries shall be
terminated as to them as of the Closing Date.
(c) Transfer Taxes. Notwithstanding any other provision of this Agreement to
the contrary, the Purchaser and the Seller shall each be liable for one-half of
all transfer, sales, use, recording or similar taxes arising from the sale of
the Shares.
(d) Assistance and Cooperation. After the Closing Date, each of the Seller
and the Purchaser shall and shall cause their respective affiliates to:
(i) assist the other party in preparing any Tax Returns or reports which
such other party is responsible for preparing and filing in accordance with
this Section 3.3;
(ii) cooperate fully in preparing for any audits of, or disputes with
taxing authorities regarding, any Tax Returns of the Company or any
Subsidiary;
(iii) make available to the other and to any taxing authority as
reasonably requested all information, records, and documents relating to
Taxes of the Company and the Subsidiaries;
(iv) provide timely notice to the other in writing of any pending or
threatened tax audits or assessments of the Company or any Subsidiary, for
taxable periods for which the other may have a liability under this Section
3.3; and
(v) furnish the other with copies of all correspondence received from
any taxing authority in connection with any tax audit or information request
with respect to any such taxable period.
(e) Survival of Tax Provisions. The obligations of the parties set forth in
this Section 3.3 shall be unconditional and absolute and shall remain in effect
until sixty days following the expiration (with valid extensions) of all
statutes of limitations applicable to the collection or assessment of the Taxes
at issue. Notwithstanding the foregoing sentence, if the Seller makes a request
for prompt assessment pursuant to Section 6501(d) of the Code or any similar
provision of state, local or foreign law with respect to any period which may be
the subject of indemnification by the Seller under Section 3.3(b)(i), the
payment by Seller of any Taxes assessed as a result of such request shall
terminate the Seller's obligations under Section 3.3(b)(i) with respect to such
period.
3.4 Access Prior to Closing. The Seller shall afford the Purchaser 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 Date to any and all of the premises,
properties, contracts, books, records and data of or relating to the Company and
the Subsidiaries for the
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purpose of enabling the Purchaser to confirm the accuracy of the Seller's
representations and warranties, and its compliance with its covenants, contained
in this Agreement and to keep itself apprised of the business, affairs,
operations and financial results of the Company and the Subsidiaries, but not to
permit the Purchaser to participate in the management of the business of the
Seller, the Company or the Subsidiaries.
3.5 Preservation of Records. The Purchaser agrees that it shall preserve and
keep the records of the Company and the Subsidiaries delivered to it hereunder
for a period of three (3) years from the Closing Date, and shall make such
records available to the Seller or its representatives, at the Seller's expense,
as may be reasonably required by the Seller. In the event the Purchaser wishes
to destroy such records after that time, it shall first give thirty (30) days'
prior written notice to the Seller and the Seller shall have the right, at its
option and at its expense, to take possession of said records within sixty (60)
days thereafter. If, following the Closing, the Seller retains any records
relating to the business of the Company and the Subsidiaries, the Seller shall
preserve and keep such records, shall make such records available to the
Purchaser and shall give the Purchaser the right to take possession of such
records, to the same extent as indicated above with respect to records held by
the Purchaser.
3.6 Confidentiality. The terms of the letter agreement dated as of March 6,
1995 (the "Confidentiality Agreement") between the Seller and the Purchaser are
herewith incorporated by reference and shall continue in full force and effect
until Closing and shall terminate as of the Closing; provided that if this
Agreement is terminated for any reason, the Confidentiality Agreement shall
remain in full force and effect after such termination. The Seller covenants
that, after the Closing, it will not, and will not permit any of its affiliates
to, without the prior written consent of the Purchaser, disclose to any person
confidential information relating to the business of the Company or any
Subsidiary (the "Confidential Information"), except to their respective
officers, directors, employees and representatives who need to know such
information for purposes of Taxes, accounting, pending litigation and other
matters necessary in respect of the Seller's ownership, prior to the Closing
Date, of the Company and the Subsidiaries, unless in the opinion of the Seller's
counsel, disclosure is required to be made under the Securities Act, the
Exchange Act, other applicable law or the regulations of the New York Stock
Exchange. In the event that the Seller or any of its affiliates is requested or
required by documents subpoena, civil investigative demand, interrogatories,
requests for information, or other similar process to disclose any Confidential
Information, the Seller will provide the Purchaser with prompt written notice of
such request or demand or other similar process so that the Purchaser may seek
an appropriate protective order or, if such request, demand or other similar
process is not mandatory, waive the Seller's compliance with the provisions of
this Section 3.6, as appropriate. As used herein, the term "Confidential
Information" does not include information which becomes generally available to
the public other than as a result of disclosure by the Seller or any of its
affiliates.
3.7 Regulatory and Other Authorizations. Each of the parties will use its
reasonable efforts to obtain the authorizations, consents, orders and approvals
of federal, state and foreign governmental bodies and officials that may be or
become necessary for the performance of its obligations pursuant to this
Agreement and the consummation of the transactions contemplated hereby and will
cooperate reasonably with each other in promptly seeking to obtain such
authorizations, consents, orders and approvals as may be necessary for the
performance of their respective obligations pursuant to this Agreement. The
parties shall use their reasonable efforts to file promptly, with the FTC, the
Antitrust Division and CFIUS, the required notification and report forms and
documentary material which comply with the provisions of the HSR Act and
Exon-Florio, and will promptly file any additional information reasonably
requested as soon as practicable after receipt of the request from the FTC, the
Antitrust Division or CFIUS.
3.8 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
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assignment, files, books and records and do all such further acts and things as
may be necessary or desirable to carry out the transactions contemplated
hereunder.
3.9 Intercompany and Other Obligations. On or prior to the Closing Date, the
Seller shall cancel, cause to be cancelled, or contribute to the capital of the
Company or the Subsidiaries, the net amount of all intercompany debt (the
"Intercompany Debt") between the Seller or any subsidiary of the Seller (other
than the Company or any Subsidiary), on the one hand, and the Company or a
Subsidiary, on the other. Until the Closing Date, all amounts, including
principal, interest and penalty, if any, owed by or to, as the case may be, the
Company and the Subsidiaries, on the one hand, and owed to or by, as the case
may be, the Seller and its other subsidiaries, on the other hand, shall be paid
in the ordinary and regular course consistent with past practice in accordance
with the terms of such obligations. On or prior to the Closing Date, the Seller
will (i) repay or cause to be repaid all amounts outstanding under the Company's
credit agreement with The CIT Group/Credit Finance, Inc. and Hi-Shear Fasteners
Europe Limited's credit facility with Barclays Bank PLC and all other
indebtedness for borrowed money (other than Intercompany Debt) of the Company or
any Subsidiary, in each case including, without limitation, all penalties,
premiums and fees associated with such repayment, and cause all necessary action
to be taken as promptly thereafter as practicable to cause all liens and
security interests related thereto to be terminated and (ii) if the Purchaser so
requests, assign (to the extent assignable) to the Company, and cause the
Company to assume, any or all contracts (including, without limitation,
insurance policies) to which Seller or any of its subsidiaries (other than the
Company and the Subsidiaries) is a party which are primarily related to the
business of the Company and the Subsidiaries (or, in the case of any such
contract which is not exclusively related to the business of the Company and the
Subsidiaries, such portion of such contract as the parties shall agree in good
faith is appropriate and reasonable).
