<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER , 1995
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
RULE 13E-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(E) OF
THE SECURITIES EXCHANGE ACT OF 1934)
H.W. KAUFMAN FINANCIAL GROUP, INC.
(NAME OF THE ISSUER)
ALAN J. KAUFMAN
AJK ENTERPRISES, INC.
AJK ACQUISITION COMPANY
HERBERT W. KAUFMAN
H.W. KAUFMAN FINANCIAL GROUP, INC.
(NAME OF PERSON(S) FILING STATEMENT)
------------------------
COMMON STOCK, PAR VALUE $.0025 PER SHARE
(TITLE OF CLASS OF SECURITIES)
486194 10 3
(CUSIP NUMBER OF CLASS OF SECURITIES)
------------------------
<TABLE>
<S> <C>
MARK SHAEVSKY, ESQ. STUART SINAI, ESQ.
HONIGMAN, MILLER, SCHWARTZ & COHN KEMP, KLEIN, UMPHREY & ENDELMAN, P.C.
2290 FIRST NATIONAL BUILDING 201 W. BIG BEAVER, SUITE 600
DETROIT, MI 48226 TROY, MI 48084
(313) 256-7562 (810) 528-1111
</TABLE>
(Name, address and telephone number of persons authorized to receive notices and
communications on
behalf of the person(s) filing statement)
This statement is filed in connection with (check the appropriate box):
a./X/ The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C, or Rule 13e3(c) under the
Securities Exchange Act of 1934.
b./ / The filing of a registration statement under the Securities Act of
1933.
c./ / A tender offer.
d./ / None of the above.
Check the following box if soliciting materials or an information statement
referred to in checking box (a) are preliminary copies: /X/
CALCULATION OF FILING FEE
<TABLE>
<CAPTION>
TRANSACTION VALUATION AMOUNT OF FILING FEE
<S> <C>
---------------------------------------------------------------------------------------------
$28,480,496* $5,696
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
</TABLE>
* The Transaction Valuation was determined by adding (i) 3,440,558, the number
of shares to be cashed out, multiplied by $8.20, the cash consideration to be
paid per share; plus (ii) the amount equal to the difference between $8.20 and
the exercise price for 32,670 outstanding in-the-money options to purchase
shares of the H.W. Kaufman Group.
/X/ Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number or the Form or
Schedule and the date of its filing.
<TABLE>
<S> <C> <C> <C>
Amount Previously Paid: $5,696 Filing Party: H.W. Kaufman Financial
Group, Inc.
Form or registration no.: Preliminary Proxy Date Filed: July 6, 1995
Statement
</TABLE>
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--------------------------------------------------------------------------------
<PAGE> 2
INTRODUCTION
The following is a cross reference sheet pursuant to General Instruction F
of Schedule 13E-3 showing the location of the information required by Schedule
13E-3 in the Preliminary Proxy Statement of H.W. Kaufman Financial Group, Inc.
("the Company") as filed with the Securities and Exchange Commission on the date
hereof. All of the information contained in the referred to portions of such
Preliminary Proxy Statement are hereby incorporated by reference.
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT
--------------------------------------------- ----------------------------------------------
<S> <C>
1. ISSUER AND CLASS OF SECURITY SUBJECT TO
THE TRANSACTIONS
Item 1(a)............................. Outside Front Cover Page of the Proxy
Statement; Notice of Special Meeting of
Shareholders; Pages i and ii of the Proxy
Statement
Item 1(b)............................. Outside Front Cover Page of the Proxy
Statement; INTRODUCTION -- Proposal to be
Considered at the Special Meeting; -- Voting
Rights; and Vote Required for Approval;
SUMMARY -- Record Date
Item 1(c)............................. SUMMARY -- Recent Prices of Company Common
Stock; THE MERGER -- Background of and Rea-
sons for the Merger; PRICE RANGE OF COMMON
STOCK
Item 1(d)............................. PRICE RANGE OF COMMON STOCK -- Dividends; THE
MERGER AGREEMENT -- Covenants, and Conditions
to Consummation of the Merger; THE MERGER --
Certain Effects of the Merger
Item 1(e)............................. Not applicable
Item 1(f)............................. COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT -- Transactions by
Company Officers or Directors in Common Stock
Within the Last 24 Months
2. IDENTITY AND BACKGROUND
Item 2(a)............................. This Statement is filed by Herbert W. Kaufman,
Alan J. Kaufman, AJK Enterprises, Inc., AJK
Acquisition Company and H. W. Kaufman
Financial Group, Inc., the issuer of the
securities that are the subject of the Rule
13e-3 transaction
Item 2(b)-(d)......................... DIRECTORS AND EXECUTIVE OFFICERS OF THE
COMPANY AND CERTAIN SIGNIFICANT EMPLOYEES;
COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT; DESCRIPTION OF AJK AND
ACQUISITION
Item 2(e)............................. To the best knowledge of the undersigned, none
of the persons with respect to whom
information is provided in this Statement,
during the last five years, has been convicted
in a criminal proceedings (excluding traffic
violations or similar misdemeanors)
</TABLE>
1
<PAGE> 3
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT
--------------------------------------------- ----------------------------------------------
<S> <C>
Item 2(f)............................. To the best knowledge of the undersigned, none
of the persons with respect to whom
information is provided in this Statement,
during the last five years, was a party to a
civil proceeding, was or is subject to a
judgment, decree or final order enjoining
further violations of, or prohibiting
activities subject to federal or state securi-
ties laws or finding any violation of such
laws
Item 2(g)............................. To the best knowledge of the undersigned, the
individuals with respect to whom information
is provided in the Statement are citizens of
the United States
3. PAST CONTRACTS, TRANSACTIONS OR
NEGOTIATIONS
Item 3(a)(1).......................... Not Applicable
Item 3(a)(2).......................... SUMMARY; THE MERGER; THE MERGER AGREEMENT
Item 3(b)............................. THE MERGER -- Background of and Reasons for
the Merger
4. TERMS OF THE TRANSACTION
Item 4(a)............................. SUMMARY; THE MERGER; THE MERGER AGREEMENT
Item 4(b)............................. THE MERGER -- Interests of Certain Persons in
the Merger
5. PLANS OR PROPOSALS OF THE ISSUER OR
AFFILIATE
Item 5(a)............................. Not Applicable
Item 5(b)............................. Not Applicable
Item 5(c)............................. Not Applicable
Item 5(d)............................. SUMMARY -- Certain Effects of the Merger; THE
MERGER -- Certain Effects of the Merger; PRICE
RANGE OF COMMON STOCK -- Dividends
Item 5(e)............................. Not Applicable
Item 5(f)-(g)......................... THE MERGER -- Certain Effects of the Merger
6. SOURCE AND AMOUNTS OF FUNDS OR
OTHER CONSIDERATION
Item 6(a)............................. SUMMARY -- Financing of the Transaction; THE
MERGER AGREEMENT -- Financing the Transac-
tion: Sources and Amounts of Funds
Item 6(b)............................. INTRODUCTION -- Expenses of Solicitations; THE
MERGER AGREEMENT -- Expenses
Item 6(c)............................. SUMMARY -- Financing of the Transaction; THE
MERGER AGREEMENT -- Financing the Transac-
tion: Sources and Amounts of Funds
Item 6(d)............................. Not Applicable
7. PURPOSE(S), ALTERNATIVES, REASONS AND
EFFECTS
Item 7(a)............................. SUMMARY -- Purpose of the Merger; THE MERGER
-- Background of and Reasons for the Merger;
Recommendations of the Special Committee and
the Board; Fairness of the Merger; -- Certain
Effects of the Merger
Item 7(b)............................. THE MERGER -- Background of and Reasons for
the Merger; Recommendations of the Special
Committee and the Board; Fairness of the
Merger
</TABLE>
2
<PAGE> 4
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT
--------------------------------------------- ----------------------------------------------
<S> <C>
Item 7(c)............................. SUMMARY -- Purpose of the Merger; THE MERGER
-- Background of and Reasons for the Merger;
-- Certain Effects of the Merger
Item 7(d)............................. THE MERGER -- Background of and Reasons for
the Merger; -- Interests of Certain Persons in
the Merger; -- Certain Effects of the Merger;
-- Certain Federal Income Tax Consequences of
the Merger
8. FAIRNESS OF THE TRANSACTION
Item 8(a)............................. THE MERGER -- Background of and Reasons for
the Merger; -- Recommendation of the Special
Committee and the Board; Fairness of the
Merger; -- Opinion of the Company's Financial
Advisor; -- Analyses Performed by Alan J.
Kaufman's Financial Advisor; SUMMARY --
Recommendation of the Board of Directors
Item 8(b)............................. THE MERGER -- Background of and Reasons for
the Merger; Recommendation of the Special
Committee; Fairness of the Merger; -- Opinion
of the Company's Financial Advisor; --
Analyses Performed by Alan J. Kaufman's
Financial Advisor
Item 8(c)............................. No. See INTRODUCTION -- Voting Rights; Votes
Required for Approval; SUMMARY -- Vote Re-
quired; THE MERGER -- Recommendation of the
Special Committee and the Board; Fairness of
the Merger
Item 8(d)............................. THE MERGER -- Background of and Reasons for
the Merger; Opinion of the Company's Financial
Advisor
Item 8(e)............................. THE MERGER -- Background of and Reasons for
the Merger; Recommendation of the Special
Committee and the Board; Fairness of the
Merger
Item 8(f)............................. No Offer Considered "Firm"; However, see THE
MERGER -- Background of and Reasons for the
Merger; -- Recommendation of the Special
Committee and the Board; Fairness of the
Merger
9. REPORTS, OPINIONS, APPRAISALS AND
CERTAIN NEGOTIATIONS
Item 9(a)............................. THE MERGER -- Opinion of the Company's Finan-
cial Advisor; -- Analyses Performed by Alan J.
Kaufman's Financial Advisor
Item 9(b)(1).......................... SUMMARY -- Opinion of Company's Financial Ad-
visor; THE MERGER -- Background of and Reasons
for the Merger; -- Opinion of the Company's
Financial Advisor; -- Analyses Performed by
Alan J. Kaufman's Financial Advisor
Item 9(b)(2).......................... THE MERGER -- Background of and Reasons for
the Merger; -- Opinion of the Company's
Financial Advisor; -- Analyses Performed by
Alan J. Kaufman's Financial Advisor
Item 9(b)(3).......................... THE MERGER -- Background of and Reasons for
the Merger; -- Opinion of the Company's
Financial Advisor; -- Analyses Performed by
Alan J. Kaufman's Financial Advisor
</TABLE>
3
<PAGE> 5
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT
--------------------------------------------- ----------------------------------------------
<S> <C>
Item 9(b)(4).......................... THE MERGER -- Background of and Reasons for
the Merger; -- Opinion of the Company's
Financial Advisor; -- Analyses Performed by
Alan J. Kaufman's Financial Advisor; THE
MERGER AGREEMENT -- Expenses
Item 9(b)(5).......................... THE MERGER -- Background of and Reasons for
the Merger; -- Recommendation of the Special
Committee and the Board, Fairness of the
Merger; -- Opinion of the Company's Financial
Advisor
Item 9(b)(6).......................... THE MERGER -- Background of and Reasons for
the Merger; Recommendation of the Special
Committee and the Board, Fairness of the
Merger; -- Opinion of the Company's Financial
Advisor; -- Analyses Performed by Alan J.
Kaufman's Financial Advisor
Item 9(c)............................. Appendix B-1 and B-2 to the Proxy Statement
10. INTEREST IN SECURITIES OF THE ISSUER
Item 10(a)............................ SUMMARY -- Interests of Certain Persons in the
Merger; Conflicts of Interest; THE MERGER --
Background of and Reasons for the Merger; COM-
MON STOCK OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Item 10(b)............................ COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT -- Transactions by
Company Officers or Directors in Common Stock
Within the Last 24 Months
11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS
WITH RESPECT TO THE ISSUER'S
SECURITIES............................... INTRODUCTION -- Voting Rights; Votes Required
for Approval; SUMMARY -- Vote Required; --
Interests of Certain Persons in the Merger;
Conflicts of Interest; THE MERGER -- Interests
of Certain Persons in the Merger; THE MERGER
AGREEMENT -- Financing the Transaction:
Sources of and Amounts of Funds
12. PRESENT INTENTION AND RECOMMENDATION
OF CERTAIN PERSONS WITH REGARD TO THE
TRANSACTION
Item 12(a)............................ INTRODUCTION -- Voting Rights; Votes Required
for Approval; SUMMARY -- Vote Required; --
Interests of Certain Persons in the Merger;
Conflicts of Interest
Item 12(b)............................ THE MERGER -- Background of and Reasons for
the Merger; -- Recommendation of the Special
Committee and the Board; Fairness of the
Merger
13. OTHER PROVISIONS OF THE TRANSACTION
Item 13(a)............................ SUMMARY -- Dissenters' Rights; THE MERGER --
Dissenters' Rights
Item 13(b)............................ Not Applicable
Item 13(c)............................ Not Applicable
14. FINANCIAL INFORMATION
Item 14(a)............................ INDEX TO FINANCIAL STATEMENTS
Item 14(b)............................ Not Applicable
15. PERSONS AND ASSETS EMPLOYED, RETAINED
OR UTILIZED
Item 15(a)............................ INTRODUCTION -- Expenses of Solicitation
</TABLE>
4
<PAGE> 6
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT
--------------------------------------------- ----------------------------------------------
<S> <C>
Item 15(b)............................ Not Applicable
16. ADDITIONAL INFORMATION................... Not Applicable
17. MATERIAL TO BE FILED AS EXHIBITS
Item 17(a)............................ Exhibit 17(a)(1) -- NBD Loan Agreements --
Annexed Hereto
Exhibit 17(a)(2) -- Subordinated Note --
Lillian Kaufman -- Annexed Hereto
Item 17(b)............................ Appendix B-1 and B-2 to the Proxy Statement
Item 17(c)............................ Appendix A to the Proxy Statement (Agreement
and Plan of Merger)
Item 17(d)............................ Exhibit 17(d)(1) -- Proxy Statement -- Annexed
Hereto
Exhibit 17(d)(2) -- Form of Proxy -- Annexed
Hereto
Item 17(e)............................ Not Applicable
Item 17(f)............................ Not Applicable
</TABLE>
5
<PAGE> 7
SIGNATURE
After due inquiry and to the best of my knowledge and belief, the
undersigned certify that the information set forth in this statement is true,
complete and correct.
Date: September 22, 1995
/s/ ALAN J. KAUFMAN /s/ HERBERT W. KAUFMAN
------------------------------- -----------------------------
ALAN J. KAUFMAN HERBERT W. KAUFMAN
AJK ENTERPRISES, INC. H. W. KAUFMAN FINANCIAL
GROUP, INC.
By: /s/ ALAN J. KAUFMAN By: /s/ HERBERT W. KAUFMAN
-------------------------- --------------------------------
Alan J. Kaufman, President Herbert W. Kaufman, President and
Chairman of the Board
AJK ACQUISITION COMPANY
By: /s/ ALAN J. KAUFMAN
--------------------------
Alan J. Kaufman, President
6
<PAGE> 8
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- ------------------------------------------------------------------------
<S> <C>
99.17(a) Exhibit 17(a)(1) -- NBD Loan Agreements -- Annexed Hereto
Exhibit 17(a)(2) -- Subordinated Note -- Lillian Kaufman -- Annexed Hereto
99.17(b) Appendix B-1 and B-2 to the Proxy Statement
99.17(c) Appendix A to the Proxy Statement (Agreement and Plan of Merger)
99.17(d) Exhibit 17(d)(1) -- Proxy Statement -- Annexed Hereto
Exhibit 17(d)(2) -- Form of Proxy -- Annexed Hereto
99.17(e) Not Applicable
99.17(f) Not Applicable
</TABLE>
<PAGE> 1
EXHIBIT 17(A)(1)
DRAFT DATED
AUGUST 31, 1995
LOAN AGREEMENT
dated as of September __, 1995
between
AJK ENTERPRISES, INC.
and
NBD BANK
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article Page
------- ------
<S> <C> <C>
I. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.1 Certain Definitions . . . . . . . . . . . . . . . . . .
1.2 Other Definitions; Rules of
Construction . . . . . . . . . . . . . . . . . . . .
II. THE Commitment AND THE ADVANCES . . . . . . . . . . . . . . . . . . .
2.1 Commitment of the Bank . . . . . . . . . . . . . . . .
2.2 Termination and Reduction of
Commitment . . . . . . . . . . . . . . . . . . . . .
2.3 Fees . . . . . . . . . . . . . . . . . . . . . . . . .
2.4 Disbursement of Advances . . . . . . . . . . . . . . .
2.5 Conditions for First Disbursement . . . . . . . . . . .
2.6 Further Conditions for Disbursement . . . . . . . . . .
2.7 Subsequent Elections as to Loans . . . . . . . . . . .
2.8 Limitation of Requests and Elections . . . . . . . . .
2.9 Minimum Amounts; Etc. . . . . . . . . . . . . . . . . .
III. PAYMENTS AND PREPAYMENTS OF ADVANCES . . . . . . . . . . . . . . . .
3.1 Principal Payments and Prepayments . . . . . . . . . .
3.2 Interest Payments . . . . . . . . . . . . . . . . . . .
3.3 Letter of Credit Reimbursement
Payments . . . . . . . . . . . . . . . . . . . . . .