3.10 Insurance. In the event that, on or prior to the Closing Date, any
material property owned or leased by the Company or any Subsidiary suffers any
material damage, destruction or allied loss, the Seller shall surrender to the
Purchaser (i) any insurance proceeds received by the Seller with respect to such
damage or loss and (ii) all rights of the Seller with respect to any causes of
action, whether or not litigation has commenced on the Closing Date, in
connection with such damage or loss.
3.11 Seller Stockholder Approval. The Seller covenants and agrees, as
promptly as practicable, to take all actions necessary duly to call, give notice
of, convene and hold a meeting of its stockholders as soon as practicable for
the purpose of adopting and approving this Agreement and the transactions
contemplated hereby and, if the Seller so elects, to approve the dissolution of
the Seller. The Board of Directors of the Seller shall, subject to its fiduciary
duties under applicable law, recommend to its stockholders the approval of this
Agreement and the transactions contemplated hereby and will use its best efforts
to obtain such approval. In connection with such stockholder meeting, the Seller
covenants and agrees, as promptly as practicable, to prepare and file with the
SEC a preliminary proxy or information statement relating to, inter alia, this
Agreement and the transactions contemplated hereby and use its best efforts to
obtain and furnish the information required to be included by the SEC in such
proxy statement and, after consultation with the Purchaser, to respond promptly
to any comments made by the SEC with respect to the preliminary proxy statement
and cause a definitive proxy statement to be mailed to its stockholders.
3.12 Non-Solicitation. The Seller shall not, nor shall it authorize or
permit any of its subsidiaries or any of its or their respective officers,
directors or employees or any investment banker, financial advisor (including
the financial advisor named in Section 2.1(B)), attorney, accountant or other
representative retained by it to, solicit or encourage any inquiries or the
making of any proposal which constitutes, or may reasonably be expected to lead
to, a Competing Transaction (as defined in Section 7.1 below), or, except in the
circumstances described below, participate in any discussions or negotiations,
or provide third parties with any nonpublic information, relating to any such
inquiry or
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proposal. Nothing contained in this Section 3.12 or in any other provision of
this Agreement shall, however, prohibit the Seller or its Board of Directors or
its representatives or agents from making such disclosures to its stockholders
as are required under applicable law or by rules of the New York Stock Exchange
or of any other exchange on which the Seller's securities may be listed for
trading. Notwithstanding the foregoing, nothing contained in this Section 3.12
or elsewhere in this Agreement shall prohibit the Board of Directors of the
Seller from furnishing information to, or entering into discussions or
negotiations with, any person or entity that makes a bona fide written proposal
for a Competing Transaction if: (A) the Board of Directors of the Seller, after
consultation with its legal counsel and financial advisors, determines in good
faith that such Competing Transaction is economically superior to the
transactions contemplated hereby and that such action is necessary or required
for the Board of Directors of the Seller to comply with its fiduciary duties to
the Seller's stockholders under applicable law, (B) before furnishing such
information to, or entering into discussions or negotiations with, such person
or entity, the Seller discloses to the Purchaser that it is furnishing
information to, or entering into discussions or negotiations with, such person
or entity, which notice shall describe in reasonable detail the terms thereof
(including the identity of the person or entity making the offer), and (C) prior
to furnishing such information to such person or entity, the Seller receives
from such person or entity an executed confidentiality agreement, with terms no
less favorable to the Seller than those contained in the Confidentiality
Agreement. Subject to compliance with the provisions of Section 7.1 and the
preceding sentence, the Board of Directors of the Seller may approve and
recommend to the Seller's stockholders a Competing Transaction.
3.13 Certain Benefit Matters. On or prior to the Closing Date, the Seller
shall take all steps necessary and appropriate to assign to the Company, and
cause the Company to assume, the insurance policies and all related agreements
and contracts implemented in connection with the Company's supplemental
executive retirement plans (collectively, the "SERPs") with respect to employees
and former employees of the Company who participate in, or are entitled to
benefits under, the SERPs as of the Closing Date. The Seller shall honor and
shall use its best efforts to cause its insurance carriers to honor all claims
for benefits incurred prior to the Closing Date under the employee welfare
benefit plans (as such term is defined in Section 3(1) of ERISA) maintained by
the Seller on behalf of the employees of the Company or its Subsidiaries in
accordance with the terms of such welfare plans, without interruption as a
result of the consummation of the transactions contemplated by this Agreement.
3.14 Estoppel Certificates. The Seller shall use reasonable efforts to
obtain and deliver to the Purchaser at or prior to the Closing an estoppel
certificate, in form and substance reasonably satisfactory to the Purchaser and
the Seller, with respect to each of the leases described in Section 2.1(G) of
the Seller's Disclosure Schedule.
ARTICLE IV
CONDITIONS TO CLOSING
4.1 Conditions to Obligations of the Seller. The obligations of the Seller
to consummate the sale of Shares to be sold hereunder are subject to the
fulfillment, prior to or on the Closing Date, of each of the following
conditions, unless waived by the Seller:
(i) Regulatory Authorizations. All authorizations, consents, orders and
approvals of federal, state and foreign regulatory bodies and officials
necessary for the performance by the Seller of this Agreement and the
consummation by the Seller of the sale and purchase of the Shares hereunder
shall have been obtained and the applicable waiting period under the HSR Act
and shall have expired or been terminated, 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
(collectively, an "Order")
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and either (A) CFIUS shall have determined not to investigate the
transactions contemplated by this Agreement under Exon-Florio (either by
action or inaction) or (B) if CFIUS shall have determined to make such an
investigation, such investigation shall have been completed or the President
shall have determined (by action or inaction) not to take any action under
Exon-Florio with respect to the transactions contemplated by this Agreement.
(ii) Representations and Warranties. The representations and warranties
of the Purchaser contained in this Agreement shall be true and correct at
and as of the Closing Date, with the same force and effect as if made at and
as of the Closing Date, except for any representation and warranty made or
given as of a specified date, which shall have been true and correct as of
such date; and the Purchaser shall have performed or complied in all
material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to the Closing
Date.
(iii) Certificate. The Purchaser shall have delivered to the Seller a
certificate, dated the Closing Date, of the Chief Executive Officer or the
Chief Financial Officer of the Purchaser to the effect that the conditions
specified in paragraph (ii) of this Section 4.1 have been satisfied.
(iv) Seller Stockholder Approval. This Agreement and the transactions
contemplated hereby shall have been approved by the stockholders of the
Seller.
4.2 Conditions to Obligation of the Purchaser. The obligation of the
Purchaser to consummate the purchase of the Shares provided for herein is
subject to the fulfillment, prior to or on the Closing Date, of each of the
following conditions, unless waived by the Purchaser:
(i) Regulatory and Other Authorizations. All authorizations, consents,
orders and approvals of federal, state and foreign regulatory bodies and
officials necessary for the performance by the Purchaser of this Agreement
and the consummation by the Purchaser of the sale and purchase of the Shares
hereunder shall have been obtained and the applicable waiting period under
the HSR Act shall have expired or been terminated, there shall be no Order
in effect and either (A) CFIUS shall have determined not to investigate the
transactions contemplated by this Agreement under Exon-Florio (either by
action or inaction) or (B) if CFIUS shall have determined to make such an
investigation, such investigation shall have been completed or the President
shall have determined (by action or inaction) not to take any action under
Exon-Florio with respect to the transactions contemplated by this Agreement.
(ii) Representations and Warranties. The representations and warranties
of the Seller contained in this Agreement shall be true and correct at and
as of the Closing Date with the same force and effect as if made at and as
of the Closing Date, except for any representation and warranty made or
given as of a specified date, which shall have been true and correct as of
such date; and the Seller shall have performed or complied in all material
respects with all agreements and covenants required by this Agreement to be
performed or complied with by it on or prior to the Closing Date.
(iii) Certificate. The Seller shall have delivered to the Purchaser a
certificate, dated the Closing Date, of the Chief Executive Officer or the
Chief Financial Officer of the Seller to the effect that the conditions
specified in paragraph (ii) of this Section 4.2 have been satisfied.
(iv) Share Certificates. The Seller shall have delivered to the
Purchaser all certificates representing the Shares, together with all
necessary stock powers and transfers, and all other documents reasonably
requested by the Purchaser to effect the transfers of the Shares.
(v) Resignations of Directors. Each director of the Company or any
Subsidiary, who is also an officer or a director of the Seller, shall have
delivered to the Purchaser a duly executed resignation effective as of the
Closing Date.
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ARTICLE V
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
5.1 Survival; Waiver of Claims. (a) The representations and warranties of
each of the Seller and the Purchaser contained in this Agreement or in any
certificate or other document delivered pursuant hereto shall survive the
Closing and expire on March 31, 1997, and no action or claim may be brought or
raised at any time with respect to any representation and warranty or with
respect to the covenants and agreements contained in Sections 3.1(Q) and 3.2
(other than any action or claim under such Sections 3.1(Q) or 3.2 based on the
taking of any action intended to cause any representation or warranty to be
inaccurate) after such date unless prior thereto the party seeking
indemnification shall have notified in writing the party from whom
indemnification is sought in reasonable detail of such claim. Except as provided
in the preceding sentence, the covenants and agreements contained herein shall
survive in accordance with their respective terms.
(b) Notwithstanding anything herein to the contrary, in the event the
Purchaser is notified in writing at least 20 business days prior to the Closing
Date (and the Closing Date and the date specified in Section 7.1(c), to the
extent necessary, shall be extended to allow for such 20 business day period of
notice) of an inaccuracy in any representation or warranty of the Seller
contained herein or a non-performance of or non-compliance with any covenant or
agreement contained herein required to be performed or complied with by the
Seller at or before the Closing, (i) if the Purchaser nevertheless consummates
the Closing hereunder, the Purchaser hereby agrees that it shall be deemed to
have waived (x) such inaccuracy, non-performance or non-compliance as a
condition of its obligation to close hereunder and (y) any and all rights,
remedies or other recourse whatsoever against the Seller, including, without
limitation, any indemnity pursuant to this Article V, to which the Purchaser
might otherwise be entitled in respect of such inaccuracy, non-performance or
non-compliance (but the Purchaser shall not be deemed to have waived any right
to receive an adjustment to the Purchase Price pursuant to Section 1.2(c) or
1.2(d) which may result from such inaccuracy, non-performance or non-
compliance), and (ii) if the Purchaser terminates this Agreement pursuant to
Section 7.1(b)(i), the Purchaser further agrees that it shall be deemed to have
waived any and all rights, remedies or other recourse against the Seller to
which the Purchaser might otherwise be entitled in respect of such inaccuracy,
non-performance or non-compliance; provided, however, that if such inaccuracy,
non-performance or non-compliance existed on the date of the execution and
delivery of this Agreement or was the result of a deliberate violation of the
covenant contained in Section 3.1(Q), the Seller shall reimburse the Purchaser
for up to $300,000 of the reasonable out-of-pocket expenses incurred by the
Purchaser prior to the date of such termination in connection with the
transactions contemplated by this Agreement. In the event the Purchaser is
entitled to reimbursement of its expenses pursuant to the preceding sentence and
to a fee pursuant to Section 7.5(b) hereof, any amounts paid pursuant to the
preceding sentence shall be credited towards the fee payable pursuant to Section
7.5(b) and in no event shall the amount the Purchaser is entitled to receive
pursuant to the preceding sentence and Section 7.5(b) exceed the amount set
forth in Section 7.5(b).
5.2 Indemnification. (a) The Seller hereby agrees to indemnify and hold
harmless the Purchaser from and against any losses, claims, damages,
liabilities, costs and expenses, including, without limitation, taxes, interest,
penalties and attorneys' fees and expenses (collectively "Damages"), asserted
against, resulting to, imposed upon or incurred by the Purchaser, directly or
indirectly, by reason of or resulting from a breach or violation of any covenant
or agreement in this Agreement or any breach of a representation or warranty of
the Seller hereunder, except to the extent the same are reflected on the balance
sheet prepared in accordance with Section 1.2(b) hereof or in the notes thereto.
The provisions of Section 3.3(b) shall govern the indemnification for Taxes to
the extent inconsistent with the provisions of this Section 5.2. Notwithstanding
the foregoing, the Seller shall have no obligation to indemnify the Purchaser
for any Damages arising from (i) any aged or surplus inventory other than any
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increase in the amount of surplus inventory for the items listed on the
Company's Special Inventory Report Number LH168R002, as of April 30, 1995 (run
date May 31, 1995), the Report Summary of which is attached as Attachment 5.2(a)
to the Seller's Disclosure Statement, from the amount of such surplus as of
April 30, 1995, as shown on such Report; (ii) the terms of the February 15, 1993
contract between the Company and Boeing Commercial Airplane Group or the July
27, 1992 contract between the Company and Textron Aerostructures (a division of
Avco Corporation); (iii) any groundwater, soil or other subsurface contamination
at the Company's facility located at 2600 Skypark Drive, Torrance, California as
described or identified in (A) a report by Blasland, Bouck & Lee ("BBL") titled
"Estimated Costs for Site Characterization and Soil and Ground-Water
Remediation, Hi-Shear Corporation Facility, 2600 Skypark Drive, Torrance,
California," dated May 1992, including any document reviewed or cited therein
(the "BBL Report"); (B) a letter dated September 15, 1992, from Peter J. Murphy
of BBL to Patrick Meade of the Company regarding "Status Report for the Hi-Shear
Facility Located at 2600 Skypark Drive, Torrance, California. BBL Project No.:
66202" (the "Status Report"); (C) a letter dated October 15, 1993, from Peter J.