3.4 Payment Method . . . . . . . . . . . . . . . . . . . .
3.5 No Setoff or Deduction . . . . . . . . . . . . . . . .
3.6 Payment on Non-Business Day;
Payment Computations . . . . . . . . . . . . . . . .
3.7 Additional Costs . . . . . . . . . . . . . . . . . . .
3.8 Illegality and Impossibility . . . . . . . . . . . . .
3.9 Indemnification . . . . . . . . . . . . . . . . . . . .
</TABLE>
LOAN AGREEMENT Page i
<PAGE> 3
<TABLE>
<CAPTION>
Article Page
------- ----
<S> <C> <C>
IV. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . .
4.1 Corporate Existence and Power . . . . . . . . . . . . .
4.2 Corporate Authority . . . . . . . . . . . . . . . . . .
4.3 Binding Effect . . . . . . . . . . . . . . . . . . . .
4.4 Subsidiaries . . . . . . . . . . . . . . . . . . . . .
4.5 Litigation . . . . . . . . . . . . . . . . . . . . . .
4.6 Financial Condition . . . . . . . . . . . . . . . . . .
4.7 Use of Advances . . . . . . . . . . . . . . . . . . . .
4.8 Consents, Etc. . . . . . . . . . . . . . . . . . . . .
4.9 Taxes . . . . . . . . . . . . . . . . . . . . . . . . .
4.10 Title to Properties . . . . . . . . . . . . . . . . . .
4.11 Borrowing Base . . . . . . . . . . . . . . . . . . . .
4.12 ERISA . . . . . . . . . . . . . . . . . . . . . . . . .
4.13 Disclosure . . . . . . . . . . . . . . . . . . . . . .
4.14 Environmental Matters . . . . . . . . . . . . . . . . .
4.15 No Burdensome Restrictions . . . . . . . . . . . . . .
4.16 Solvency . . . . . . . . . . . . . . . . . . . . . . .
4.17 Intellectual Property . . . . . . . . . . . . . . . . .
4.18 Labor Matters . . . . . . . . . . . . . . . . . . . . .
4.19 Not an Investment Company . . . . . . . . . . . . . . .
V. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.1 Affirmative Covenants . . . . . . . . . . . . . . . . .
(a) Preservation of Corporate
Existence, Etc. . . . . . . . . . . . . . .
(b) Compliance with Laws, Etc. . . . . . . . . . .
(c) Maintenance of Properties;
Insurance . . . . . . . . . . . . . . . . .
(d) Reporting Requirements . . . . . . . . . . . .
(e) Accounting; Access to
Records, Books, Etc. . . . . . . . . . . .
(f) Further Assurances . . . . . . . . . . . . . .
(g) Underwriting Access . . . . . . . . . . . . .
</TABLE>
LOAN AGREEMENT Page ii
<PAGE> 4
<TABLE>
<CAPTION>
Article Page
------- ----
<S> <C> <C>
5.2 Negative Covenants . . . . . . . . . . . . . . . . . .
(a) Minimum EBITDA . . . . . . . . . . . . . . . .
(b) Fixed Charge Coverage
Ratio . . . . . . . . . . . . . . . . . . .
(c) Interest Coverage Ratio . . . . . . . . . . .
(d) Total Funded Debt to
EBITDA Ratio . . . . . . . . . . . . . . . .
(e) Indebtedness . . . . . . . . . . . . . . . . .
(f) Liens . . . . . . . . . . . . . . . . . . . .
(g) Merger; Acquisitions; Etc. . . . . . . . . . .
(h) Disposition of Assets, Etc. . . . . . . . . .
(i) Nature of Business . . . . . . . . . . . . . .
(j) Dividends and Other Restricted
Payments . . . . . . . . . . . . . . . . . .
(k) Investments, Loans and
Advances . . . . . . . . . . . . . . . . . .
(l) Transactions with Affiliates . . . . . . . . .
(m) Payments and Modifications of
Subordinated Debt . . . . . . . . . . . . .
(n) Negative Pledge Limitation . . . . . . . . . .
(o) Inconsistent Agreements . . . . . . . . . . .
(p) Accounting Changes . . . . . . . . . . . . . .
VI. DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.1 Events of Default . . . . . . . . . . . . . . . . . . .
6.2 Remedies . . . . . . . . . . . . . . . . . . . . . . .
VII. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.1 Amendments, Etc. . . . . . . . . . . . . . . . . . . .
7.2 Notices . . . . . . . . . . . . . . . . . . . . . . . .
7.3 No Waiver By Conduct; Remedies
Cumulative . . . . . . . . . . . . . . . . . . . . .
7.4 Reliance on and Survival of
Various Provisions . . . . . . . . . . . . . . . . .
7.5 Expenses; Indemnification . . . . . . . . . . . . . . .
7.6 Successors and Assigns . . . . . . . . . . . . . . . .
</TABLE>
LOAN AGREEMENT Page iii
<PAGE> 5
<TABLE>
<CAPTION>
Article Page
------- ----
<S> <C> <C>
7.7 Counterparts . . . . . . . . . . . . . . . . . . . . .
7.8 Governing Law . . . . . . . . . . . . . . . . . . . . .
7.9 Table of Contents and Headings . . . . . . . . . . . .
7.10 Construction of Certain Provisions . . . . . . . . . .
7.11 Integration and Severability . . . . . . . . . . . . .
7.12 Independence of Covenants . . . . . . . . . . . . . . .
7.13 Interest Rate Limitation . . . . . . . . . . . . . . .
7.14 Waiver of Jury Trial . . . . . . . . . . . . . . . . .
EXHIBITS
--------
Exhibit A . . . . . . . . . . . . Guaranty
Exhibit B . . . . . . . . . . . . Pledge Agreement
Exhibit C . . . . . . . . . . . . Revolving Credit Note
Exhibit D . . . . . . . . . . . . Subordination Agreement
Exhibit E . . . . . . . . . . . . Term Note
Exhibit F . . . . . . . . . . . . Request for Advance
Exhibit G . . . . . . . . . . . . Request for Conversion
SCHEDULES
---------
Schedule 2.5 . . . . . . . . . . Opinion
Schedule 4.4 . . . . . . . . . . Subsidiaries
Schedule 4.5 . . . . . . . . . . Litigation
Schedule 4.12 . . . . . . . . . . Specified Documents
Schedule 4.14 . . . . . . . . . . Environmental Matters
Schedule 5.2(e) . . . . . . . . . Indebtedness
Schedule 5.2(f) . . . . . . . . . Liens
Schedule 5.2(k) . . . . . . . . . Investments, Loans and Advances
</TABLE>
LOAN AGREEMENT Page iv
<PAGE> 6
THIS LOAN AGREEMENT, dated as of September ___ , 1995 (this
"Agreement"), is by and among AJK ENTERPRISES, INC., a Michigan corporation
(the "Company") and NBD BANK, a Michigan banking corporation (the "Bank").
INTRODUCTION
The Company desires to obtain a term loan in the aggregate
principal amount of $5,000,000 and a reducing revolving credit facility,
including letters of credit, in the aggregate principal amount of $15,000,000,
in order to acquire 100% of the common stock of the H.W. Kaufman Financial
Group, Inc. and to provide funds and other financial accommodations for working
capital and acquisitions and for its other general corporate purposes, and the
Bank is willing to make such term loan and to establish such a credit facility
in favor of the Company on the terms and conditions herein set forth.
In consideration of the premises and of the mutual agreements
herein contained, the parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
1.1 Certain Definitions. As used herein the following
terms shall have the following respective meanings:
"Advance" shall mean any Loan and any Letter of Credit Advance.
"Affiliate", when used with respect to any person shall mean
any other person which, directly or indirectly, controls or is controlled by or
is under common control with such person. For purposes of this definition
"control" (including the correlative meanings of the terms "controlled by" and
"under common control with"), with respect to any person, shall mean
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such person, whether through the
ownership of voting securities or by contract or otherwise.
"Applicable Margin" shall mean, with respect to any Eurodollar
Rate Loan, Standby Letter of Credit fee and facility fee, the following margin
based upon the Total Funded Debt to EBITDA Ratio as adjusted on the first day
of each fiscal quarter of the Company based upon such ratio for the four fiscal
quarters immediately preceding the fiscal quarter most recently ended;
provided, that, the (a) Eurodollar Rate shall not be adjusted pursuant to the
applicable Eurodollar Rate margin for any outstanding Eurodollar Rate Loan
until after the end of the Eurodollar Interest Period for such Eurodollar Rate
Loan, (b) upon and during the continuance of any Event of Default the margin
shall be based on Level I and (c) the Applicable Margin shall be based on Level
II until the first day of the fiscal quarter commencing October 1, 1996:
<PAGE> 7
<TABLE>
<CAPTION>
Section Section
2.3(a) 2.3(b)
Total Funded Debt To Floating Eurodollar Facility Letter of
Level EBITDA Rate Rate Fee Credit Fee
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
I greater than 3.90:1.00 1.50% 3.00% .30% 1.50%
II equal to or less than 1.00% 2.50% .25% 1.25%
3.90:1.0 and greater than
3.0:1.0
III equal to or less than 0.75% 2.25% .25% 1.25%
3.0:1.0 and greater than
2.5:1.0
IV equal to or less than 2.5 0.50% 2.00% .225% 1.0%
to 1:0 and greater than
2.0:1.0
V equal to or less than 0% 1.75% .225% 1.0%
2.0:1.0
</TABLE>
"Applicable Lending Office" shall mean, with respect to any
Advance made by the Bank or with respect to the Bank's Commitment, the office
of the Bank or of any Affiliate of the Bank located at the address specified as
the applicable lending office for the Bank set forth in Section 7.2 or any
other office or Affiliate of the Bank or of any Affiliate of the Bank hereafter
selected and notified to the Company by the Bank.
"Borrowing" shall mean the aggregation of Advances of the Bank
made to the Company, or continuations and conversions of any Loans, made
pursuant to Article II on a single date and, in the case of any Loans, for a
single Interest Period, which Borrowings may be classified for purposes of this
Agreement by reference to the type of Loans or the type of Advance comprising
the related Borrowing, e.g., a "Eurodollar Rate Borrowing" is a Borrowing
comprised of Eurodollar Rate Loans and a "Letter of Credit Borrowing" is an
Advance comprised of a single Letter of Credit.
"Business Day" shall mean a day other than a Saturday, Sunday
or other day on which the Bank is not open to the public for carrying on
substantially all of its banking functions in Detroit, Michigan, and in the
case of transactions involving transactions in any currency other than Dollars,
in London, England.
"Capital Lease" of any person shall mean any lease which, in
accordance with generally accepted accounting principles, is or should be
capitalized on the books of such person.
LOAN AGREEMENT Page 2
<PAGE> 8
"Capital Stock" shall include capital stock and any securities
exchangeable for or convertible into capital stock and any warrants, rights or
other options to purchase or otherwise acquire capital stock or such
securities.
"Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time, and the regulations thereunder.
"Commercial Letter of Credit" shall mean any commercial letter
of credit issued by the Bank hereunder.
"Commitment" shall mean the commitment of the Bank to make
Revolving Credit Advances pursuant to Section 2.1, in amounts not exceeding an
aggregate principal amount outstanding of (i) $15,000,000 for the period of
time from the Effective Date to, but not including, June 30, 1996; (ii)
$14,000,000 for the period of time from June 30, 1996 to, but not including,
June 30, 1997; (iii) $13,000,000 for the period of time from June 30, 1997 to,
but not including, June 30, 1998, and (iv) $12,000,000 thereafter, as such
amount may also otherwise be reduced from time to time pursuant to Section 2.2.
"Consolidated" or "consolidated" shall mean, when used with
reference to any financial term in this Agreement, the aggregate for two or
more persons of the amounts signified by such term for all such persons
determined on a consolidated basis in accordance with generally accepted
accounting principles.
"Contingent Liabilities" of any person shall mean, as of any
date, all obligations of such person or of others for which such person is
contingently liable, as obligor, guarantor, surety, accommodation party,
partner or in any other capacity, or in respect of which obligations such
person assures a creditor against loss or agrees to take any action to prevent
any such loss (other than endorsements of negotiable instruments for collection
in the ordinary course of business), including without limitation all
reimbursement obligations of such person in respect of any letters of credit,
surety bonds or similar obligations (including, without limitation, bankers
acceptances) and all obligations of such person to advance funds to, or to
purchase assets, property or services from, any other person in order to
maintain the financial condition of such other person.
"Contractual Obligation" shall mean as to any person, any
provision of any security issued by such person or of any agreement, instrument
or other undertaking to which such person is a party or by which it or any of
its property is bound.
"Default" shall mean any event or condition described in
Section 6.1 which might become an Event of Default with notice or lapse of time
or both.
"Dollars" and "$" shall mean the lawful money of the United
States of America.
LOAN AGREEMENT Page 3
<PAGE> 9
"EBIT" shall mean, for any period, the net income (or loss) of
the Company and its Subsidiaries on a consolidated basis for such period taken
as a single accounting period, minus to the extent included in determining such
net income, without duplication: (a) the income of any Person (other than a
Subsidiary of the Company) in which any Person other than the Company or any of
its Subsidiaries has a joint interest or partnership interest, except to the
extent of the amount of cash dividends or other distributions actually paid to
the Company or any of its Subsidiaries by such Person during such period, (b)
the income of any Person (other than any Subsidiary existing as the Effective
Date) accrued prior to the date such Person becomes a Subsidiary of the Company
or is merged into or consolidated with the Company or any of its Subsidiaries
or such Person's assets are acquired by the Company or any of its Subsidiaries,
(c) the proceeds of any insurance policy, net of any losses covered by such
insurance proceeds which reduced net income for such period, (d) gains or
losses from the sale, exchange, transfer or other disposition of assets not in
the ordinary course of business of the Company and its Subsidiaries, and
related tax effects, (e) any extraordinary or non-recurring gains or non-cash
losses of the Company or its Subsidiaries, and related tax effects, and (f) the
income of any Subsidiary of the Company to the extent that the declaration or
payment of dividends or similar distributions by that Subsidiary of that income
is not at the time permitted by operation of the terms of its charter or of any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Subsidiary; plus, to the extent deducted in
determining such net income, without duplication: (a) Interest Expense, (b)
federal, state and local taxes on the income of the Company and its
Subsidiaries, including the Michigan single business tax, and (c) transaction
costs directly related to the acquisition of the Kaufman Group by the Company.
"EBITDA" shall mean, for any period, the sum of (a) EBIT for
such period plus (b) all amounts deducted in determining such EBIT on account
of depreciation and amortization expense, all as determined in accordance with
Generally Accepted Accounting Principles.
"Effective Date" shall mean the effective date specified in the
final paragraph of this Agreement.
"Environmental Laws" at any date shall mean all provisions of
law, statute, ordinances, rules, regulations, judgments, writs, injunctions,
decrees, orders, awards and standards which are applicable to the Company or
any Subsidiary promulgated by the government of the United States of America or
any foreign government or by any state, province, municipality or other
political subdivision thereof or therein, or by any court, agency,
instrumentality, regulatory authority or commission of any of the foregoing
concerning the protection of, or regulating the discharge of substances into,
the environment.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended from time to time, and the regulations thereunder.
"ERISA Affiliate" shall mean, with respect to any person, any
trade or business (whether or not incorporated) which, together with such
person or any Subsidiary of such person,
LOAN AGREEMENT Page 4
<PAGE> 10
would be treated as a single employer under Section 414 of the Code and the
regulations promulgated thereunder.
"Eurodollar Business Day" shall mean, with respect to any
Eurodollar Rate Loan, a day which is both a Business Day and a day on which
dealings in Dollar deposits are carried out in the London interbank market.
"Eurodollar Interest Period" shall mean, with respect to any
Eurodollar Rate Loan, the period commencing on the day such Eurodollar Rate
Loan is made or converted to a Eurodollar Rate Loan and ending on the day which
is one, two, three or six months thereafter, as the Company may elect under
Section 2.4 or 2.7, and each subsequent period commencing on the last day of
the immediately preceding Eurodollar Interest Period and ending on the day
which is one, two, three or six months thereafter, as the Company may elect
under Section 2.4 or 2.7, provided, however, that (a) any Eurodollar Interest
Period which commences on the last Eurodollar Business Day of a calendar month
(or on any day for which there is no numerically corresponding day in the
appropriate subsequent calendar month) shall end on the last Eurodollar
Business Day of the appropriate subsequent calendar month, (b) each Eurodollar
Interest Period which would otherwise end on a day which is not a Eurodollar
Business Day shall end on the next succeeding Eurodollar Business Day or, if
such next succeeding Eurodollar Business Day falls in the next succeeding
calendar month, on the next preceding Eurodollar Business Day, and (c) no
Eurodollar Interest Period which would end after the Maturity Date (or the
Termination Date with respect to any Revolving Credit Loans) shall be
permitted.
"Eurodollar Rate" shall mean, with respect to any Eurodollar
Rate Loan and the related Eurodollar Interest Period, the per annum rate that
is equal to the sum of:
(a) the Applicable Margin, plus
(b) the rate per annum obtained by dividing (i) the per
annum rate of interest at which deposits in Dollars for such Eurodollar
Interest Period and in an aggregate amount comparable to the amount of such
Eurodollar Rate Loan are offered to the Bank by other prime banks in the London
interbank market at approximately 11:00 a.m. London time on the second
Eurodollar Business Day prior to the first day of such Eurodollar Interest
Period by (ii) an amount equal to one minus the stated maximum rate (expressed
as a decimal) of all reserve requirements (including, without limitation, any
marginal, emergency, supplemental, special or other reserves) that are
specified on the first day of such Eurodollar Interest Period by the Board of
Governors of the Federal Reserve System (or any successor agency thereto) for
determining the maximum reserve requirement with respect to eurocurrency
funding (currently referred to as "Eurocurrency liabilities" in Regulation D of
such Board) maintained by a member bank of such System;
LOAN AGREEMENT Page 5
<PAGE> 11
all as conclusively determined by the Bank, absent manifest error, such sum to
be rounded up, if necessary, to the nearest whole multiple of one one-ten
thousandths of one percent (1/10,000 of 1%).
"Eurodollar Rate Loan" shall mean any Loan which bears interest
at the Eurodollar Rate.
"Event of Default" shall mean any of the events or conditions
described in Section 6.1.
"Federal Funds Rate" shall mean the per annum rate that is
equal to the average of the rates on overnight federal funds transactions with
members of the Federal Reserve System arranged by federal funds brokers, as
published by the Federal Reserve Bank of New York for such day, or, if such
rate is not so published for any day, the average of the quotations for such
rates received by the Bank from three federal funds brokers of recognized
standing selected by the Bank in its discretion;
all as conclusively determined by the Bank, absent manifest error, such sum to
be rounded up, if necessary, to the nearest whole multiple of one one-hundredth
of one percent (1/100 of 1%), which Federal Funds Rate shall change
simultaneously with any change in such published or quoted rates.
"Fixed Charges" shall mean, for any period, the sum, without
duplication, of (a) Interest Expense for such period, plus (b) all payments of
principal or other sums paid or payable during such period by the Company or
any of its Subsidiaries with respect to any Indebtedness, plus (c) all debt
discount and expense amortized or required to be amortized during such period
the Company or any of its Subsidiaries, plus (d) all obligations of the Company
or any of its Subsidiaries in respect of the termination of any interest rate
or currency swap, rate cap or similar transaction paid or required to be paid
during such period by such person, plus (e) the maximum amount of all rents and
other payments (exclusive of property taxes, property and liability insurance
premiums and maintenance costs) paid or required to be paid by the Company or
any of its Subsidiaries during such period under any Capital Lease or other
lease of real or personal property in respect of which the Company or any of
its Subsidiaries is obligated as a lessee or user, plus (f) all dividends and
other distributions paid or, in the case of any preferred stock, otherwise
accumulating during such period on any capital stock of the Company.
"Fixed Charge Coverage Ratio" shall mean, for any period, the
ratio of EBITDA for such period to Fixed Charges for such period.
"Fixed Rate Loans" shall mean Eurodollar Rate Loans and
Negotiated Rate Loans.
"Floating Rate" shall mean the per annum rate equal to the sum
of (a) the Applicable Margin plus (b) the greater of (i) the Prime Rate in
effect from time to time , and (ii)
LOAN AGREEMENT Page 6
<PAGE> 12
the sum of six hundred twenty-five one-thousandths of one percent (.625%) per
annum plus the Federal Funds Rate in effect from time to time; which Floating
Rate shall change simultaneously with any change in such Prime Rate or Federal
Funds Rate, as the case may be.
"Floating Rate Loan" shall mean any Loan which bears interest
at the Floating Rate.
"Generally Accepted Accounting Principles" or "generally
accepted accounting principles" shall mean generally accepted accounting
principles in effect from time to time applied on a basis consistent with that
reflected in the financial statements referred to in Section 4.6.
"Guaranties" shall mean the guaranties entered into by each of
the Guarantors for the benefit of the Bank pursuant to this Agreement in
substantially the form of Exhibit A hereto, as amended or modified from time to
time.
"Guarantor" shall mean Alan J. Kaufman and each person
otherwise entering into a Guaranty from time to time.
"Hazardous Materials" includes, without limitation, any
flammable explosives, radioactive materials, hazardous materials, hazardous
wastes, hazardous or toxic substances or related materials defined in the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended (42 U.S.C. Sections 9601, et seq.), the Hazardous Materials
Transportation Act, as amended (49 U.S.C. Sections 1801, et seq.), the
Resource Conservation and Recovery Act, as amended (42 U.S.C. Sections 6901, et
seq.) and in the regulations adopted and publications promulgated pursuant
thereto, or any other federal, state or local government law, ordinance, rule
or regulation.
"Indebtedness" of any person shall mean, as of any date, (a)
all obligations of such person for borrowed money, (b) all obligations of such
person as lessee under any Capital Lease, (c) all obligations which are secured
by any Lien existing on any asset or property of such person whether or not the
obligation secured thereby shall have been assumed by such person (to the
extent of such Lien if such obligation is not assumed), (d) all obligations of
such person for the unpaid purchase price for goods, property or services
acquired by such person, except for trade accounts payable arising in the
ordinary course of business that are not past due, (e) all obligations of such
person to purchase goods, property or services where payment therefor is
required regardless of whether delivery of such goods or property or the
performance of such services is ever made or tendered (generally referred to as
"take or pay contracts"), except those in the ordinary course of business that
are not past due, (f) all liabilities of such person in respect of Unfunded
Benefit Liabilities under any Plan of such person or of any ERISA Affiliate,
and (g) all obligations of such person in respect of any interest rate or
currency swap, rate cap or other similar transaction (valued in an amount equal
to the highest termination payment, if any, that would be payable by such
person upon termination for any reason on the date of determination).
LOAN AGREEMENT Page 7
<PAGE> 13
"Interest Coverage Ratio" shall mean, for any period, the ratio
of (a) EBITDA for such period to (b) Interest Expense for such period.
"Interest Expense" shall mean, for any period, the total
interest expense of the Company and its Subsidiaries for such period,
determined for the Company and its Subsidiaries on a consolidated basis in
accordance with Generally Accepted Accounting Principles; provided, however,
notwithstanding anything herein to the contrary, Interest Expense for the four
fiscal quarters ending December 31, 1995 shall be deemed to be an amount equal
to four times the Interest Expense for the fiscal quarter ending December 31,
1995, Interest Expense for the four fiscal quarters ending March 31, 1996 shall
be deemed to be an amount equal to two times the Interest Expense for the two
fiscal quarters ending March 31, 1996, and Interest Expense for the four fiscal
quarters ending June 30, 1996 shall be deemed to be an amount equal to four-
thirds times the Interest Expense for the three fiscal quarters ending June 30,
1996.
"Interest Payment Date" shall mean (a) with respect to any
Fixed Rate Loan, the last day of each Interest Period with respect to such
Fixed Rate Loan and, in the case of any Interest Period exceeding three months,
those days that occur during such Interest Period at intervals of three months
after the first day of such Interest Period, and (b) in all other cases, the
last Business Day of each month occurring after the date hereof, commencing
with the first such Business Day occurring after the date of this Agreement.
"Interest Period" shall mean any Eurodollar Interest Period or
Negotiated Interest Period, as the case may be.
"Kaufman Affiliate" shall mean any children of Alan J. Kaufman
and any trust controlled by Alan J. Kaufman.
"Kaufman Group" shall mean the H.W. Kaufman Financial Group,
Inc., a Michigan corporation.
"Letter of Credit" shall mean a standby or commercial letter of
credit having a stated expiry date or a date upon which the draft must be
reimbursed not later than twelve months after the date of issuance and not
later than the fifth Business Day before the Termination Date issued by the
Bank for the account of the Company under an application and related
documentation acceptable to the Bank requiring, among other things, immediate
reimbursement by the Company to the Bank in respect of all drafts or other
demand for payment honored thereunder and all expenses paid or incurred by the
Bank relative thereto.
"Letter of Credit Advance" shall mean any issuance of a Letter
of Credit under Section 2.4 made pursuant to Section 2.1.
"Letter of Credit Documents" shall have the meaning ascribed
thereto in Section 3.3(b).
LOAN AGREEMENT Page 8
<PAGE> 14
"Lien" shall mean any pledge, assignment, hypothecation,
mortgage, security interest, conditional sale or title retaining contract, sale
and leaseback transaction, financing statement filing, or any other type of
lien, charge, encumbrance or other similar claim or right.
"Loan" shall mean any Revolving Credit Loan and the Term Loan.
Any such Loan or portion thereof may also be denominated as a Floating Rate
Loan, Negotiated Rate Loan or a Eurodollar Rate Loan and such Loans are
referred to herein as "types" of Loans.
"Loan Documents" shall mean, collectively, this Agreement, the
Notes, the Security Documents and all agreements, instruments and documents
executed pursuant thereto at any time.
"Material Adverse Effect" shall mean a material adverse effect
on (a) the business, assets, operations or condition (financial or otherwise)
of the Company and its Subsidiaries on a consolidated basis, (b) the ability of
the Company or any Guarantor to perform its obligations under any Loan
Document, or (c) the validity or enforceability of any Loan Document or the
rights or remedies of the Bank under any Loan Document.
"Maturity Date" shall mean with respect to the Term Loan, the
fifth anniversary of the date such Term Loan is made, which in any event shall
be no later than August 31, 2000.
"Multiemployer Plan" shall mean any "multiemployer plan" as
defined in Section 4001(a)(3) of ERISA or Section 414(f) of the Code.
"Negotiated Rate" shall mean, with respect to any Negotiated
Rate Loan, the rate per annum, if any, agreed upon between the Company and the
Bank at the time such Negotiated Rate Loan is to be made.
"Negotiated Interest Period" shall mean, with respect to a
Negotiated Rate Loan, the period commencing on the day such Negotiated Rate
Loan is made or converted to a Negotiated Rate Loan and ending on any date
agreed upon between the Company and the Bank at the time such Negotiated Rate
Loan is made, and each subsequent period commencing on the last day of the
immediately preceding Negotiated Interest Period and ending on the date agreed
upon between the Company and the Bank at the time such Negotiated Rate Loan is
elected to be continued as a Negotiated Rate Loan, provided, however, that no
Negotiated Interest Period which would end after the Termination Date shall be
permitted.
"Negotiated Rate Loan" shall mean any Loan bearing interest at
the Negotiated Rate.
"Note" shall mean any Revolving Credit Note or any Term Note.
"Overdue Rate" shall mean (a) in respect of principal of
Floating Rate Loans, a rate per annum that is equal to the sum of three percent
(3%) per annum plus the Floating Rate, (b) in respect of principal of
Eurodollar Rate Loans, a rate per annum that is equal to the sum of
LOAN AGREEMENT Page 9
<PAGE> 15
three percent (3%) per annum plus the per annum rate in effect thereon until
the end of the then current Interest Period for such Loan and, thereafter, a
rate per annum that is equal to the sum of three percent (3%) per annum plus
the Floating Rate, and (c) in respect of other amounts payable by the Company
hereunder (other than interest), a per annum rate that is equal to the sum of
three percent (3%) per annum plus the Floating Rate.
"PBGC" shall mean the Pension Benefit Guaranty Corporation and
any entity succeeding to any or all of its functions under ERISA.
"Permitted Liens" shall mean Liens permitted by Section 5.2(f)
hereof.
"Person" or "person" shall include an individual, a
corporation, an association, a limited liability company, a partnership, a
trust or estate, a joint stock company, an unincorporated organization, a
joint venture, a trade or business (whether or not incorporated), a government
(foreign or domestic) and any agency or political subdivision thereof, or any
other entity.
"Plan" shall mean, with respect to any person, any pension plan
(including a Multiemployer Plan) subject to Title IV of ERISA or to the minimum
funding standards of Section 412 of the Code which has been established or
maintained by such person, any Subsidiary of such person or any ERISA
Affiliate, or by any other person if such person, any Subsidiary of such person
or any ERISA Affiliate could have liability with respect to such pension plan.
"Pledge Agreement" shall mean the pledge agreement entered into
by the Guarantor for the benefit of the Bank pursuant to this Agreement in
substantially the form of Exhibit B hereto, as amended or modified from time to
time.
"Prime Rate" shall mean the per annum rate announced by the
Bank from time to time as its "prime rate" (it being acknowledged that such
announced rate may not necessarily be the lowest rate charged by the Bank to
any of its customers); which Prime Rate shall change simultaneously with any
change in such announced rate.
"Prohibited Transaction" shall mean any transaction involving
any Plan which is proscribed by Section 406 of ERISA or Section 4975 of the
Code.
"Purchase Agreements" shall have the meaning ascribed thereto
in Section 2.5(j).
"Reportable Event" shall mean a reportable event as described
in Section 4043(b) of ERISA including those events as to which the thirty (30)
day notice period is waived under Part 2615 of the regulations promulgated the
PBGC under ERISA.
"Requirement of Law" shall mean as to any person, the
certificate of incorporation and by-laws or other organizational or governing
documents of such person, and any law, treaty,
LOAN AGREEMENT Page 10
<PAGE> 16
rule or regulation or determination of an arbitrator or a court or other
governmental authority, in each case applicable to or binding upon such person
or any of its property to which such person or any of its property is subject.
"Revolving Credit Advance" shall mean any Revolving Credit Loan
and any Letter of Credit Advance.
"Revolving Credit Loan" shall mean any borrowing under Section
2.4 evidenced by the Revolving Credit Note and made pursuant to Section 2.1.
"Revolving Credit Note" shall mean any promissory note of the
Company evidencing the Revolving Credit Loans, in substantially the form
annexed hereto as Exhibit C, as amended or modified from time to time and
together with any promissory note or notes issued in exchange or replacement
therefor.
"Security Documents" shall mean, collectively, the Pledge
Agreement, each Guaranty, each Subordination Agreement and all other related
agreements and documents, including financing statements and similar documents,
delivered pursuant to this Agreement or otherwise entered into by any person to
secure the Advances.
"Significant Subsidiary" shall mean each Subsidiary of the
Company which, at the time of determination, satisfies either of the following
two conditions: (a) the total assets owned by such Subsidiary equals or
exceeds an amount equal to 5% of the Consolidated Tangible Net Worth of the
Company and its Subsidiaries, as determined in accordance with Generally
Accepted Accounting Principles, or (b) meets the definition of a "significant
subsidiary" contained as of the date hereof in Rule 1-02(v) of Regulation S-X
promulgated by Securities and Exchange Commission.
"Solvent" when used with respect to any person, means that, as
of any date of determination, (a) the amount of the "present fair saleable
value" of the business and the assets of such person will, as of such date,
exceed the amount of all "liabilities of such person, contingent or otherwise",
as of such date, as such quoted terms are determined in accordance with
applicable federal and state laws governing determinations of the insolvency of
debtors, (b) the present fair saleable value of the assets of such person will,
as of such date, be greater than the amount that will be required to pay the
liability of such person on its debts as such debts become absolute and
matured, (c) such person will not have, as of such date, an unreasonably small
amount of capital with which to conduct its business, and (d) such person will
be able to pay its debts as they mature. For purposes of this definition, (i)
"debt" means liability on a "claim", and (ii) "claim" means any (x) right to
payment, whether or not such a right is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed,
legal, equitable, secured or unsecured or (y) right to an equitable remedy
for breach of performance if such breach gives rise to a right to payment,
whether or not such right to an equitable remedy
LOAN AGREEMENT Page 11
<PAGE> 17
is reduced to judgment, fixed, contingent, matured or unmatured, disputed,
undisputed, secured or unsecured.
"Standby Letter of Credit" shall mean any standby letter of
credit issued by the Bank hereunder.
"Subordinated Creditor" shall mean Lillian Kaufman and each
other creditor of the Company which is a holder of Subordinated Debt.
"Subordination Agreement" shall mean the Subordination
Agreement in the form of Exhibit D hereto as amended or modified from time to
time, and any other agreement of any other Subordinated Creditor of the
Company, in form and substance satisfactory to the Bank.
"Subordinated Debt" shall mean, as of any date, that
Indebtedness of the Company for borrowed money which is expressly subordinate
and junior in right and priority of payment to the Advances and other
Indebtedness of the Company to the Bank and subject to such other terms and
conditions, including maturities, covenants and defaults, satisfactory to the
Bank, all in manner and by written agreement satisfactory in form and substance
to the Bank.