Murphy of BBL to Patrick Meade of the Company regarding "Tasking, Cost Estimates
and Schedule for Remedial Design Activities at Hi-Shear Torrance Facility. BBL
Project No.: 66202" (the "Tasking Report"); (D) any and all ground-water
monitoring reports submitted to the Company by BBL (the "Monitoring Reports"),
including, but not limited to the draft "Second Quarter 1995 Ground-Water
Monitoring Report, Hi-Shear Corporation, 2600 Skypark Drive, Torrance,
California" dated August 1995 or as would be described or identified in any
additional investigations or studies undertaken pursuant to recommendations made
in the BBL Report, the Status Report, the Tasking Report or the Monitoring
Reports (collectively, the "Reports") or as would be required by a governmental
agency with respect to the contamination described or identified in the Reports;
or (iv) the absence of any reserve or other provision for any of the foregoing
in any financial statement or notes thereto with respect to the Company referred
to herein or in the Seller's Disclosure Statement. For the avoidance of doubt,
the preceding sentence shall not create any implied obligation of the Seller to
indemnify the Purchaser for any Damages relating to any other matters disclosed
on the Seller's Disclosure Schedule.
(b) The Purchaser hereby agrees to indemnify and hold harmless the Seller
from and against any Damages asserted against, resulting to, imposed upon or
incurred by the Seller, directly or indirectly, by reason of or resulting from a
breach or violation of any covenant or agreement in this Agreement or any breach
of a representation or warranty of the Purchaser hereunder.
(c) Solely for determining the Purchaser's right to indemnification
hereunder for any breach of the Seller's representations and warranties or the
Seller's covenant contained in Section 3.1(Q) hereof, and not for purposes of
determining whether the conditions to closing set forth in Article IV hereof
have been satisfied (including, without limitation, the conditions set forth in
Section 4.2(ii)) or for any other purpose whatsoever, it is understood and
agreed that "material" is defined to mean any inaccuracy or inaccuracies in the
representations and warranties set forth in any one lettered paragraph of
Section 2.1 hereof which have a cumulative net adverse effect of more than
$250,000 on the business, financial condition or results of operations of the
Company and the Subsidiaries taken as a whole.
(d) Promptly after receipt by the indemnified party of notice of the
commencement of any action, suit or proceeding or the written assertion of any
claim, demand or Tax deficiency, the indemnified party shall, if a claim in
respect thereof is to be made against the indemnifying party under this Section
5.2, notify the indemnifying party in writing of such notice, but the omission
so to notify the indemnifying party shall not relieve the indemnifying party
from any liability which it may otherwise have to the indemnified party unless
the indemnifying party's rights are materially prejudiced thereby. In case any
such action, suit, proceeding, demand, Tax deficiency or claim shall be brought
or asserted against the indemnified party (or the Company or any Subsidiary if
the Purchaser is the indemnified party) and it shall notify the indemnifying
party of the commencement or assertion thereof, the indemnifying party shall
notify the indemnified party within 30 days of such notice as to whether or not
the indemnifying party desires to participate therein. If the indemnifying party
elects to participate in the defense of such
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matter, all decisions relating thereto (except as provided in Section 3.3 above)
shall be decided jointly by the indemnified party and the indemnifying party,
including but not limited to settlements and appeals. The parties shall use all
reasonable efforts to minimize the amount of any loss resulting from any such
matter and shall fully cooperate with one another in regard thereto, including,
without limitation, delivering copies of all pleadings, documents, reports and
correspondence to the other party, and acting reasonably in all matters in which
joint decisions are required.
(e) After the Closing, the Purchaser will make, and will cause Hi-Shear
Fasteners Europe Limited to make, reasonably diligent efforts to collect the
B.P.190,000 receivable of Hi-Shear Fasteners Europe Limited referred to in
Section 2.1(D) of the Seller's Disclosure Schedule; provided, however, that,
notwithstanding anything in this Agreement to the contrary, to the extent such
receivable is not paid on or prior to March 31, 1997, the Seller shall pay the
Purchaser the unpaid amount thereof upon demand after such date, and the
Purchaser and Hi-Shear Fasteners Europe Limited thereupon shall assign in
writing to the Seller all of their respective rights to receive, and the Seller
shall be subrogated to all rights of the Purchaser and Hi-Shear Fasteners Europe
Limited to receive, payment of all unpaid amounts due with respect to such
receivable. The Purchaser and Hi-Shear Fasteners Europe Limited shall thereafter
reasonably cooperate with the Seller, at the cost and expense of the Seller, in
the Seller's efforts to collect the payment of such amount. Any amount due the
Purchaser from the Seller pursuant to the first sentence of this paragraph (e)
shall not be subject to, or credited against, the limitations on claims set
forth in Section 5.3 of this Agreement. For purposes of preparing the
consolidated balance sheet of the Company and the Subsidiaries as at the Closing
Date referred to in Section 1.2(b) of this Agreement, such receivable shall be
valued at B.P.190,000.
5.3 Limit on Claims. No claim or claims with respect to breaches of
representations and warranties of the Seller or of the Seller's covenant
contained in Section 3.1(Q) hereof shall be asserted by the Purchaser pursuant
to the indemnification provisions provided for pursuant to this Article V,
unless the amount of the Damages with respect to breaches of representations and
warranties and such covenant is at least U.S. $250,000 in the aggregate and then
only to the extent such Damages exceed U.S. $250,000. In no event shall the
Seller be liable to the Purchaser for more than an amount equal to the Purchase
Price in the aggregate with respect to any claim or claims for indemnification
pursuant to this Article V.
5.4 Remedies. The parties hereto agree that irreparable damage would occur
in the event any provision of this Agreement was not performed in accordance
with the terms hereof and that, unless and until this Agreement is properly
terminated in accordance with the provisions of Section 7.1 hereof, the parties
shall be entitled to specific performance of the terms hereof, in addition to
any other remedy at law or in equity.
5.5 Remedies Exclusive. The remedies provided herein shall be exclusive and
shall preclude the assertion by any party hereto or any other rights or the
seeking of any other remedies against the other party hereto for claims arising
under this Agreement at common law, in equity (including rights of specific
performance), under any statute, rule or regulation or otherwise.
5.6 Certain Distributions. The Seller covenants and agrees that until March
31, 1997, it will retain and not distribute to its stockholders (including,
without limitation, by means of a dividend, dissolution, stock redemption or
stock repurchase) at least $3 million of the Purchase Price (the "Retained
Amount"). The Purchaser agrees that, subject to the Seller's compliance with the
covenant and agreement set forth in Section 3.9(i) of this Agreement, the Seller
may distribute to its stockholders the balance of the Purchase Price at such
times prior to or after March 31, 1997 and in such manner as the Board of
Directors of the Seller may deem appropriate, and solely for such purpose, the
Board of Directors of the Seller shall be entitled to proceed as if the Seller's
liability to the Purchaser under this Agreement and in respect of the
transactions contemplated hereby is in no event greater than $3 million. After
March 31, 1997, the Seller may distribute the Retained Amount to its
stockholders;
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provided, however, that if on or prior to March 31, 1997, the Purchaser shall
have notified the Seller of a claim for indemnification in accordance with this
Article V, and such claim shall remain unresolved as of such date, the Seller
shall retain and not distribute to its stockholders a portion of such Retained
Amount which the Seller and the Purchaser shall agree, or a panel of arbitrators
referred to in Section 8.3(b) shall determine, to be sufficient to enable the
Seller to satisfy such claim for indemnification to the extent it may be
obligated with respect thereto. Upon final resolution of such claim, or at such
earlier time as the Purchaser and the Seller may agree or such a panel of
arbitrators may determine, the Seller may distribute to its stockholders the
balance of such Retained Amount. The Purchaser, for the benefit of itself, its
successors and assigns, hereby irrevocably waives and agrees it will not assert
against the Seller, any subsidiary of the Seller or any officer, director,
employee, expert or stockholder of the Seller or any such subsidiary, any claim
for the recovery of any such distribution permitted hereby, or for Damages for,
or for other legal or equitable relief in respect of, the declaration, payment,
making or receipt of any such distribution permitted hereby under any federal,
state, local or foreign law, statute or regulation (including, without
limitation, any applicable bankruptcy, insolvency, fraudulent conveyance or
other law affecting or protecting the rights of creditors or the Delaware
General Corporation Law), at common law, in equity or otherwise, notwithstanding
the fact that as a result of any such distributions, the Seller may not have
funds sufficient to indemnify the Purchaser in respect of any claim for Damages
asserted hereunder or otherwise.
ARTICLE VI
FEES RELATING TO THIS TRANSACTION
6.1 The Seller's Fee. The Seller has not entered into any agreement with any
other party and is not responsible for claims by any other party for brokerage
or other commissions related to this Agreement or the transactions contemplated
hereby, except that the Seller has retained as its financial adviser and the
Seller is responsible for, and shall indemnify the Purchaser against, any
obligations with respect to the fee of Lazard Freres & Co. LLC.
6.2 The Purchaser's Fee. The Purchaser has not entered into any agreement
with any other party and is not responsible for claims by any other party for
brokerage or other commissions related to this Agreement or the transaction
contemplated hereby, except that the Purchaser has retained as its financial
adviser, and the Purchaser is responsible for, and shall indemnify the Seller
against, any obligations with respect to the fee of Banexi International
Financial Services (North America) Corp.
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 Termination. This Agreement may be terminated at any time, whether
before or after approval of this Agreement and the transactions contemplated
hereby by the stockholders of the Seller:
(a) by mutual written consent of the Purchaser and the Seller;
(b) by either the Purchaser or the Seller if (i) there has been a breach
of any representation, warranty, covenant or agreement on the part of the
other set forth in this Agreement which breach has not been cured within
five business days following receipt by the breaching party of notice of
such breach, or (ii) if any permanent injunction or other order of a court
or other competent authority preventing the consummation of the transactions
contemplated hereby shall have become final and non-appealable;
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(c) by either the Purchaser or the Seller if, for any reason, the
Closing shall not have occurred on or before May 31, 1996; provided,
however, that the right to terminate this Agreement under this Section
7.1(c) shall not be available to any party whose failure to fulfill any
obligation under this Agreement has been the cause of, or resulted in, the
failure of the Closing to have occurred on or prior to such date;
(d) by either the Purchaser or the Seller if the approval of the
stockholders of the Seller of this Agreement and the transactions
contemplated hereby shall not have been obtained by reason of the failure to
obtain the required affirmative vote at a duly held meeting of stockholders
or at any adjournment thereof;
(e) by the Seller, if the Board of Directors of the Seller shall have
recommended a Competing Transaction to its stockholders and shall have
determined, after consultation with the Seller's legal counsel and financial
advisors, that such Competing Transaction is economically superior to the
transactions contemplated hereby and that such action is necessary or
required for the Board of Directors to comply with its fiduciary duties to
the Seller's stockholders under applicable law; or
(f) by the Purchaser, if (i) the Board of Directors of the Seller
withdraws, modifies or changes its recommendation of this Agreement or the
transactions contemplated hereby in a manner adverse to the Purchaser or
shall have resolved to do so, or (ii) the Board of Directors of the Seller
shall have recommended to the stockholders of the Seller any Competing
Transaction or resolved to do so, or (iii) a tender offer or exchange offer
for all of the outstanding shares of capital stock of the Seller (other than
any such shares "beneficially owned" (within the meaning of Rule 13d-3 under
the Exchange Act) by the person or "group" (within the meaning of Rule
13d-5(b) under the Exchange Act) making such tender or exchange offer) is
commenced, and the Board of Directors of the Seller, within ten (10)
business days after such tender offer or exchange offer is so commenced,
either fails to recommend against acceptance of such tender offer or
exchange offer by its stockholders or takes no position with respect to the
acceptance of such tender offer or exchange offer by its stockholders.
For purposes of this Agreement, "Competing Transaction" shall mean any of,
or a proposal to effect any of, the following (other than the transactions
contemplated by this Agreement): (i) any merger, consolidation, business
combination, or other similar transaction with respect to the Seller or the
Company; (ii) any sale, transfer or other disposition of the Shares or of all or
substantially all of the assets of the Company and the Subsidiaries; or (iii)
any tender offer or exchange offer for all the outstanding shares of capital
stock of the Seller (other than any such shares "beneficially owned" (within the
meaning of Rule 13d-3 under the Exchange Act) by the person or "group" (within
the meaning of Rule 13d-5(b) under the Exchange Act) making such tender or
exchange offer) or the filing of a registration statement under the Securities
Act in connection therewith.
7.2 Effect of Termination. In the event of termination of this Agreement by
either the Seller or the Purchaser as provided in Section 7.1, this Agreement
shall forthwith become void and there shall be no liability or obligation on the
part of the Purchaser or the Seller or their respective officers or directors
except (y) with respect to Sections 3.6, 6.1, 6.2, 7.5 and this Section 7.2 and
(z) to the extent that such termination results from the willful breach by a
party hereto of any of its representations, warranties, covenants or agreements
set forth in this Agreement.
7.3 Amendment. This Agreement may be amended by the parties hereto at any
time before or after approval of this Agreement and the transactions
contemplated hereby by the stockholders of the Seller, but, after any such
approval, no amendment shall be made which by law requires further approval by
such stockholders without such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
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7.4 Extension; Waiver. Any party may: (a) extend the time for the
performance of any of the obligations or other acts of the other party 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, covenants or conditions contained herein. Except as
provided in Section 5.1(b) hereof, any agreement on the part of a party hereto
to any such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party, and no such extension or waiver shall
be construed as an extension or waiver of any other obligation, inaccuracy or
compliance with any other provision.