"Subsidiary" of any person shall mean any other person (whether
now existing or hereafter organized or acquired) in which (other than directors
qualifying shares required by law) at least a majority of the securities or
other ownership interests of each class having ordinary voting power or
analogous right (other than securities or other ownership interests which have
such power or right only by reason of the happening of a contingency), at the
time as of which any determination is being made, are owned, beneficially and
of record, by such person or by one or more of the other Subsidiaries of such
person or by any combination thereof. Unless otherwise specified, reference to
"Subsidiary" shall mean a Subsidiary of the Company.
"Term Loan" shall mean any borrowing under Section 2.4
evidenced by the Term Note and made pursuant to Section 2.1.
"Term Note" shall mean any promissory note of the Company
evidencing the Term Loan, in substantially the form annexed hereto as Exhibit
E, as amended or modified from time to time and together with any promissory
note or notes issued in exchange or replacement therefor.
"Termination Date" shall mean the earlier to occur of (a)
August 31, 2000 and (b) the date on which the Commitment shall be terminated
pursuant to Section 2.2 or 6.2.
"Total Funded Debt" shall mean, as of any date, the
consolidated Indebtedness of the Company and its Subsidiaries which by its
terms has a final maturity, duration or payment date more than one year from
the date such Indebtedness was originally incurred or otherwise created
(including any such Indebtedness having a final maturity, duration or payment
date within
LOAN AGREEMENT Page 12
<PAGE> 18
one year from such date it was incurred or otherwise created pursuant to the
terms of any revolving credit or similar agreement or otherwise, which may be
renewed or extended for more than one year from such date, whether or not
theretofore renewed or extended) and it shall also include, regardless of
whether or not it would otherwise be included hereunder, all Indebtedness for
borrowed money of Royal Premium Budget, Inc. and all Revolving Credit Advances.
"Total Funded Debt to EBITDA Ratio" shall mean, for any period,
the ratio of Total Funded Debt of the Company as of the last day of such period
to the EBITDA of the Company for such period.
"Unfunded Benefit Liabilities" shall mean, with respect to any
Plan as of any date, the amount of the unfunded benefit liabilities determined
in accordance with Section 4001(a)(18) of ERISA.
1.2 Other Definitions; Rules of Construction. As used
herein, the terms "Bank", "Company" and "this Agreement" shall have the
respective meanings ascribed thereto in the introductory paragraph of this
Agreement. Such terms, together with the other terms defined in Section 1.1,
shall include both the singular and the plural forms thereof and shall be
construed accordingly. All computations required hereunder and all financial
terms used herein shall be made or construed in accordance with Generally
Accepted Accounting Principles unless such principles are inconsistent with the
express requirements of this Agreement; provided that, if the Company notifies
the Bank that the Company wishes to amend any covenant in Article V to
eliminate the effect of any change in Generally Accepted Accounting Principles
in the operation of such covenant (or if the Bank notifies the Company that the
Bank wishes to amend Article V for such purpose), then the Company's compliance
with such covenant shall be determined on the basis of Generally Accepted
Accounting Principles in effect immediately before the relevant change in
Generally Accepted Accounting Principles became effective, until either such
notice is withdrawn or such covenant is amended in a manner satisfactory to the
Company and the Bank. Use of the terms "herein", "hereof", and "hereunder"
shall be deemed references to this Agreement in its entirety and not to the
Section or clause in which such term appears. References to "Sections" and
"subsections" shall be to Sections and subsections, respectively, of this
Agreement unless otherwise specifically provided.
ARTICLE II.
THE COMMITMENT AND THE ADVANCES
2.1 Commitment of the Bank.
(a) Revolving Credit Advances. The Bank
agrees, subject to the terms and conditions of this Agreement, to make
Revolving Credit Loans to the Company pursuant to Section 2.4 and Section 3.3
and to issue Letter of Credit Advances to the Company pursuant to Section 2.4,
from time to time from and including the Effective Date to but excluding the
LOAN AGREEMENT Page 13
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Termination Date, not to exceed in aggregate principal amount at any time
outstanding the amount of the Commitment, provided that the aggregate principal
amount of Letter of Credit Advances outstanding at any time shall not exceed
$1,500,000.
(b) Term Loan. The Company shall borrow, and
the Bank agrees to lend, subject to the terms and conditions of this Agreement,
a single Term Loan to the Company on or within three (3) days after the
Effective Date in an amount equal to $5,000,000.
2.2 Termination and Reduction of Commitment. (a) The
Company shall have the right to terminate or reduce the Commitment at any time
and from time to time at its option, provided that (i) the Company shall give
notice of such termination or reduction to the Bank specifying the amount and
effective date thereof, (ii) each partial reduction of the Commitment shall be
in a minimum amount of $1,000,000 and in an integral multiple of $1,000,000,
(iii) no such termination or reduction shall be permitted with respect to any
portion of the Commitment as to which a request for a Revolving Credit Advance
pursuant to Section 2.4 is then pending and (iv) the Commitment may not be
terminated if any Revolving Credit Advances are then outstanding and may not be
reduced below the principal amount of Revolving Credit Advances then
outstanding. The Commitment or any portion thereof terminated or reduced
pursuant to this Section 2.2, whether optional or mandatory, may not be
reinstated.
(b) For purposes of this Agreement, a Letter of
Credit Advance (i) shall be deemed outstanding in an amount equal to the sum of
the maximum amount available to be drawn under the related Letter of Credit on
or after the date of determination and on or before the stated expiry date
thereof plus the amount of any draws under such Letter of Credit that have not
been reimbursed as provided in Section 3.3 and (ii) shall be deemed outstanding
at all times on and before such stated expiry date or such earlier date on
which all amounts available to be drawn under such Letter of Credit have been
fully drawn, and thereafter until all related reimbursement obligations have
been paid pursuant to Section 3.3. As provided in Section 3.3, upon each
payment made by the Bank in respect of any draft or other demand for payment
under any Letter of Credit, the amount of any Letter of Credit Advance
outstanding immediately prior to such payment shall be automatically reduced by
the amount of each Revolving Credit Loan deemed advanced in respect of the
related reimbursement obligation of the Company.
2.3 Fees. (a) The Company agrees to pay to the Bank a
facility fee on the daily average amount of the Commitment, used or unused, for
the period from the Effective Date to but excluding the Termination Date, at a
per annum rate equal to the Applicable Margin. Accrued facility fees shall be
payable quarterly in arrears on the last Business Day of each August, November,
February and May, commencing on the first such Business Day occurring after the
Effective Date, and on the Termination Date.
(b) The Company agrees to pay to a fee to the
Bank, at a per annum rate equal to the Applicable Margin, on the maximum amount
available to be drawn from time to time under such Standby Letters of Credit
for the period from and including the date of
LOAN AGREEMENT Page 14
<PAGE> 20
issuance of such Standby Letter of Credit to and including the stated expiry
date of such Standby Letter of Credit, with respect to Commercial Letters of
Credit a fee to the Bank to be negotiated at the time of issuance between the
Bank and the Company, which fee shall be paid at each time as any commercial
letter of credit is presented and drawn upon in whole or in part. Such fees
are nonrefundable and the Company shall not be entitled to any rebate of any
portion thereof if such Standby Letter of Credit does not remain outstanding
through its stated expiry date or for any other reason. The Company further
agrees to pay to the Bank, on demand, such other customary administrative fees,
charges and expenses of the Bank in respect of the issuance, negotiation,
acceptance, amendment, transfer and payment of such Standby Letter of Credit or
otherwise payable pursuant to the application and related documentation under
which such Letter of Credit is issued, and the Bank agrees to provide a
schedule of such charges from time to time upon the request of the Company.
(c) The Company agrees to pay to the Bank on
the fifth anniversary of the Effective Date (the "Fifth Anniversary Date") a
fee equal to the difference of one percent (1%) of 5.2 times the Final EBITDA
less the Associated Debt on the Fifth Anniversary Date less one percent (1%) of
$28,212,560 (the original purchase price) less the Associated Debt on the
Effective Date.
As used above, the following terms shall have the following
meanings:
"Final EBITDA" shall mean the higher of (i) EBITDA for the four
fiscal quarters most recently ended as of the Fifth Anniversary
Date or (ii) the annual average of EBITDA for each of three
most recently ended fiscal years prior to the Fifth Anniversary
Date.
"Associated Debt" shall mean $18,522,000 with respect to such
amount as of the Effective Date, and shall mean, as of the
Fifth Anniversary Date, the daily average of the amount of the
Revolving Credit Advances for the one year period prior to the
Fifth Anniversary Date, the amount of the Term Loan as of the
Fifth Anniversary Date and the amount of the Subordinated Debt
as of the Fifth Anniversary Date.
Notwithstanding the above, (i) in the event that Alan J.
Kaufman and Kaufman Affiliates retain at least a majority ownership and control
of the Company on the Fifth Anniversary Date the above fee shall not exceed
$250,000, and (ii) if the Commitments are terminated prior to the Fifth
Anniversary Date by the Company for any reason or by the Bank due to Event of
Default the Company shall pay a fee to the Bank under this Section 2.3(c) in an
amount equal to $250,000 on the date the Commitments are terminated.
LOAN AGREEMENT Page 15
<PAGE> 21
(d) The Company agrees to pay to the Bank a
closing fee in the amount of $75,000 on the Effective Date.
2.4 Disbursement of Advances. (a) The Company shall give
the Bank notice of its request for each Advance in substantially the form of
Exhibit F hereto not later than 10:00 a.m. Detroit time (i) three Eurodollar
Business Days prior to the date such Advance is requested to be made if such
Advance is to be made as a Eurodollar Rate Loan, (ii) five Business Days prior
to the date any Letter of Credit Advance is requested to be made, and (iii) one
Business Day prior to the date such Advance is requested to be made in all
other cases, which notice shall specify whether a Eurodollar Rate Loan,
Negotiated Rate Loan, Floating Rate Loan or a Letter of Credit Advance is
requested and, in the case of each requested Eurodollar Rate Loan or Negotiated
Rate Loan, the Interest Period to be initially applicable to such Loan and, in
the case of each Letter of Credit Advance, such information as may be necessary
for the issuance thereof by the Bank. Subject to the terms and conditions of
this Agreement, the proceeds of each such requested Loan shall be made
available to the Company by depositing the proceeds thereof in immediately
available funds, in an account maintained and designated by the Company at the
principal office of the Bank. Subject to the terms and conditions of this
Agreement, the Bank shall, on the date any Letter of Credit Advance is
requested to be made, issue the related Letter of Credit for the account of the
Company. Notwithstanding anything herein to the contrary, the Bank may decline
to issue any requested Letter of Credit on the basis that the beneficiary, the
purpose of issuance or the terms or the conditions of drawing are contrary to a
policy of the Bank.
(b) All Revolving Credit Loans made under this
Section 2.4 shall be evidenced by the Revolving Credit Note and the Term Loan
made under this Section 2.4 shall be evidenced by the Term Note, and all such
Loans shall be due and payable and bear interest as provided in Article III.
The Bank is hereby authorized by the Company to record on the schedule attached
to the Note, or in its books and records, the date, amount and type of each
Loan and the duration of the related Interest Period (if applicable), the
amount of each payment or prepayment of principal thereon, and the other
information provided for on such schedule, which schedule or books and records,
as the case may be, shall constitute prima facie evidence of the information so
recorded, provided, however, that failure of the Bank to record, or any error
in recording, any such information shall not relieve the Company of its
obligation to repay the outstanding principal amount of the Loans, all accrued
interest thereon and other amounts payable with respect thereto in accordance
with the terms of the Note and this Agreement. Subject to the terms and
conditions of this Agreement, the Company may borrow Revolving Credit Loans
under this Section 2.4 and under Section 3.3, prepay Revolving Credit Loans
pursuant to Section 3.1 and reborrow Revolving Credit Loans but not Term Loans
under this Section 2.4 and under Section 3.3.
2.5 Conditions for First Disbursement. The obligation of
the Bank to make the first Advance hereunder is subject to receipt by the Bank
of the following documents and completion of the following matters, in form and
substance reasonably satisfactory to the Bank:
LOAN AGREEMENT Page 16
<PAGE> 22
(a) Charter Documents. Certificates of recent
date of the appropriate authority or official of the Company's state of
incorporation (listing all charter documents of the Company on file in that
office if such listing is available) and certifying as to the good standing and
corporate existence of the Company together with copies of such charter
documents of the Company certified as of a recent date by such authority or
official and certified as true and correct as of the Effective Date by a duly
authorized officer of the Company;
(b) By-Laws and Corporate Authorizations.
Copies of the by-laws of the Company together with all authorizing resolutions
and evidence of other corporate action taken by the Company to authorize the
execution, delivery and performance by the Company of this Agreement, the Note
and the Security Documents to which the Company is a party and the consummation
by the Company of the transactions contemplated hereby, certified as true and
correct as of the Effective Date by a duly authorized officer of the Company;
(c) Incumbency Certificate. Certificates of
incumbency of the Company containing, and attesting to the genuineness of, the
signatures of those officers authorized to act on behalf of the Company in
connection with this Agreement, the Note and the Security Documents to which
the Company is a party and the consummation by the Company of the transactions
contemplated hereby, certified as true and correct as of the Effective Date by
a duly authorized officer of the Company;
(d) Note. The Revolving Credit Note and the
Term Note duly executed on behalf of the Company for the Bank;
(e) Security Documents. (i) The Pledge duly
executed on behalf of the Guarantor, together with the originals of all stock
certificates representing 100% of the Capital Stock of the Company and with
assignments separate from certificate for each such stock certificate in form
acceptable to the Bank;
(ii) the Guaranty duly executed on
behalf of the Guarantor; and
(iii) the Subordination Agreement duly
executed on behalf of the Company and the Subordinated Creditor, together with
a copy of the original promissory note and other instruments evidencing the
Subordinated Debt;
(f) Legal Opinions. The favorable written
opinion of Honigman Miller Schwartz and Cohn counsel for the Company and the
Guarantor in the form attached hereto as Schedule 2.5(f) and of counsel for the
Subordinated Creditor in a form reasonably satisfactory to the Bank;
(g) Consents, Approvals, Etc. Copies of all
governmental and nongovernmental consents, approvals, authorizations,
declarations, registrations or filings, if any,
LOAN AGREEMENT Page 17
<PAGE> 23
required on the part of the Company or any Guarantor in connection with the
execution, delivery and performance of this Agreement, the Note, the Security
Documents or the transactions contemplated hereby or as a condition to the
legality, validity or enforceability of this Agreement, the Note or any of the
Security Documents, certified as true and correct and in full force and effect
as of the Effective Date by a duly authorized officer of the Company, or, if
none are required, a certificate of such officer to that effect;
(h) Fees. The closing fee described in Section
2.3(d), respectively;
(i) Financial Statements, Etc. The pro forma
balance sheet of the Company after giving effect to the transactions
contemplated by the Purchase Agreements, certified as true and correct and
prepared in accordance with generally accepted accounting principles by the
chief financial officer of the Company, and projections of the Company;
(j) Purchase Agreements. Certified copies of
all purchase agreements and other agreements and documents executed or
delivered or to be executed and delivered in connection with the acquisition by
the Company of the Kaufman Group (all such purchase agreements and other
agreements and documents collectively referred to as the "Purchase
Agreements");
(k) Acquisition. Evidence satisfactory to the
Bank that (i) all transactions pursuant to the Purchase Agreements, but for the
initial Advance under this Agreement, have been completed in accordance with
the Purchase Agreements, the pro forma financial statements delivered to the
Bank pursuant to Section 2.5(i) and all laws and regulations.
(l) Liens. Evidence satisfactory to the Bank
that all assets of the Company, the Kaufman Group, and its Subsidiaries are
free and clear of any Lien except those permitted under this Agreement; and
(m) Miscellaneous. Such other documents, and
completion of such other matters (including without limitation any due
diligence), as the Bank may reasonably request.
2.6 Further Conditions for Disbursement. The obligation
of the Bank to make any Advance (including the first Advance), or any
continuation or conversion under Section 2.7 is further subject to the
satisfaction of the following conditions precedent:
(a) The representations and warranties
contained in Article IV hereof and in the Security Documents shall be true and
correct on and as of the date such Advance is made (both before and after such
Advance is made) as if such representations and warranties were made on and as
of such date;
LOAN AGREEMENT Page 18
<PAGE> 24
(b) No Default or Event of Default shall exist
or shall have occurred and be continuing on the date such Advance is made
(whether before or after such Advance is made); and
(c) In the case of any Letter of Credit
Advance, the Company shall have delivered to the Bank an application for the
related Letter of Credit and other related documentation requested by and
acceptable to the Bank appropriately completed and duly executed on behalf of
the Company.
The Company shall be deemed to have made a representation and warranty to the
Bank at the time of the making of, and the continuation or conversion of, each
Advance to the effects set forth in clauses (a) and (b) of this Section 2.6.