7.5 Fees and Expenses. (a) Except as otherwise expressly provided herein,
all costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expense.
(b) The Seller agrees that (i) if the Seller shall terminate this Agreement
pursuant to Section 7.1(e), (ii) if the Purchaser or the Seller shall terminate
this Agreement pursuant to Section 7.1(d) due to the failure of the Seller's
stockholders to approve this Agreement and the transactions contemplated hereby,
and (A) at the time of such failure so to approve this Agreement there shall
exist or have been proposed a Competing Transaction and (B) within one year
following such termination, the Seller or any of its subsidiaries shall have
consummated a Competing Transaction, (iii) if the Purchaser or the Seller shall
terminate this Agreement pursuant to Section 7.1(c), a vote of the stockholders
of Seller at a duly held meeting with respect to this Agreement and the
transactions contemplated hereby shall not have occurred and been certified
prior to such termination and (A) at the time of such termination there shall
exist or have been proposed a Competing Transaction and (B) within one year
following such termination, Seller or any of its subsidiaries shall have
consummated a Competing Transaction, or (iv) if the Purchaser terminates this
Agreement pursuant to Section 7.1(f)(i) or (ii), then the Seller shall pay to
the Purchaser an amount equal to $1.3 million, which sum the Seller and the
Purchaser agree is reasonable under the circumstances since it would be
impracticable and extremely difficult to fix the amount of actual damages to the
Purchaser in the case of such a termination.
(c) The Seller and the Purchaser each agree that the payment provided for in
Section 7.5(b) shall be the sole and exclusive remedy of the Purchaser upon any
termination of this Agreement as described in Section 7.5(b) and such remedies
shall be limited to the sum stipulated in Section 7.5(b), regardless of the
circumstances (including willful or deliberate conduct) giving rise to such
termination.
(d) Any payment required to be made pursuant to Section 7.5(b) shall be made
to the Purchaser not later than two business days after delivery to the Seller
of notice of demand for payment, and shall be made by wire transfer of
immediately available funds to an account designated by the Purchaser in the
notice of demand for payment delivered pursuant to this Section 7.5(d).
ARTICLE VIII
MISCELLANEOUS
8.1 Public Disclosure. The parties agree that, except as may be required to
comply with the requirements of applicable law or the rules of any stock
exchange or any interdealer trading system upon which their shares may be listed
or quoted for trading, no press release or similar public announcement or
communication will be made or caused to be made concerning the execution or
performance of this Agreement unless reviewed in advance by both parties.
8.2 Governing Law. This Agreement shall be deemed to be made in and in all
respects shall be interpreted and construed, and it and the rights of the
parties with respect to the transactions contemplated hereby shall be governed,
by and in accordance with the law of the State of New York
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(including the law of such State with respect to the authority of arbitrators to
make awards of punitive damages), without regard to the conflicts of law
provisions thereof.
8.3 Dispute Resolution; Jurisdiction.
(a) Negotiation. (i) In the event of any dispute, controversy or claim (a
"Dispute") arising out of or relating to this Agreement (including any provision
of any Disclosure Schedule, Exhibit, document or certificate) or the breach,
termination or validity thereof, but with the exception of any disputes arising
under Section 1.2(b) of this Agreement which shall be resolved in the manner
provided therein, upon the written request of either party to this Agreement (a
"Party"), the matter shall immediately be referred to senior officers of each
Party for resolution. The senior officers shall meet promptly and attempt in
good faith to negotiate a resolution of the Dispute.
(ii) If the parties are unable to resolve the Dispute within 10 business
days after a Party's written request for a meeting was made, then either Party
may submit the Dispute to arbitration as the exclusive means of resolving it in
accordance with the procedures set forth in Section 8.3(b) hereof.
(b) Arbitration. (i) Any unresolved Dispute shall be finally settled by
arbitration in accordance with the Arbitration Rules of the International
Chamber of Commerce (the "ICC") then in effect (the "Rules"), except as modified
herein. The arbitration shall be held in New York, New York. The arbitration
proceedings shall be conducted, and the award shall be rendered, in the English
language, and to the extent the arbitrators are required to apply the laws
governing contracts, the laws of the State of New York shall govern.
(ii) There shall be three arbitrators of whom each Party shall select one in
accordance with the Rules. The two Party-appointed arbitrators shall select a
third arbitrator to serve as Chair of the tribunal within 30 days of the
selection of the second arbitrator. If any arbitrator has not been appointed
within the time limits specified herein and in the Rules, such appointment shall
be made by the ICC Court of Arbitration upon the written request of either
Party.
(iii) The hearing shall be held no later than 150 days and the award shall
be rendered no later than 180 days following the appointment of the last of the
three arbitrators.
(iv) The Parties hereby waive any rights of application or appeal to the
courts of the United States and of the Republic of France to the fullest extent
permitted by law in connection with any question of fact or law arising in the
course of the arbitration or with respect to any award made except for actions
to enforce an arbitral award and actions seeking interim, interlocutory or other
provisional relief in any court of competent jurisdiction.
(v) The award shall be final and binding upon the Parties, and shall be the
sole and exclusive remedy between the Parties regarding any claims,
counterclaims, issues, or accounting presented to the arbitral tribunal.
(vi) Any monetary award shall be made and promptly payable in U.S. dollars
free of any tax (except to the extent required by law), deduction or offset, and
the arbitral tribunal shall be authorized in its discretion to grant pre-award
and post-award interest at commercial rates. Any costs, fees, or taxes incident
to enforcing the award shall, to the maximum extent permitted by law, be charged
against the party resisting such enforcement.
(vii) This Agreement and the rights and obligations of the Parties shall
remain in full force and effect pending the award in any arbitration proceeding
hereunder.
(viii) All notices by one party to the other in connection with the
arbitration shall be in accordance with the provision of Section 8.4 hereof.
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(ix) This agreement to arbitrate shall be binding upon the successors and
assigns of each Party.
(x) If at any time there are pending two or more arbitrations hereunder, any
party to any such arbitrations may apply for consolidation of any two or more of
such arbitrations. Such application shall be made to the arbitral tribunal in
the arbitration that, among the arbitrations sought to be consolidated, was the
first commenced under this Agreement (the "Primary Tribunal"). Arbitrations may
be consolidated, in whole or in part, if there are significant common issues of
law or fact or one or more common parties between the arbitrations sought to be
consolidated. In determining whether and to what extent to order consolidation,
the Primary Tribunal shall consider the extent to which consolidation would
facilitate efficiencies and economies in the arbitration process, and the
desirability of avoiding possibly conflicting results under different
arbitrations. The consolidated arbitration shall be held before the Primary
Tribunal. If there are more than two parties to any arbitration consolidated
hereunder, the Primary Tribunal may interpret and supplement the Rules in their
application to the consolidated arbi-tration as may be necessary or appropriate
to accommodate the multi-party nature of the arbitration and to ensure the just,
expeditious, economical and final determination of the dispute. The award in any
arbitration under this Section 8.3(b), or in any arbitration consolidated
hereunder, shall be final and binding on all of the parties hereto and on all
other persons (whether or not they participated in the consolidated arbitration)
that were given an opportunity to participate fully in such arbitration.