For purposes of this Section 2.6 the representations and warranties contained
in Section 4.6 hereof shall be deemed made with respect to both the financial
statements referred to therein and the most recent financial statements
delivered pursuant to Section 5.1(d)(ii) and (iii).
2.7 Subsequent Elections as to Loans. The Company may
elect (a) to continue a Fixed Rate Loan of one type, or a portion thereof, as a
Fixed Rate Loan of the then existing type or (b), may elect to convert a Fixed
Rate Loan of one type, or a portion thereof, to a Loan of another type or (c)
elect to convert a Floating Rate Loan, or a portion thereof, to a Fixed Rate
Loan, in each case by giving notice thereof to the Bank in substantially the
form of Exhibit G hereto not later than 10:00 a.m. Detroit time three
Eurodollar Business Days prior to the date any such continuation of or
conversion to a Eurodollar Rate Loan is to be effective and not later than
10:00 a.m. Detroit time on one Business Day prior to the date such continuation
or conversion is to be effective in any other case, provided that an
outstanding Fixed Rate Loan may only be converted on the last day of the then
current Interest Period with respect to such Loan, and provided, further, if a
continuation of a Loan as, or a conversion of a Loan to a Fixed Rate Loan is
requested, such notice shall also specify the Interest Period to be applicable
thereto upon such continuation or conversion. If the Company shall not timely
deliver such a notice with respect to any outstanding Fixed Rate Loan, the
Company shall be deemed to have elected to convert such Fixed Rate Loan to a
Floating Rate Loan on the last day of the then current Interest Period with
respect to such Loan.
2.8 Limitation of Requests and Elections.
Notwithstanding any other provision of this Agreement to the contrary, if, upon
receiving a request for a Eurodollar Rate Loan pursuant to Section 2.4, or a
request for a continuation of a Eurodollar Rate Loan as a Eurodollar Rate Loan
of the then existing type, or a request for a conversion of a Floating Rate
Loan or a Negotiated Rate Loan to a Eurodollar Rate Loan pursuant to Section
2.7, (a) in the case of any Eurodollar Rate Loan, deposits in Dollars for
periods comparable to the Interest Period elected by the Company are not
available to the Bank in the London interbank market, (b) the Eurodollar Rate
will not adequately and fairly reflect the cost to the Bank of making, funding
or maintaining the related Eurodollar Rate Loan, or (c) by reason of national
or international financial, political or economic conditions or by reason of
any applicable law, treaty or other international
LOAN AGREEMENT Page 19
<PAGE> 25
agreement, rule or regulation (whether domestic or foreign) now or hereafter in
effect, or the interpretation or administration thereof by any governmental
authority charged with the interpretation or administration thereof, or
compliance by the Bank with any guideline, request or directive of such
authority (whether or not having the force of law), including without
limitation exchange controls, it is impracticable, unlawful or impossible for,
or shall limit or impair the ability of, (i) the Bank to make or fund the
relevant Loan or to continue such Loan as a Loan of the then existing type or
to convert a Loan to such a Loan or (ii) the Company to make or the Bank to
receive any payment under this Agreement at the place specified for payment
hereunder or to freely convert any amount paid into Dollars at market rates of
exchange or to transfer any amount paid or so converted to the address of its
principal office specified in Section 7.2, then the Company shall not be
entitled, so long as such circumstances continue, to request a Loan of the
affected type pursuant to Section 2.4 or a continuation of or conversion to a
Loan of the affected type pursuant to Section 2.7. In the event that such
circumstances no longer exist, the Bank shall again consider requests for Loans
of the affected type pursuant to Section 2.4, and requests for continuations of
and conversions to Loans of the affected type pursuant to Section 2.7.
Notwithstanding any other provision of this Agreement to the
contrary and in order to give effect to the provisions of Section 3.1(a)(ii),
the Company shall make requests for Eurodollar Rate Loans or Negotiated Rate
Loans pursuant to Section 2.4, and requests for continuations of and
conversions to Eurodollar Rate Loans or Negotiated Rate Loans pursuant to
Section 2.7, such that, on each date that any scheduled principal payment is
due with respect to the Term Loan pursuant to Section 3.1(a), either Floating
Rate Loans, Negotiated Rate Loans or Eurodollar Rate Loans having an Interest
Period ending on such date, or any combination thereof, are outstanding on such
date in an aggregate outstanding principal amount not less than the amount of
such principal payment.
2.9 Minimum Amounts; Etc. Except for (a) Advances which
exhaust the entire remaining amount of the Commitment, and (b) payments
required pursuant to Section 3.1(c) or Section 3.8, each Floating Rate Loan and
each continuation or conversion pursuant to Section 2.7 and each prepayment
thereof shall be in a minimum amount of $50,000 and in an integral multiple of
$50,000, each Fixed Rate Loan shall be in a minimum amount of $1,000,000 and in
an integral multiple of $1,000,000.
ARTICLE III.
PAYMENTS AND PREPAYMENTS OF ADVANCES
3.1 Principal Payments and Prepayments.
(a) Unless earlier payment is required under
this Agreement (i) the Company shall pay to the Bank on the Termination Date
the entire outstanding principal amount of the Revolving Credit Loans and (ii)
the Company shall pay to the Bank the outstanding
LOAN AGREEMENT Page 20
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principal amount of the Term Loan in twenty (20) equal quarterly installments in
the amount of $250,000 payable on the last Business Day of each August,
November, February and May commencing on the last Business Day of November,
1995, to and including the Maturity Date, when the entire outstanding principal
amount of the Term Loan shall be due and payable.
(b) The Company may at any time and from time
to time prepay all or a portion of the Loans, without premium or penalty,
provided that (i) the Company may not prepay any portion of any Loan as to
which an election for a continuation of or a conversion to a Eurodollar Rate
Loan is pending pursuant to Section 2.4, (ii) unless earlier payment is
required under this Agreement, any Eurodollar Rate Loan may only be prepaid on
the last day of the then current Eurodollar Interest Period with respect to
such Loan, and (iii) any prepayment of a Negotiated Rate Loan shall be subject
to the prepayment premium described in Section 3.9(b). Upon the giving of such
notice, the aggregate principal amount of such Loan or portion thereof so
specified in such notice, together with such accrued interest and other
amounts, shall become due and payable on the specified prepayment date.
(c) If at any time the aggregate outstanding
principal amount of the Revolving Credit Advances shall exceed the aggregate
Commitment, the Company shall forthwith pay to the Bank, without demand, an
amount not less than the amount of such excess for application to the
outstanding principal amount of the Loans, provided that if any such prepayment
would be in excess of the outstanding amount of the Loans, the Company shall
deliver cash collateral to the Bank to secure the outstanding Letters of Credit
in the amount of such excess which is greater than the outstanding Loans and
the Company hereby grants to the Bank a first priority lien and security
interest in such collateral, and all such cash collateral shall be under the
sole and exclusive control of the Bank.
(d) All prepayments of the Term Loan, whether
optional or mandatory, shall be applied to installments of principal of the
Term Loan in the inverse order of their maturities and no partial prepayment of
the Term Loan shall reduce the amount or defer the date of the scheduled
installments of principal required to be paid thereon.
3.2 Interest Payments. The Company shall pay interest to
the Bank on the unpaid principal amount of each Loan, for the period commencing
on the date such Loan is made until such Loan is paid in full, on each Interest
Payment Date and at maturity (whether at stated maturity, by acceleration or
otherwise), and thereafter on demand, at the following rates per annum:
(a) During such periods that such Loan is a
Floating Rate Loan, the Floating Rate.
(b) During such periods that such Loan is a
Eurodollar Rate Loan, the Eurodollar Rate applicable to such Loan for each
related Eurodollar Interest Period.
LOAN AGREEMENT Page 21
<PAGE> 27
(c) During such periods that such Loan is a
Negotiated Rate Loan, the Negotiated Rate applicable to such Loan for each
related Negotiated Interest Period.
Notwithstanding the foregoing paragraphs (a), (b) and (c), the Company shall
pay interest on demand by the Bank at the Overdue Rate on the outstanding
principal amount of any Loan and any other amount payable by the Company
hereunder (other than interest) at any time on or after an Event of Default if
required in writing by the Bank.
3.3 Letter of Credit Reimbursement Payments. (a)(i) The
Company agrees to pay to the Bank, on the day on which the Bank shall honor a
draft or other demand for payment presented or made under any Letter of Credit,
an amount equal to the amount paid by the Bank in respect of such draft or
other demand under such Letter of Credit and all expenses paid or incurred by
the Bank relative thereto. Unless the Company shall have made such payment to
the Bank on such day, upon each such payment by the Bank, the Bank shall be
deemed to have disbursed to the Company, and the Company shall be deemed to
have elected to satisfy its reimbursement obligation by, a Revolving Credit
Loan bearing interest at the Floating Rate for the account of the Bank in an
amount equal to the amount so paid by the Bank in respect of such draft or
other demand under such Letter of Credit. Such Revolving Credit Loan shall be
disbursed notwithstanding any failure to satisfy any conditions for
disbursement of any Loan set forth in Article II hereof and, to the extent of
the Revolving Credit Loan so disbursed, the reimbursement obligation of the
Company under this Section 3.3 shall be deemed satisfied; provided, however,
that nothing in this Section 3.3 shall be deemed to constitute a waiver of any
Default or Event of Default caused by the failure to the conditions for
disbursement or otherwise.
(ii) If, for any reason (including
without limitation as a result of the occurrence of an Event of Default with
respect to the Company pursuant to Section 6.1(h)), Floating Rate Loans may not
be made by the Bank as described in Section 3.3(a)(i), then the Company agrees
that each reimbursement amount not paid pursuant to the first sentence of
Section 3.3(a)(i) shall bear interest, payable on demand by the Bank, at the
interest rate then applicable to Floating Rate Loans.
(b) The reimbursement obligation of the Company
under this Section 3.3 shall be absolute, unconditional and irrevocable and
shall remain in full force and effect until all obligations of the Company to
the Bank hereunder shall have been satisfied, and such obligations of the
Company shall not be affected, modified or impaired upon the happening of any
event, including without limitation, any of the following, whether or not with
notice to, or the consent of, the Company:
(i) Any lack of validity or
enforceability of any Letter of Credit or any documentation relating to any
Letter of Credit or to any transaction related in any way to such Letter of
Credit (the "Letter of Credit Documents");
LOAN AGREEMENT Page 22
<PAGE> 28
(ii) Any amendment, modification,
waiver, consent, or any substitution, exchange or release of or failure to
perfect any interest in collateral or security, with respect to any of the
Letter of Credit Documents;
(iii) The existence of any claim,
setoff, defense or other right which the Company may have at any time against
any beneficiary or any transferee of any Letter of Credit (or any persons or
entities for whom any such beneficiary or any such transferee may be acting),
the Bank or any other person or entity, whether in connection with any of the
Letter of Credit Documents, the transactions contemplated herein or therein or
any unrelated transactions;
(iv) Any draft or other statement or
document presented under any Letter of Credit proving to be forged, fraudulent,
invalid or insufficient in any respect or any statement therein being untrue or
inaccurate in any respect;
(v) Payment by the Bank to the
beneficiary under any Letter of Credit against presentation of a document which
does not comply with the terms of the Letter of Credit, including failure of
any documents to bear any reference or adequate reference to such Letter of
Credit;
(vi) Any failure, omission, delay or
lack on the part of the Bank or any party to any of the Letter of Credit
Documents to enforce, assert or exercise any right, power or remedy conferred
upon the Bank or any such party under this Agreement or any of the Letter of
Credit Documents, or any other acts or omissions on the part of the Bank or any
such party;
(vii) Any other event or circumstance
that would, in the absence of this clause, result in the release or discharge
by operation of law or otherwise of the Company from the performance or
observance of any obligation, covenant or agreement contained in this Section
3.3.
No setoff, counterclaim, reduction or diminution of any obligation or any
defense of any kind or nature which the Company has or may have against the
beneficiary of any Letter of Credit shall be available hereunder to the Company
against the Bank. Nothing in this Section 3.3 shall limit the liability, if
any, of the Bank to the Company pursuant to Section 7.5.
3.4 Payment Method. (a) All payments to be made by the
Company hereunder will be made to the Bank in Dollars and in immediately
available, freely transferable, cleared funds not later than 1:00 p.m. at the
principal office of the Bank specified in Section 7.2. Payments received after
1:00 p.m. at the place for payment shall be deemed to be payments made prior to
1:00 p.m. at the place for payment on the next succeeding Business Day. The
Company hereby authorizes the Bank to charge its account with the Bank in order
to cause timely payment
LOAN AGREEMENT Page 23
<PAGE> 29
of amounts due hereunder to be made (subject to sufficient funds being
available in such account for that purpose).
(b) At the time of making each such payment,
the Company shall, subject to the other terms and conditions of this Agreement,
specify to the Bank that Loan or other obligation of the Company hereunder to
which such payment is to be applied. In the event that the Company fails to so
specify the relevant obligation or if an Event of Default shall have occurred
and be continuing, the Bank may apply such payments as it may determine in its
sole discretion.
3.5 No Setoff or Deduction. All payments of principal of
and interest on the Loans and other amounts payable by the Company hereunder
shall be made by the Company without setoff or counterclaim, and, subject to
the next succeeding sentence, free and clear of, and without deduction or
withholding for, or on account of, any present or future taxes, levies,
imposts, duties, fees, assessments, or other charges of whatever nature,
imposed by any governmental authority, or by any department, agency or other
political subdivision or taxing authority, except for any such tax imposed on
the net income of the Bank by the jurisdiction under the laws of which the Bank
is organized or by the jurisdiction of the Bank's Applicable Lending Office.
If any such taxes, levies, imposts, duties, fees, assessments or other charges
are imposed, the Company will pay such additional amounts as may be necessary
so that payment of principal of and interest on the Loans and other amounts
payable hereunder, after withholding or deduction for or on account thereof,
will not be less than any amount provided to be paid hereunder and, in any such
case, the Company will furnish to the Bank certified copies of all tax receipts
evidencing the payment of such amounts within 45 days after the date any such
payment is due pursuant to applicable law. If the Company is required to pay
any additional amounts to or for the account of the Bank under this Section
3.5, the Bank will change the jurisdiction of its Applicable Lending Office so
as to eliminate or reduce any such additional payment which may thereafter
accrue if such change, in the judgment of the Bank, is not otherwise
disadvantageous to the Bank.
3.6 Payment on Non-Business Day; Payment Computations.
Except as otherwise provided in this Agreement to the contrary, whenever any
installment of principal of, or interest on, any Loan or any other amount due
hereunder becomes due and payable on a day which is not a Business Day, the
maturity thereof shall be extended to the next succeeding Business Day and, in
the case of any installment of principal, interest shall be payable thereon at
the rate per annum determined in accordance with this Agreement during such
extension. Computations of interest and other amounts due under this Agreement
shall be made on the basis of a year of 360 days (or 365 or 366 days, as the
case may be, when determining the Floating Rate) for the actual number of days
elapsed, including the first day but excluding the last day of the relevant
period.
3.7 Additional Costs. (a) In the event that any
applicable law, treaty or other international agreement, rule or regulation
(whether domestic or foreign) now or hereafter in
LOAN AGREEMENT Page 24
<PAGE> 30
effect and whether or not presently applicable to the Bank, or any
interpretation or administration thereof by any governmental authority charged
with the interpretation or administration thereof, or compliance by the Bank
with any guideline, request or directive of any such authority (whether or not
having the force of law), shall (i) affect the basis of taxation of payments to
the Bank of any amounts payable by the Company under this Agreement (other than
taxes imposed on the overall net income of the Bank, by the jurisdiction, or by
any political subdivision or taxing authority of any such jurisdiction, in
which the Bank has its principal office), or (ii) shall impose, modify or deem
applicable any reserve, special deposit or similar requirement against assets
of, deposits with or for the account of, or credit extended by the Bank, or
(iii) shall impose any other condition with respect to this Agreement, or any
of the Commitment, the Notes or the Loans or any Letter of Credit, and the
result of any of the foregoing is to increase the cost to the Bank of making,
funding or maintaining any Eurodollar Rate Loan or any Letter of Credit or to
reduce the amount of any sum receivable by the Bank thereon, then the Company
shall pay to the Bank, from time to time, upon request by the Bank additional
amounts sufficient to compensate the Bank for such increased cost or reduced
sum receivable to the extent, in the case of any Eurodollar Rate Loan, the Bank
is not compensated therefor in the computation of the interest rate applicable
to such Eurodollar Rate Loan. A statement as to the amount of such increased
cost or reduced sum receivable, prepared in good faith and in reasonable detail
by the Bank and submitted by the Bank to the Company, shall be conclusive and
binding for all purposes absent manifest error in computation.