(c) New York Jurisdiction. Each of the parties to this Agreement hereby
irrevocably and unconditionally (i) consents to submit to the jurisdiction of
the federal and state courts located in the County of New York for any
proceeding arising in connection with this Agreement or with respect to the
rights of the parties under this Agreement or in connection with the
transactions contemplated hereby (and each such party agrees not to commence any
such proceeding, except in such courts), (ii) agrees that process in any such
proceeding may be served upon it in the same manner as notice may be given to it
as provided in Section 8.4 of this Agreement with the same legal force and
validity as if served upon such party personally, (iii) waives any objection to
the laying of venue of any such proceeding in the federal and state courts
located in the City, County and State of New York, and (iv) waives, and agrees
not to plead or to make, any claim that any such proceeding is brought in an
improper or otherwise inconvenient forum. The parties agree that, whether or not
personal jurisdiction can be obtained against the Seller, the Company, any
Subsidiary or any other affiliate of any of them in the Republic of France, no
proceeding will be brought against the Seller, the Company, any Subsidiary or
any affiliate of any of them in any court or before any tribunal in the Republic
of France.
8.4 Notices. Any notices or other communications required under their
Agreement shall be in writing, shall be deemed to have been given and received
when delivered in person or by telecopy, or if sent by overnight express courier
service, shall be deemed to have been received on the first business day
thereafter, and
(a) if to the Seller, addressed to:
Hi-Shear Industries Inc.
3333 New Hyde Park Road
North Hills, New York 11042
Telecopy: (516) 365-8629
Telephone: (516) 627-8600
Attention: Chairman of the Board and
Chief Executive Officer
A-28
<PAGE>
with a copy to:
Stephen F. Farrell, Esq.
Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, NY 10178
Telecopy: (212) 309-6273
Telephone: (212) 309-6000
(b) if to the Purchaser, addressed to:
GFI Industries S.A.
Espace Vauban-BP 431
Boulevard Richelieu
Belfort Cedex
France 90008
Telecopy: 011-33-84-57-02-00
Telephone: 011-33-84-57-00-77
Attention: Chairman of the Board and
Chief Executive Officer
with a copy to:
Nancy A. Lieberman, Esq.
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, NY 10022
Telecopy: (212) 735-2000
Telephone: (212) 735-3000
or at such other place or places or to such other person or persons as shall be
designated in writing by the parties to this Agreement in the manner herein
provided.
8.5 Section Headings. The section and paragraph headings contained in this
Agreement are for reference purposes only and shall not in any way affect the
meaning or interpretation of this Agreement.
8.6 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.
8.7 Assignment. Except as provided in the following sentence, this Agreement
may not be assigned, by operation of law or otherwise. The Purchaser may assign
its rights under this Agreement in whole or in part to a subsidiary of the
Purchaser which will take title to the Shares and will assume all obligations of
the Purchaser hereunder; provided, however, that in such event, the Purchaser
will remain fully liable for the fulfillment of all such obligations. As a
condition of such assignment, the assignee in writing shall make all of the
representations and warranties of the Purchaser hereunder and otherwise agree to
perform all of the obligations of the Purchaser hereunder. This Agreement shall
be binding upon and inure to the benefit of successors and permitted assigns of
the parties hereto.
8.8 Limitation on Rights. In no event shall the Purchaser, by reason of the
consummation of the transactions contemplated by this Agreement, be deemed to
have acquired any interest in or rights with respect to (i) the claims the
Seller and its subsidiaries (other than the Company and the Subsidiaries) have
against the United States Navy or (ii) any net operating losses that the Seller
and its subsidiaries (other than the Company and its Subsidiaries to the extent
required by applicable Tax law) may have.
A-29
<PAGE>
8.9 Miscellaneous. This Agreement (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, provided, however, the
Confidentiality Agreement shall remain in full force and effect until Closing;
and (b) is not intended to confer upon any other persons, including, but not
limited to, employees of the Seller, the Company or any Subsidiary, any rights
or remedies hereunder. 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.
Wherever the phrase "to the Seller's knowledge" appears in this Agreement, the
parties intend that such phrase be construed to mean that the Seller has made
due inquiry of the appropriate officers of the Company and the Subsidiaries with
respect to such matter. Subject to Section 5.2(c), wherever the word "material"
is used with respect to (i) a party and/or any subsidiary of a party or its
business, financial condition or results of operations, the parties intend that
it shall be construed to mean material to the business, financial condition or
results of operations of such party and its subsidiaries taken as a whole and
(ii) the Company and/or any Subsidiary or any of their businesses, financial
condition or results of operations, the parties intend that it shall be
construed to mean material to the business, financial condition and results of
operations of the Company and the Subsidiaries taken as a whole.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first above written.
HI-SHEAR INDUSTRIES INC.
By /s/ DAVID A. WINGATE
__________________________________________
David A. Wingate
Chairman of the Board and
Chief Executive Officer
GFI INDUSTRIES S.A.
By /s/ FREDERIC ROURE
__________________________________________
Frederic Roure
Chairman of the Board and
Chief Executive Officer
A-30
<PAGE>
APPENDIX B
[LAZARD FRERES & CO. LLC Letterhead]
October 7, 1995
The Board of Directors
Hi-Shear Industries
3333 New Hyde Park Road
North Hills, New York 11042
Dear Members of the Board:
We understand that GFI Industries S.A. (the "Company") and Hi-Shear
Industries (the "Subject Company") propose to enter into an Agreement (the
"Agreement"), pursuant to which the Company will acquire Hi-Shear Corporation, a
Delaware corporation and certain of its affiliated companies ("HSC"), and a
wholly owned subsidiary of the Subject Company (the "Acquisition") for a
purchase price of $46 million, of which $12.5 million will be used to pay off
existing long-term indebtedness of HSC. You have advised us that the Subject
Company and its subsidiary have sufficient net operating losses ("NOL")
available to absorb substantially any federal and potential state corporate
level taxes arising from the transaction and that the NOL's will be used for
this purpose.
You have requested our opinion as to the fairness, from a financial point of
view, to the Subject Company of the consideration to be paid in the Acquisition.