(b) In the event that any applicable law,
treaty or other international agreement, rule or regulation (whether domestic
or foreign) now or hereafter in effect and whether or not presently applicable
to the Bank, or any interpretation or administration thereof by any
governmental authority charged with the interpretation or administration
thereof, or compliance by the Bank with any guideline, request or directive of
any such authority (whether or not having the force of law), including any
risk-based capital guidelines, affects or would affect the amount of capital
required or expected to be maintained by the Bank (or any corporation
controlling the Bank) and the Bank determines that the amount of such capital
is increased by or based upon the existence of the Bank's obligations hereunder
and such increase has the effect of reducing the rate of return on the Bank's
(or such controlling corporation's) capital as a consequence of such
obligations hereunder to a level below that which the Bank (or such controlling
corporation) could have achieved but for such circumstances (taking into
consideration its policies with respect to capital adequacy), then the Company
shall pay to the Bank from time to time, upon request by the Bank additional
amounts sufficient to compensate such Bank (or such controlling corporation)
for any increase in the amount of capital and reduced rate of return which the
Bank reasonably determines to be allocable to the existence of the Bank's
obligations hereunder. A statement as to the amount of such compensation,
prepared in good faith and in reasonable detail by the Bank and submitted by
such Bank to the Company, shall be conclusive and binding for all purposes
absent manifest error in computation. The Bank may, at its option, specify
that such amounts be paid by way of an increase in the facility fees payable by
the Company pursuant to Section 2.3(a).
LOAN AGREEMENT Page 25
<PAGE> 31
(c) The Bank agrees that all costs and expenses
under Sections 3.7(a) and (b) shall not be requested if they are not requested
of other borrowers similar to the Company, provided that the Bank's
determination of similar borrowers shall be conclusive and binding absent
manifest error, and shall only be charged when actually incurred by the Bank.
3.8 Illegality and Impossibility. In the event that any
applicable law, treaty or other international agreement, rule or regulation
(whether domestic or foreign) now or hereafter in effect and whether or not
presently applicable to the Bank, or any interpretation or administration
thereof by any governmental authority charged with the interpretation or
administration thereof, or compliance by the Bank with any guideline, request
or directive of such authority (whether or not having the force of law),
including without limitation exchange controls, shall make it unlawful or
impossible for the Bank to maintain any Loan under this Agreement, the Company
shall upon receipt of notice thereof from the Bank, repay in full the then
outstanding principal amount of each Loan so affected, together with all
accrued interest thereon to the date of payment and all amounts owing to the
Bank under Section 3.9, (a) on the last day of the then current Interest Period
applicable to such Loan if the Bank may lawfully continue to maintain such Loan
to such day, or (b) immediately if the Bank may not continue to maintain such
Loan to such day.
3.9 Indemnification. (a) If the Company makes any
payment of principal with respect to any Eurodollar Rate Loan on any other date
than the last day of an Interest Period applicable thereto (whether pursuant to
Section 3.1(c), Section 3.8, Section 6.2 or otherwise), or if the Company fails
to borrow any Eurodollar Rate Loan after notice has been given to the Bank in
accordance with Section 2.4, the Company shall reimburse the Bank on demand for
any resulting loss or expense incurred by the Bank in connection with such
payment, including without limitation any loss incurred in obtaining,
liquidating or employing deposits from third parties, whether or not the Bank
shall have funded or committed to fund such Loan. A statement as to the amount
of such loss or expense, prepared in good faith and in reasonable detail by the
Bank and submitted by the Bank to the Company, shall be conclusive and binding
for all purposes absent manifest error in computation. Calculation of all
amounts payable to the Bank under this Section 3.9(a) shall be made as though
the Bank shall have actually funded or committed to fund the relevant
Eurodollar Rate Loan through the purchase of an underlying deposit in an amount
equal to the amount of such Loan in the relevant market and having a maturity
comparable to the related Eurodollar Interest Period and, through the transfer
of such deposit to a domestic office of the Bank in the United States;
provided, however, that the Bank may fund any Eurodollar Rate Loan in any
manner it sees fit and the foregoing assumption shall be utilized only for the
purpose of calculation of amounts payable under this Section 3.9.
(b) If the Company makes any payment of principal with
respect to any Negotiated Rate Loan on any other date than the last day of an
Interest Period applicable thereto (whether pursuant to Section 3.1(c)or
Section 6.2 or otherwise), or if the Company fails to borrow any Negotiated
Rate Loan after notice has been given to the Bank in accordance with Section
2.4, the Company shall pay to the Bank a prepayment premium on the principal
amount
LOAN AGREEMENT Page 26
<PAGE> 32
prepaid, computed for the period from the date of prepayment to the scheduled
maturity thereof at a per annum rate equal to amount by which the interest rate
on the Negotiated Rate Loan exceeds the yield, as of the date of prepayment, on
United States treasury bills, notes or bonds, selected by the Bank in its
discretion, having a maturity comparable to the scheduled maturity of the
principal amount prepaid, plus one half of one percent (1/2%) per anum. The
Company agrees that amounts payable pursuant hereto are a reasonable
pre-estimate of loss and not a penalty.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to the Bank that:
4.1 Corporate Existence and Power. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the state of its jurisdiction of incorporation and is duly qualified to
do business, and is in good standing, in all additional jurisdictions where
such qualification is necessary under applicable law, except where the failure
to so qualify would not have a Material Adverse Effect. The Company has all
requisite corporate power to own or lease the properties used in its business
and to carry on its business as now being conducted and as proposed to be
conducted, and to execute and deliver this Agreement, the Notes and the
Security Documents to which it is a party and to engage in the transactions
contemplated by this Agreement.
4.2 Corporate Authority. The execution, delivery and
performance by the Company of this Agreement, the Notes and the Security
Documents to which it is a party have been duly authorized by all necessary
corporate action and are not in contravention of any law, rule or regulation,
or any judgment, decree, writ, injunction, order or award of any arbitrator,
court or governmental authority, or of the terms of the Company's charter or
by-laws, or of any contract or undertaking to which the Company is a party or
by which the Company or any of its property may be bound or affected and will
not result in the imposition of any Lien on any of their property or of any of
their Subsidiaries except for Permitted Liens.
4.3 Binding Effect. This Agreement is, and the Notes and
the Security Documents to which the Company or any Guarantor is a party when
delivered hereunder will be, legal, valid and binding obligations of the
Company and the Guarantor, respectively, enforceable against the Company and
the Guarantor in accordance with their respective terms, except to the extent
such enforceability may be limited by applicable bankruptcy, insolvency or
other similar laws affecting the enforcement of creditors' rights generally.
4.4 Subsidiaries. Schedule 4.4 hereto correctly sets
forth the corporate name, jurisdiction of incorporation and ownership of each
Subsidiary of the Company. Each such Subsidiary and each corporation becoming
a Subsidiary of the Company after the date hereof is
LOAN AGREEMENT Page 27
<PAGE> 33
and will be a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation and is and will be duly
qualified to do business in each additional jurisdiction where such
qualification is or may be necessary under applicable law, except where the
failure to so qualify would not have a Material Adverse Effect. Each
Subsidiary of the Company has and will have all requisite corporate power to
own or lease the properties used in its business and to carry on its business
as now being conducted and as proposed to be conducted. All outstanding shares
of capital stock of each class of each Subsidiary of the Company have been and
will be validly issued and are and will be fully paid and nonassessable and,
except as otherwise indicated in Schedule 4.4 hereto or disclosed in writing to
the Bank from time to time, are and will be owned, beneficially and of record,
by the Company or another Subsidiary of the Company free and clear of any
Liens.
4.5 Litigation. Except as set forth in Schedule 4.5
hereto, there is no action, suit or proceeding pending or, to the best of the
Company's and the Guarantors' knowledge, threatened against or affecting the
Company or any of its Subsidiaries or any Guarantor before or by any court,
governmental authority or arbitrator, which if adversely decided might have a
Material Adverse Effect and, to the best of the Company's knowledge, there is
no basis for any such action, suit or proceeding.
4.6 Financial Condition. The consolidated balance sheet
of Kaufman Group and its Subsidiaries and the consolidated statements of income
and cash flows of Kaufman Group and its Subsidiaries for the fiscal year ended
December 31, 1994 and reported on by BDO Seidman, independent certified public
accountants, and the interim consolidated balance sheet and interim
consolidated statements of income and cash flows of Kaufman Group and its
Subsidiaries, as of or for the six-month period ended on June 30, 1995, copies
of which have been furnished to the Bank, fairly present, and the financial
statements of Kaufman Group and its Subsidiaries delivered pursuant to Section
5.1(d) will fairly present, the consolidated financial position of the Company
and its Subsidiaries as at the respective dates thereof, and the consolidated
results of operations of the Company and its Subsidiaries for the respective
periods indicated, all in accordance with Generally Accepted Accounting
Principles consistently applied (subject, in the case of said interim
statements, to year-end audit adjustments). There has been no event or
development which has had or could reasonably be expected to have a Material
Adverse Effect since June 30, 1995. There is no material Contingent Liability
of Kaufman Group or the Company or any of their Subsidiaries that is not
reflected in such financial statements or in the notes thereto.
4.7 Use of Advances. The Company will use the proceeds
of the Advances to acquire 100% of the common stock of the Kaufman Group, for
the Company's other acquisitions, and for its general corporate purposes. The
Company does not extend or maintain, in the ordinary course of business, credit
for the purpose, whether immediate, incidental, or ultimate, of buying or
carrying margin stock (within the meaning of Regulation U of the Board of
Governors of the Federal Reserve System), and no part of the proceeds of any
Advance will be used for the purpose, whether immediate, incidental, or
ultimate, of buying or carrying any such
LOAN AGREEMENT Page 28
<PAGE> 34
margin stock or maintaining or extending credit to others for such purpose.
After applying the proceeds of each Advance, such margin stock will not
constitute more than 25% of the value of the assets that are subject to any
provisions of this Agreement or any Security Document that may cause the
Advances to be deemed secured, directly or indirectly, by margin stock.
4.8 Consents, Etc. Except for such consents, approvals,
authorizations, declarations, registrations or filings delivered by the Company
and the Guarantors pursuant to Section 2.5(g), if any, each of which is in full
force and effect, no consent, approval or authorization of or declaration,
registration or filing with any governmental authority or any nongovernmental
person or entity, including without limitation any creditor, lessor or
stockholder of the Company or any Guarantor or any of their respective
Subsidiaries, is required on the part of the Company or any Guarantor in
connection with the execution, delivery and performance of this Agreement, the
Note, the Security Documents or the transactions contemplated hereby or as a
condition to the legality, validity or enforceability of this Agreement, the
Notes or any of the Security Documents.
4.9 Taxes. The Company and its Subsidiaries have filed
all tax returns (federal, state and local) required to be filed and have paid
all taxes shown thereon to be due, including interest and penalties, or have
established adequate financial reserves on their respective books and records
for payment thereof in accordance with Generally Accepted Accounting
Principles. Neither the Company nor any of its Subsidiaries knows of any
actual or proposed tax assessment or any basis therefor, and no extension of
time for the assessment of deficiencies in any federal or state tax has been
granted by the Company or any such Subsidiary.
4.10 Title to Properties. Except as otherwise disclosed
in the latest balance sheet delivered pursuant to Section 4.6 or 5.1(d) of this
Agreement, the Company or one or more of their respective Subsidiaries have
good and marketable fee simple title to all of the real property, and a valid
and indefeasible ownership interest in all of the other properties and assets
reflected in said balance sheet or subsequently acquired by the Company or any
such Subsidiary. All of such properties and assets are free and clear of any
Lien, except for Permitted Liens. The Company has acquired, free and clear of
all Liens, all Capital Stock of the Kaufman Group and all other transactions
contemplated pursuant to the Purchase Agreements have been completed in
accordance therewith and in accordance with all applicable laws and
regulations.
4.11 ERISA. The Company, its Subsidiaries, their ERISA
Affiliates and their respective Plans are in compliance in all material
respects with those provisions of ERISA and of the Code which are applicable
with respect to any Plan. No Prohibited Transaction and no Reportable Event
has occurred with respect to any such Plan. None of the Company, any its of
its Subsidiaries or any of their ERISA Affiliates is an employer with respect
to any Multiemployer Plan. The Company, its Subsidiaries and their ERISA
Affiliates have met the minimum funding requirements under ERISA and the Code
with respect to each of their respective Plans, if any, and have not incurred
any liability to the PBGC or any Plan other than premiums not yet due and
payable. The execution, delivery and performance of this Agreement,
LOAN AGREEMENT Page 29
<PAGE> 35
the Note and the Security Documents does not constitute a Prohibited
Transaction. There is no material Unfunded Benefit Liability, with respect to
any Plan of the Company, its Subsidiaries or their ERISA Affiliates.
4.12 Disclosure. No report or other information specified
on Schedule 4.12 furnished to the Bank contains any material misstatement of
fact or omits to state any material fact or any fact necessary to make the
statements contained therein not misleading in light of the circumstances in
which they were made.
4.13 Environmental Matters. The Company and its
Subsidiaries are in substantial compliance with all Environmental Laws in
jurisdictions in which the Company or any of its Subsidiaries owns or operates,
or has owned or operated, a facility or site, or arranges or has arranged for
disposal or treatment of hazardous substances, solid waste, or other wastes,
accepts or has accepted for transport any Hazardous Material or holds or has
held any interest in real property or otherwise. No demand, claim, notice,
action, administrative proceeding, investigation or inquiry whether brought by
any governmental authority, private person or entity or otherwise, arising
under, relating to or in connection with any Environmental Laws is pending or
threatened against the Company or any of its Subsidiaries, any real property in
which the Company or any of its Subsidiaries holds or has held an interest or
any past or present operation of the Company or any of its Subsidiaries which
could have a Material Adverse Effect. Neither the Company nor any of its
Subsidiaries (a) is the subject of any federal or state investigation
evaluating whether any remedial action is needed to respond to a release of any
toxic substances, radioactive materials, hazardous wastes or related materials
into the environment, (b) has received any notice of any Hazardous Materials
in, or upon any of its properties in violation of any Environmental Laws, (c)
knows of any basis for any such investigation, notice or violation, or (d) owns
or operates, or has owned or operated, property which appears on the United
States National Priority List or any other governmental listing which
identifies sites for remedial clean-up or investigatory actions, except as
disclosed on Schedule 4.14 hereto, and as to such matters disclosed on such
Schedule, none will have a Material Adverse Effect. No release, threatened
release or disposal of Hazardous Materials is occurring or has occurred on,
under or to any real property in which the Company or any of its Subsidiaries
holds any interest or performs any of its operations, in violation of any
Environmental Law.
4.14 No Default. Neither the Company nor any Guarantor is
in default or has received any written notice of default under or with respect
to any of its Contractual Obligations in any respect which could have a
Material Adverse Effect. No Default or Event of Default has occurred and is
continuing.
4.15 No Burdensome Restrictions. No Requirement of Law or
Contractual Obligation applicable to the Company or any of its Subsidiaries
could have a Material Adverse Effect.
LOAN AGREEMENT Page 30
<PAGE> 36
4.16 Solvency. After giving effect to the transactions
contemplated by the Purchase Agreements and this Agreement, the Company and its
Subsidiaries on a consolidated basis are Solvent.
4.17 Intellectual Property; Licenses. The Company and each
of its Subsidiaries owns, or is licensed to use, all trademarks, trade names,
service marks, copyrights, technology, know-how and processes necessary for the
conduct of its business as currently conducted (the "Intellectual Property")
except for those the failure to own or license which could not reasonably be
expected to have a Material Adverse Effect. No material claim has been
asserted and is pending by any person challenging or questioning the use of any
such Intellectual Property or the validity or effectiveness of any such
Intellectual Property, nor does the Company or any of its Subsidiaries know of
any valid basis for any such claim, the use of such Intellectual Property by
the Company and each of its Subsidiaries does not infringe on the rights of any
Person, and, to the knowledge of the Company, no Intellectual Property has been
infringed, misappropriated or diluted by any other Person except for such
claims, infringements, misappropriations and dilutions that, in the aggregate,
could not have a Material Adverse Effect. The Company and its Subsidiaries
have all state licenses and other licenses required to conduct its business as
general agents and brokers of insurance.
4.18 Labor Matters. There are no strikes or other labor
disputes against the Company or any Subsidiary pending or, to the knowledge of
the Company, threatened that (individually or in the aggregate) could have a
Material Adverse Effect. Hours worked by and payment made to employees of the
Company and its Subsidiaries have not been in violation of the Fair Labor
Standards Act or any other applicable Requirement of Law dealing with such
matters that (individually or in the aggregate) could have a Material Adverse
Effect. All payments due from the Company and each of its Subsidiaries on
account of employee health and welfare insurance that (individually or in the
aggregate) could have a Material Adverse Effect if not paid have been paid or
accrued as a liability on the books of the Company and its Subsidiaries.
4.19 Not an Investment Company. The Company is not an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
ARTICLE V.
COVENANTS
5.1 Affirmative Covenants. The Company covenants and
agrees that, until the Termination Date and thereafter until payment in full of
the principal of and accrued interest on the Notes and the performance of all
other obligations of the Company under the Loan Documents, unless the Bank
shall otherwise consent in writing, it shall and shall cause each of its
Subsidiaries to:
LOAN AGREEMENT Page 31
<PAGE> 37
(a) Preservation of Corporate Existence, Etc.