In connection with this opinion, we have:
(i) Reviewed the financial terms and conditions of a current draft of the
Agreement;
(ii) Analyzed certain historical business and financial information relating to
HSC and the Subject Company;
(iii) Reviewed various financial forecasts and other data provided to us by the
Subject Company relating to its (and HSC's) businesses, including actual
operating results through August 1995. No projections were made available
to us beyond those for the fiscal year ending May 31, 1996, and we were
told that no such projections exist;
(iv) Held discussions with members of the senior management of the Subject
Company with respect to the businesses and prospects of HSC and the
Subject Company;
(v) Reviewed public information with respect to certain other companies in
lines of businesses we believe to be generally comparable to the businesses
of HSC;
(vi) Reviewed the financial terms of certain business combinations involving
companies in lines of businesses we believe to be generally comparable to
those of HSC, and in other industries generally;
(vii) Reviewed the historical stock prices and trading volumes of the Subject
Company's common stock;
(viii) Relied on your advice that no substantial corporate level federal or
potential state income or capital gains taxes will be payable in
connection with the transaction by the Subject Company or HSC by reason
of the availability of net operating losses; and
(ix) Conducted such other financial studies, analyses and investigations as we
deemed appropriate.
We have relied upon the accuracy and completeness of the foregoing
information provided by the Subject Company, and have not assumed any
responsibility for any independent verification of such information or any
independent valuation or appraisal of any of the assets or liabilities of HSC or
the Subject Company. With respect to financial forecasts, we have assumed that
they have been
<PAGE>
[LAZARD FRERES & CO. LLC 2nd Page Letterhead]
reasonably prepared on bases reflecting the best currently available estimates
and judgments of management of the Subject Company as to the future financial
performance of the Subject Company. We assume no responsibility for and express
no view as to such forecasts or the assumptions on which they are based.
Further, our opinion is necessarily based on economic, monetary, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof. Lazard has not been authorized to solicit potential
purchasers of HSC or the Subject Company but it has had discussions with certain
potentially interested parties suggested by the Subject Company.
In rendering our opinion, we have assumed that the Acquisition will be
consummated on the terms described in the current draft of the Agreement,
without any waiver of any material terms or conditions by the Subject Company
and that completion of the transaction will not have any impact on certain
pending litigation between the Subject Company and the Department of Defense.
We have also reviewed the letter dated October 6, 1995 from, and had
discussions with, a second bidder which has proposed, subject to certain
conditions including the negotiation and execution of definitive agreements to
be approved by your and its Boards of Directors, to acquire HSC for $48.4
million in cash (without the assumption of debt).
Lazard Freres & Co. LLC is acting as financial advisor to the Subject
Company in connection with the Acquisition and will receive a fee for our
services payable upon consummation of a transaction. Lazard Freres & Co. LLC has
had a continuing relationship with the Subject Company and has performed
investment banking services for the Subject Company in the past.
Our opinion is directed to the Board of Directors of the Company and does
not constitute a recommendation to any stockholder of the Company as to how such
stockholder should vote at the stockholders' meeting to be held in connection
with the Merger. It is understood that this letter may not be disclosed or
otherwise referred to without our prior consent, except as may otherwise be
required by law or by a court of competent jurisdiction.
Based on and subject to the foregoing, we are of the opinion that the
consideration to be paid to the Subject Company in the Acquisition is fair to
the Subject Company from a financial point of view.
Very truly yours,
LAZARD FRERES & CO. LLC
By /s/ Jonathan O'Herron
---------------------------------
Managing Director
2
<PAGE>
APPENDIX C
PROPOSED AMENDMENTS TO THE COMPANY'S
CERTIFICATE OF INCORPORATION AND BY-LAWS
RESOLVED, that the stockholders of Hi-Shear Industries Inc. (the "Company")
approve the amendment of the Certificate of Incorporation and By-Laws of the
Company to eliminate the classification of its Board of Directors into three
classes of Directors, each of which are elected to hold office for a term of
three years, as is currently required by Section (12) of the Company's
Certificate of Incorporation and Section 1 of Article III of the Company's
By-Laws; and
RESOLVED, that the stockholders of the Company hereby approve the amendment
of the Certificate of Incorporation of the Company to delete Section (12)
thereof, which provides for the classification of the Company's Board of
Directors; and
RESOLVED, that the stockholders of the Company hereby approve the amendment
of Section 1 of Article III of the By-Laws of the Company to read in its
entirety as follows:
"Section 1. Election and Term. Directors who are elected at an annual
meeting of stockholders, and directors who are elected in the interim to
fill vacancies and newly created directorships, shall hold office until the
next annual meeting of stockholders and until their successors are elected
and qualified or until their earlier resignation or removal."
<PAGE>
HI-SHEAR INDUSTRIES INC.
PROXY SOLICITED BY BOARD OF DIRECTORS FOR
ANNUAL MEETING, JANUARY 30, 1996
The undersigned hereby appoints David A. Wingate, Victor J. Galgano and
Harold L. Bernstein, or any of them, as the undersigned's proxy or proxies, with
full power of substitution, to vote all shares of common stock of Hi-Shear
Industries Inc. (the "Company") which the undersigned is entitled to vote at the
annual meeting of stockholders to be held at the Garden City Hotel, Garden City,
New York on Tuesday, January 30, 1996 at 11:00 a.m., Eastern Standard Time, and
any adjournments thereof, as fully as the undersigned could if personally
present, upon the proposals set forth on the reverse side hereof and to transact
such other business as may properly come before the meeting, revoking any proxy
or proxies heretofore given.
This proxy will be voted in accordance with the specifications made. If a
valid proxy is returned, and no choice is indicated with respect to a proposal,
this proxy will be voted FOR such proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE PROPOSALS.
(Continued, and to be dated and signed, on other side)
Hi-Shear Industries Inc.
P.O. Box 11039
New York, N.Y. 10203-0039
<PAGE>
1. Approval of the sale of all of the outstanding capital stock of the
Company's wholly-owned subsidiary, Hi-Shear Corporation, to GFI Industries S.A.
FOR / / AGAINST / / ABSTAIN / /
2. Approval of amendments to the Certificate of Incorporation and By-Laws of
the Company to eliminate the classified board of directors and to provide that
all of the Company's directors will be elected annually upon the expiration of
their current terms.
FOR / / AGAINST / / ABSTAIN / /
3. Election of directors
FOR all nominees listed below / /
WITHHOLD AUTHORITY to vote for all nominees listed below / /
*EXCEPTIONS / /
Nominees: HAROLD L. BERNSTEIN and VICTOR J. GALGANO
(INSTRUCTIONS: To withhold authority to vote for any individual nominee
mark the "EXCEPTIONS" box and write that nominee's name on
the space provided below.)
*Exceptions: ______________________________________________________________
4. Ratification of the appointment of Coopers & Lybrand L.L.P. as auditors
for the 1996 fiscal year.
FOR / / AGAINST / / ABSTAIN / /
Change of Address and/or
Comments Mark Here / /
Please sign exactly as your name appears hereon. When signing as attorney,
executor, administrator, trustee, guardian, etc., give your full title as such.
For joint accounts, each joint owner should sign.
Dated: , 1996
----------------
--------------------------
Signature of Stockholder
--------------------------
Signature of Stockholder
Vote must be Indicated
(x) in Black or Blue Ink.
Sign, Date and Return the Proxy Card Promptly Using the Enclosed Envelope.