Do or cause to be done all things necessary to preserve, renew and keep in full
force and effect its legal existence, and its qualification as a foreign
corporation in good standing in each jurisdiction in which such qualification
is necessary under applicable law, and the rights, licenses, permits (including
those required under Environmental Laws), franchises, patents, copyrights,
trademarks and trade names material to the conduct of its businesses, except
where the failure to do any of the foregoing would not have a Material Adverse
Effect; and defend all of the foregoing against all claims, actions, demands,
suits or proceedings at law or in equity or by or before any governmental
instrumentality or other agency or regulatory authority.
(b) Compliance with Laws, Etc. Comply in all
material respects with all applicable laws, rules, regulations and orders of
any governmental authority, whether federal, state, local or foreign (including
without limitation ERISA, the Code and Environmental Laws), in effect from time
to time, except where the failure to comply would not have a Material Adverse
Effect;; and pay and discharge promptly when due all taxes, assessments and
governmental charges or levies imposed upon it or upon its income, revenues or
property, before the same shall become delinquent or in default, as well as all
lawful claims for labor, materials and supplies or otherwise, which, if unpaid,
might give rise to Liens upon such properties or any portion thereof, except to
the extent that payment of any of the foregoing is then being contested in good
faith by appropriate legal proceedings and with respect to which adequate
financial reserves have been established on the books and records of the
Company or any of its Subsidiaries in accordance with Generally Accepted
Accounting Principles.
(c) Maintenance of Properties; Insurance.
Maintain, preserve and protect all property that is material to the conduct of
its business, and keep such property in good repair, working order and
condition and from time to time make, or cause to be made all needful and
proper repairs, renewals, additions, improvements and replacements thereto
necessary in order that the business carried on in connection therewith may be
properly conducted at all times in accordance with customary and prudent
business practices for similar businesses, except where the failure to do any
of the foregoing would not have a Material Adverse Effect; and to maintain in
full force and effect insurance with responsible and reputable insurance
companies or associations in such amounts, on such terms and covering such
risks, including fire and other risks insured against by extended coverage, as
is usually carried by companies engaged in similar businesses and owning
similar properties similarly situated and maintain in full force and effect
public liability insurance, insurance against claims for personal injury or
death or property damage occurring in connection with any of its activities or
any properties owned, occupied or controlled by it, in such amount as it shall
reasonably deem necessary, and maintain such other insurance as may be required
by law or as may be reasonably requested by the Bank for purposes of assuring
compliance with this Section 5.1(c).
(d) Reporting Requirements. Furnish to the
Bank the following:
LOAN AGREEMENT Page 32
<PAGE> 38
(i) Promptly and in any event within
three calendar days after becoming aware of the occurrence of (A) any Default
or Event of Default, (B) the commencement of any material litigation against,
by or affecting the Company or any Guarantor and any material developments
therein, or (C) entering into any material contract or undertaking that is not
entered into in the ordinary course of business or (D) any development in the
business or affairs of the Company, any of its Subsidiaries or any Guarantor or
which has resulted in or which is likely in the reasonable judgment of the
Company to result in a Material Adverse Effect, a statement of the chief
financial officer of the Company or the Guarantor, as the case may be, setting
forth details of each such Default or Event of Default or such litigation,
material contract or undertaking or development and the action which the
Company such Guarantor as the case may be, has taken and proposes to take with
respect thereto;
(ii) As soon as available and in any
event within 60 days after the end of each fiscal quarter of the Company, the
consolidated and consolidating balance sheet of the Company and its
Subsidiaries as of the end of such quarter, and the related consolidated and
consolidating statements of income and cash flows for the period commencing at
the end of the previous fiscal year and ending with the end of such quarter,
setting forth in each case in comparative form the corresponding figures for
the corresponding date or period of the preceding fiscal year, all in
reasonable detail and duly certified (subject to year-end audit adjustments) by
the chief financial officer of the Company as having been prepared in
accordance with Generally Accepted Accounting Principles, together with a
certificate of the chief financial officer of the Company stating (A) that no
Default or Event of Default has occurred and is continuing or, if a Default or
Event of Default has occurred and is continuing, a statement setting forth the
details thereof and the action which the Company has taken and proposes to take
with respect thereto, and (B) that a computation (which computation shall
accompany such certificate and shall be in reasonable detail) showing
compliance with Section 5.2(a), (b), (c) and (d) hereof is in conformity with
the terms of this Agreement;
(iii) As soon as available and in any
event within 120 days after the end of each fiscal year of the Company, a copy
of the consolidated balance sheet of the Company and its Subsidiaries as of the
end of such fiscal year and the related consolidated statements of income,
retained earnings and changes in financial position of the Company and its
Subsidiaries for such fiscal year, with a customary audit report of Coopers &
Lybrand LLP, or other independent certified public accountants selected by the
Company and acceptable to the Bank, without qualifications unacceptable to the
Bank, together with a certificate of such accountants stating (A) that they
have reviewed this Agreement and stating further whether, in the course of
their review of such financial statements, they have become aware of any
Default or Event of Default and, if such a Default or Event of Default exists
and is continuing, a statement setting forth the nature and status thereof, and
(B) that a computation by the Company (which computation shall accompany such
certificate and shall be in reasonable detail) showing compliance with Section
5.2 (a), (b), (c) and (d) hereof is in conformity with the terms of this
Agreement;
LOAN AGREEMENT Page 33
<PAGE> 39
(iv) Promptly after the sending or
filing thereof, copies of all reports, proxy statements and financial
statements which the Company or any Guarantor sends to or files with any of
their respective security holders or any securities exchange or the Securities
and Exchange Commission or any successor agency thereof; and
(v) Promptly and in any event within
10 calendar days after receiving or becoming aware thereof (A) a copy of any
notice of intent to terminate any Plan of the Company, any Guarantor, their
respective Subsidiaries or any ERISA Affiliate filed with the PBGC, (B) a
statement of the chief financial officer of the Company or any Guarantor, as
the case may be; setting forth the details of the occurrence of any Reportable
Event with respect to any such Plan, (C) a copy of any notice that the Company,
any Guarantor, any of their respective Subsidiaries or any ERISA Affiliate may
receive from the PBGC relating to the intention of the PBGC to terminate any
such Plan or to appoint a trustee to administer any such Plan, or (D) a copy of
any notice of failure to make a required installment or other payment within
the meaning of Section 412(n) of the Code or Section 302(f) of ERISA with
respect to any such Plan; and
(vi) Promptly, such other information
respecting the business, properties, operations or condition, financial or
otherwise, of the Company, any of its Subsidiaries or any Guarantor as the Bank
may from time to time reasonably request.
(e) Accounting; Access to Records, Books, Etc.
Maintain a system of accounting established and administered in accordance with
sound business practices to permit preparation of financial statements in
accordance with Generally Accepted Accounting Principles and to comply with the
requirements of this Agreement and, at any reasonable time and from time to
time, (i) permit the Bank or any agents or representatives thereof to examine
and make copies of and abstracts from the records and books of account of, and
visit the properties of the Company and its Subsidiaries, and to discuss the
affairs, finances and accounts of the Company and its Subsidiaries with their
respective directors and officers and, with prior notice to an officer of the
Company, their respective employees and independent auditors, and by this
provision of the Company its Subsidiaries hereby authorizes such persons to
discuss such affairs, finances and accounts with the Bank, and (ii) permit the
Bank or any of its agents or representatives to conduct a comprehensive field
audit of its books, records, properties and assets, which field audit shall be
at the expense of the Company upon and during the continuance of an Event of
Default.
(f) Further Assurances. Will, and will cause
each Subsidiary to, execute and deliver within 30 days after request therefor
by the Bank, all further instruments and documents and take all further action
that may be necessary or desirable, or that the Bank may request, in order to
give effect to, and to aid in the exercise and enforcement of the rights and
remedies of the Bank under, the Loan Documents.
(g) Underwriting Access. Maintain access to,
and underwriting authority for, primary insurance markets acceptable to the
Bank including, but not limited to, the
LOAN AGREEMENT Page 34
<PAGE> 40
Scottsdale Insurance Company or other comparable companies approved by the Bank
in its reasonable discretion.
5.2 Negative Covenants. Until the Termination Date and
thereafter until payment in full of the principal of and accrued interest on
the Notes and the performance of all other obligations of the Company and the
Loan Documents, the Company agrees that, unless the Bank shall otherwise
consent in writing it shall not, and shall not permit any of its Subsidiaries
to:
(a) Minimum EBITDA. Permit or suffer EBITDA,
as of the end of any fiscal quarter of the Company as calculated for the four
consecutive fiscal quarters then ending, to be less than (i) $5,000,000 for any
fiscal quarter ending during the period from and including the Effective Date
to and including December 30, 1996, (ii) $5,200,000 for any fiscal quarter
ending during the period from and including December 31, 1996 to and including
December 30, 1997, (iii) $5,400,000 for any fiscal quarter ending during the
period from and including December 31, 1997 to and including December 30, 1998,
and (iv) $5,600,000 for any fiscal quarter thereafter.
(b) Fixed Charge Coverage Ratio. Permit or
suffer the Fixed Charge Coverage Ratio, as of the end of any fiscal quarter of
the Company as calculated for the four consecutive fiscal quarters then ending
(subject to the definition of Interest Expense), to be less than (i) 1.10 to
1.00 for any fiscal quarter ending during the period from and including the
Effective Date to and including December 30, 1996, (ii) 1.15 to 1.00 for any
fiscal quarter ending during the period from and including December 31, 1996 to
and including December 30, 1997, (iii) 1.30 to 1.00 for any fiscal quarter
ending during the period from and including December 31, 1997 to and including
December 30, 1998, (iv) 1.40 to 1.00 for any fiscal quarter ending during the
period from and including December 31, 1998 to and including December 30, 1999
and (iv) 1.50 to 1.00 for any fiscal quarter thereafter.
(c) Interest Coverage Ratio. Permit or suffer
the Interest Coverage Ratio, as of the end of any fiscal quarter of the Company
as calculated for the four consecutive fiscal quarters then ending (subject to
the definition of Interest Expense), to be less than (i) 2.75 to 1.00 for any
fiscal quarter ending during the period from and including the Effective Date
to and including December 30, 1997, (ii) 3.00 to 1.00 for any fiscal quarter
ending during the period from and including December 31, 1997 to and including
December 30, 1998, and (iii) 3.75 to 1.00 for any fiscal quarter thereafter.
(d) Total Funded Debt to EBITDA Ratio. Permit
or suffer, as of the end of any fiscal quarter, the ratio of (i) Total Funded
Debt as of the end of such fiscal quarter, to (ii) EBITDA, as calculated for
the four consecutive fiscal quarters ending as of the end of such fiscal
quarter, to be greater than (w) 3.50 to 1.00 for any fiscal quarter ending
during the period from and including the Effective Date to and including
December 30, 1996, (x) 3.00 to 1.00 for any fiscal quarter ending during the
period from and including December 31, 1996 to and
LOAN AGREEMENT Page 35
<PAGE> 41
including December 30, 1997, (y) 2.50 to 1.00 for any fiscal quarter ending
during the period from and including December 31, 1997 to and including
December 30, 1998, and (z) 2.00 to 1.00 for any fiscal quarter thereafter.
(e) Indebtedness. Create, incur, assume or in
any manner become liable in respect of, or suffer to exist, any Indebtedness
other than:
(i) The Advances and any other
Indebtedness owing to the Bank.
(ii) The Indebtedness described in
Schedule 5.2(e) hereto, having the same terms as those existing on the date of
this Agreement, provided that extensions and renewals thereof shall be
permitted but no increase provided that no increase in the amount thereof shall
be permitted;
(iii) Indebtedness in aggregate
outstanding principal amount not exceeding $500,000 which is secured by one or
more liens permitted by Section 5.2(f)(v) hereof;
(iv) Subordinated Debt of the Company
described in Schedule 5.2(e) hereto; and
(v) Other unsecured Indebtedness of
the Company in an aggregate amount not to exceed $1,000,000.
(f) Liens. Create, incur or suffer to exist
any Lien on any of the assets, rights, revenues or property, real, personal or
mixed, tangible or intangible, whether now owned or hereafter acquired, of the
Company or any of its Subsidiaries, other than:
(i) Liens for taxes not delinquent or
for taxes being contested in good faith by appropriate proceedings and as to
which adequate financial reserves have been established on its books and
records in accordance with Generally Accepted Accounting Principles;
(ii) Liens (other than any Lien
imposed by ERISA or any Environmental Law) created and maintained in the
ordinary course of business which are not material in the aggregate, and which
would not have a Material Adverse Effect and which constitute (A) pledges or
deposits under worker's compensation laws, unemployment insurance laws or
similar legislation, (B) good faith deposits in connection with bids, tenders,
contracts or leases to which the Company or any of its Subsidiaries is a party
for a purpose other than borrowing money or obtaining credit, including rent
security deposits, (C) liens imposed by law, such as those of carriers,
warehousemen and mechanics, if payment of the obligation secured thereby is not
yet due, (D) Liens securing taxes, assessments or other governmental charges or
levies not yet subject to penalties for nonpayment, and (E) pledges or
deposits to secure public
LOAN AGREEMENT Page 36
<PAGE> 42
or statutory obligations of the Company or any of its Subsidiaries, or surety
or customs bonds to which the Company or any of its Subsidiaries is a party;
(iii) Liens affecting real property which
constitute minor survey exceptions or defects or irregularities in title,
easements or reservations of, or rights of others for, rights of way, sewers,
electric lines, telegraph and telephone lines and other similar purposes, or
zoning or other restrictions as to the use of such real property, provided that
all of the foregoing, in the aggregate, do not at any time materially detract
from the value of said properties or materially impair their use in the
operation of the businesses of the Company or any of its Subsidiaries
(iv) Each Lien described in Schedule
5.2(f) hereto may be suffered to exist upon the same terms as those existing on
the date hereof, but no increase in the amount secured thereby shall be
permitted;
(v) Any Lien created to secure
payment of a portion of the purchase price of, or existing at the time of
acquisition of, any tangible fixed asset acquired by the Company or any of its
Subsidiaries may be created or suffered to exist upon such fixed asset if the
outstanding principal amount of the Indebtedness secured by such Lien does not
at any time exceed the purchase price paid by the Company or such Subsidiary
for such fixed asset and the aggregate principal amount of all Indebtedness
secured by such Liens does not exceed $500,000, provided that such Lien does
not encumber any other asset at any time owned by the Company or such
Subsidiary, and provided, further, that not more than one such Lien shall
encumber such fixed asset at any one time;
(vi) The interest or title of a lessor
under any lease otherwise permitted under this Agreement with respect to the
property subject to such lease to the extent performance of the obligations of
the Company or its Subsidiary thereunder are not delinquent; and
(vii) Any liens on any assets of a
Subsidiary of the Company solely in favor of another Subsidiary or the Company;
(viii) Liens solely in favor of the
Bank; and
(ix) Any Lien existing on an asset at
the time it is acquired by the Company or any of its Subsidiaries provided that
such Lien is not created in contemplation of such acquisition and the aggregate
value of the property subject to all such Liens does not exceed $1,000,000.
(g) Merger; Acquisitions; Etc. Purchase or
otherwise acquire, whether in one or a series of transactions, all or a
substantial portion of the business assets, rights, revenues or property, real,
personal or mixed, tangible or intangible, of any person, or all or a
LOAN AGREEMENT Page 37
<PAGE> 43
substantial portion of the capital stock of or other ownership interest in any
other person; nor merge or consolidate or amalgamate with any other person or
take any other action having a similar effect, nor enter into any joint venture
or similar arrangement with any other person (all of the foregoing defined
herein as "Acquisition Transactions"), provided, however, that this Section
5.2(g) shall not prohibit any Acquisition Transaction if (i) the Company shall
be the surviving or continuing corporation thereof, (ii) immediately before and
after such Acquisition Transaction, no Default or Event of Default shall exist
or shall have occurred and be continuing and the representations and warranties
contained in Article IV shall be true and correct in all material respects on
and as of the date thereof (both before and after such Acquisition Transaction
is consummated) as if made on the date such Acquisition Transaction is
consummated, (iii) prior to the consummation of such Acquisition Transaction,
the Company shall have provided to the Bank an opinion of counsel and a
certificate of the chief financial officer of the Company (attaching
computations to demonstrate compliance with all financial covenants hereunder),
each stating that such Acquisition Transaction complies with this Section
5.2(g) and that any other conditions under this Agreement relating to such
transaction have been satisfied; and (iv) the aggregate purchase price paid or
payable by the Company (and it is acknowledged and agreed that the purchase
price shall include all future and contingent payments pursuant to any such
merger or acquisition, which future or contingent payments shall be deemed
expended on the date of such Acquisition Transaction and be based upon existing
renewal rates for any price based on commissions to be paid) pursuant to such
Acquisition Transactions does not exceed (x) $2,000,000 in the aggregate for
each of the first two years after the Effective Date of this Agreement, (y)
$3,000,000 in the aggregate for the third year after the Effective Date, and
(z) $4,000,000 in the aggregate for any year thereafter, without prior written
approval of the Bank.
(h) Disposition of Assets; Etc. Sell, lease,
license, transfer, assign or otherwise dispose of all or a substantial portion
of its business, assets, rights, revenues or property, real, personal or mixed,
tangible or intangible, whether in one or a series of transactions, other than
inventory sold in the ordinary course of business upon customary credit terms
and sales of scrap or obsolete material or equipment, provided, however, that
this Section 5.2(h) shall not prohibit any such sale, lease, license, transfer,
assignment or other disposition if (i) the aggregate book value (disregarding
any write-downs of such book value other than ordinary depreciation and
amortization) of all of the business, assets, rights, revenues and property
disposed of after the date of this Agreement shall be less than 10% percent of
such aggregate book value of the consolidated total assets of the Company and
its Subsidiaries, and if, immediately before and after such transaction, no
Default or Event of Default shall exist or shall have occurred and be
continuing, (ii) such sale, lease, license, transfer, assignment or other
disposition is from a Subsidiary to another Subsidiary or from any Subsidiary
to the Company, (iii) such sale, lease, license, transfer, assignment or other
disposition is for fair market value on arm's length basis and the proceeds
thereof are used to pay the Term Loan or the Revolving Credit Loans, provided
that any such payments on the Revolving Credit Loans shall also reduce the
amount of the Commitment by a like amount, or (iv) the proceeds thereof are
used within 30 days of such sale to purchase property of comparable value.
LOAN AGREEMENT Page 38
<PAGE> 44
(i) Nature of Business. Make any substantial
change in the nature of its business from that engaged in on the date of this
Agreement or engage in any other businesses other than those in which it is
engaged on the date of this Agreement.
(j) Dividends and Other Restricted Payments.
Make, pay, declare or authorize any dividend, payment or other distribution in
respect of any class of its capital stock or any dividend, payment or
distribution in connection with the redemption, purchase, retirement or other
acquisition, directly or indirectly, of any shares of its Capital Stock, other
than such dividends, payments or other distributions to the extent payable
solely in shares of the capital stock of the Company or to the extent payable
to the Company by a Subsidiary of the Company.
(k) Investments, Loans and Advances, Contingent
Liabilities. Subject to Section 5.2(g), purchase or otherwise acquire any
capital stock of or other ownership interest in, or debt securities of or other
evidences of Indebtedness of, any other person; nor make any loan or advance of
any of its funds or property or make any other extension of credit to, or make
any investment or acquire any interest whatsoever in, any other person; nor
incur any Contingent Liability; other than (i) extensions of trade credit made
in the ordinary course of business on customary credit terms and commission,
travel and similar advances made to officers and employees in the ordinary
course of business, and (ii) commercial paper of any United States issuer
having the highest rating then given by Moody's Investors Service, Inc., or
Standard & Poor's Corporation, direct obligations of and obligations fully
guaranteed by the United States of America or any agency or instrumentality
thereof, or certificates of deposit of any commercial bank which is a member of
the Federal Reserve System and which has capital, surplus and undivided profit
(as shown on its most recently published statement of condition) aggregating
not less than $100,000,000, provided, however, that each of the foregoing
investments has a maturity date not later than 180 days after the acquisition
thereof by the Company or any of its Subsidiaries, and (iii) those
investments, loans, advances and other transactions described in Schedule
5.2(k) hereto, having the same terms as existing on the date of this Agreement,
but no extension or renewal thereof shall be permitted.
(l) Transactions with Affiliates. Enter into,
become a party to, or become liable in respect of, any contract or undertaking
with any Affiliate except in the ordinary course of business and on terms not
less favorable to the Company or such Subsidiary than those which could be
obtained if such contract or undertaking were an arms length transaction with a
person other than an Affiliate.
(m) Payments and Modification of Subordinated
Debt. Make any payment, prepayment or redemption of any Subordinated Debt
except as allowed in the relevant Subordinated Agreement, nor enter into any
agreement or arrangement providing for the defeasance of any Subordinated
Indebtedness, nor amend or modify or supplement, or consent or agree to any
amendment or modification or supplement, of any agreement under which any
Subordinated Debt is issued or created or otherwise related thereto if the
effect of such amendment, modification or supplement would be to increase the
amount of, or advance to an
LOAN AGREEMENT Page 39
<PAGE> 45
earlier date, the scheduled maturity date or any payment date or other required
payment thereof, increase the rate of interest, prepayment charges, fees or
other amounts payable with respect thereto, make any of the representations,
covenants, defaults or other terms more burdensome or restrictive against the
Company or any of its Subsidiaries or add any additional covenants,
representations, defaults or other terms which are more burdensome or
restrictive against the Company or any of its Subsidiaries or amend, modify or
supplement in any manner any subordination provisions or terms thereof.
(n) Negative Pledge Limitation. Enter into any
agreement with any person other than the Bank pursuant hereto which prohibits
or limits the ability of the Company or any Subsidiary to create, incur, assume
or suffer to exist any Lien upon any of its assets, rights, revenues or
property, real, personal or mixed, tangible or intangible, whether now owned or
hereafter acquired.
(o) Inconsistent Agreements. Enter into any
agreement containing any provision which would be violated or breached by this
Agreement or any of the transactions contemplated hereby or by performance by
the Company or any Guarantor of its obligations in connection therewith.
(p) Accounting Changes. The Company shall not
change its fiscal year or make any significant changes (i) in accounting
treatment and reporting practices except as permitted by generally accepted
accounting principles and disclosed to the Bank, or (ii) in tax reporting
treatment except as permitted by law and disclosed to the Bank.
ARTICLE VI.
DEFAULT
6.1 Events of Default. The occurrence of any one of the
following events or conditions shall be deemed an "Event of Default" hereunder
unless waived pursuant to Section 7.1:
(a) Nonpayment. The Company shall fail to pay
when due any principal of either of the Notes, or any reimbursement obligation
under Section 3.3 (whether by deemed disbursement of a Revolving Credit Loan or
otherwise), or failure to pay any interest on either of the Notes or any fees
or any other amount payable hereunder, which failure continues for a period of
five days; or
(b) Misrepresentation. Any representation or
warranty made by the Company or any Guarantor in Article IV hereof or in any
Security Document or any other certificate, report, financial statement or
other document furnished by or on behalf of the Company or any Guarantor in
connection with this Agreement, shall prove to have been incorrect in any
material respect when made or deemed made; or
LOAN AGREEMENT Page 40
<PAGE> 46
(c) Certain Covenants. The Company shall fail
to perform or observe any term, covenant or agreement contained in Article V
hereof, other than Section 5.1(f) and Sections 5.2(o), (p), (l) and (n);
(d) Other Defaults. The Company or any
Guarantor shall fail to perform or observe any other term, covenant or
agreement contained in this Agreement or in any Security Document or any other
agreement or document executed by the Company or any Guarantor with or in favor
of the Bank at any time, and any such failure shall remain unremedied for 15
calendar days after notice thereof shall have been given to the Company such
Guarantor, as the case may be, by the Bank (or such longer or shorter period of
time as may be specified in such Security Document); or
(e) Cross Default. The Company, any of its
Subsidiaries or any Guarantor shall fail to pay any part of the principal of,
the premium, if any, or the interest on, or any other payment of money due
under any of its Indebtedness or Contingent Liabilities (other than
Indebtedness hereunder), beyond any period of grace provided with respect
thereto, which individually or together with other such Indebtedness and
Contingent Liabilities as to which any such failure exists has an aggregate
outstanding principal amount in excess of $500,000; or if the Company, any of
its Subsidiaries or any Guarantor fails to perform or observe any other term,
covenant or agreement contained in, or if any other event or condition occurs
or exists under, any agreement, document or instrument evidencing or securing
any such Indebtedness having such aggregate outstanding principal amount, or
under which any such Indebtedness or Contingent Liabilities was incurred,
issued or created, beyond any period of grace, if any, provided with respect
thereto if the effect of such failure is either (i) to cause, or permit the
holders of such Indebtedness or Contingent Liabilities (or a trustee on behalf
of such holders) to cause, any payment in respect of such Indebtedness or
Contingent Liabilities to become due prior to its due date or (ii) to permit
the holders of such Indebtedness or Contingent Liabilities (or a trustee on
behalf of such holders) to elect a majority of the board of directors of the
Company; or
(f) Judgments. One or more judgments or orders
for the payment of money in an aggregate amount of $500,000 shall be rendered
against the Company, any of its Subsidiaries, or any Guarantor, or any other
judgment or order (whether or not for the payment of money) shall be rendered
against or shall affect the Company, any of its Subsidiaries or any Guarantor
which causes or could cause a Material Adverse Effect and either (i) such
judgment or order shall have remained unsatisfied and the Company, such
Subsidiaries or such Guarantor shall not have taken action necessary to stay
enforcement thereof by reason of pending appeal or otherwise, prior to the
expiration of the applicable period of limitations for taking such action or,
if such action shall have been taken, a final order denying such stay shall
have been rendered, or (ii) enforcement proceedings shall have been commenced
by any creditor upon any such judgment or order; or
(g) ERISA. The occurrence of a Reportable
Event that results in or could result in liability of the Company, any
Subsidiary or their ERISA Affiliates to the PBGC
LOAN AGREEMENT Page 41
<PAGE> 47
or to any Plan and such Reportable Event is not corrected within thirty (30)
days after the occurrence thereof; or the occurrence of any Reportable Event
which could constitute grounds for termination of any Plan of the Company, any
Guarantor or their ERISA Affiliates by the PBGC or for the appointment by the
appropriate United States District Court of a trustee to administer any such
Plan and such Reportable Event is not corrected within thirty (30) days after
the occurrence thereof; or the filing by the Company, any Guarantor or any of
their ERISA Affiliates of a notice of intent to terminate a Plan or the
institution of other proceedings to terminate a Plan; or the Company, any
Guarantor or any of their ERISA Affiliates shall fail to pay when due any
liability to the PBGC or to a Plan; or the PBGC shall have instituted
proceedings to terminate, or to cause a trustee to be appointed to administer,
any Plan of the Company, any Guarantor or any of their ERISA Affiliates; or any
person engages in a Prohibited Transaction with respect to any Plan which
results in or could result in liability of the Company, any Guarantor, any of
their ERISA Affiliates, any Plan of the Company, any Guarantor, or their ERISA
Affiliates or fiduciary of any such Plan; or failure by the Company, any
Guarantor or any of their ERISA Affiliates to make a required installment or
other payment to any Plan within the meaning of Section 302(f) of ERISA or
Section 412(n) of the Code that results in or could result in liability of the
Company, any Guarantor or any of their ERISA Affiliates to the PBGC or any
Plan; or the withdrawal of the Company, any Guarantor or any of their ERISA
Affiliates from a Plan during a plan year in which it was a "substantial
employer" as defined in Section 4001(9a)(2) of ERISA; or the Company, any
Guarantor or any of their ERISA Affiliates becomes an employer with respect to
any Multiemployer Plan without the prior written consent of the Bank; or
(h) Insolvency, Etc. The Company, any of its
Significant Subsidiaries or any Guarantor shall be dissolved or liquidated (or
any judgment, order or decree therefor shall be entered), or shall generally
not pay its debts as they become due, or shall admit in writing its inability
to pay its debts generally, or shall make a general assignment for the benefit
of creditors, or shall institute, or there shall be instituted against the
Company, any of its Significant Subsidiaries or any Guarantor any proceeding or
case seeking to adjudicate it a bankrupt or insolvent or seeking liquidation,
winding up, reorganization, arrangement, adjustment, protection, relief or
composition of it or its debts under any law relating to bankruptcy, insolvency
or reorganization or relief or protection of debtors or seeking the entry of an
order for relief, or the appointment of a receiver, trustee, custodian or other
similar official for it or for any substantial part of its assets, rights,
revenues or property, and, if such proceeding is instituted against the
Company, such Significant Subsidiary or such Guarantor and is being contested
by the Company, such Significant Subsidiaries or such Guarantor, as the case
may be, in good faith by appropriate proceedings, such proceeding shall remain
undismissed or unstayed for a period of 60 days; or the Company, such
Significant Subsidiary or such Guarantor shall take any action (corporate or
other) to authorize or further any of the actions described above in this
subsection; or
(i) Loan Documents. Any Loan Document shall at
any time for any reason cease to be valid and binding and enforceable against
any obligor thereunder, or the validity, binding effect or enforceability
thereof shall be contested by any person, or any obligor,
LOAN AGREEMENT Page 42
<PAGE> 48
shall deny that it has any or further liability or obligation thereunder, or
any Loan Document shall be terminated, invalidated or set aside, or be declared
ineffective or inoperative or in any way cease to give or provide to the Bank
the benefits purported to be created thereby.
(j) Control. Alan J. Kaufman and Kaufman
Affiliates shall cease to own directly or indirectly free and clear of all
Liens (other than in favor of the Bank) a majority of the Capital Stock of the
Company of each class having ordinary voting power for the election of
directors (other than securities which have such power only by reason of the
happening of a contingency), or any person other than Alan J. Kaufman and
Kaufman Affiliates shall possess, directly or indirectly, the power to direct
or cause the direction of the management and policies of the Company, whether
through the ownership of voting securities or by contract or otherwise.
6.2 Remedies.
(a) Upon the occurrence and during the
continuance of any Event of Default, the Bank may by notice to the Company (i)
terminate the Commitment or (ii) declare the outstanding principal of, and
accrued interest on, the Notes, all unpaid reimbursement obligations in respect
of drawings under Letters of Credit and all other amounts owing under this
Agreement to be immediately due and payable, or (iii) demand immediate delivery
of cash collateral, and the Company agrees to deliver such cash collateral upon
demand, in an amount equal to the maximum amount that may be available to be
drawn at any time prior to the stated expiry of all outstanding Letters of
Credit, or any one or more of the foregoing, whereupon the Commitment shall
terminate forthwith and all such amounts, including such cash collateral, shall
become immediately due and payable, provided that in the case of any event or
condition described in Section 6.1(h) with respect to the Company or any
Guarantor, the Commitment shall automatically terminate forthwith and all such
amounts, including such cash collateral, shall automatically become immediately
due and payable without notice; in all cases without demand, presentment,
protest, diligence, notice of dishonor or other formality, all of which are
hereby expressly waived. Such cash collateral delivered in respect of
outstanding Letters of Credit shall be deposited in a special cash collateral
account to be held by the Bank as collateral security for the payment and
performance of the Company's obligations under this Agreement to the Bank.
(b) The Bank may in addition to the remedies
provided in Section 6.2(a), exercise and enforce any and all other rights and
remedies available to it, whether arising under this Agreement, the Notes or
any Security Document or under applicable law, in any manner deemed appropriate
by the Bank, including suit in equity, action at law, or other appropriate
proceedings, whether for the specific performance (to the extent permitted by
law) of any covenant or agreement contained in this Agreement or in the Notes
or any Security Document or in aid of the exercise of any power granted in this
Agreement, the Notes or any Security Document.
(c) Upon the occurrence and during the
continuance of any Event of Default, the Bank may at any time and from time to
time, without notice to the Company or any
LOAN AGREEMENT Page 43
<PAGE> 49
Guarantor (any requirement for such notice being expressly waived by the
Company and each Guarantor) set off and apply against any and all of the
obligations of the Company and each Guarantor now or hereafter existing under
this Agreement, any and all deposits (general or special, time or demand,
provisional or final) at any time held and other indebtedness at any time owing
by the Bank to or for the credit or the account of the Company or any Guarantor
and any property of the Company or any Guarantor from time to time in
possession of the Bank, irrespective of whether or not the Bank shall have made
any demand hereunder and although such obligations may be contingent and
unmatured. Each of the Company and the Guarantors hereby grants to the Bank a
lien on and security interest in all such deposits, indebtedness and property
as collateral security for the payment and performance of the obligations of
the Company and each Guarantor under this Agreement. The rights of the Bank
under this Section 6.2(c) are in addition to other rights and remedies
(including, without limitation, other rights of setoff) which the Bank may
have.
ARTICLE VIII.
MISCELLANEOUS
7.1 Amendments, Etc. No amendment, modification,
termination or waiver of any provision of this Agreement nor any consent to any
departure therefrom shall be effective unless the same shall be in writing and
signed by the Company and Bank. Any such amendment, waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
7.2 Notices. (a) Except as otherwise provided in Section
8.2(c) hereof, all notices and other communications hereunder shall be in
writing and shall be delivered or sent to the Company at 30833 Northwestern
Highway, Suite 220, Farmington Hills, Michigan 48334, Attention: Chief
Financial Officer, Facsimile No. (810)932-9040, Facsimile Confirmation No.
___________, to the Bank at 611 Woodward Avenue, Detroit, Michigan 48226,
Attention: Michigan Banking Division, Facsimile No. (313)225-2290, Facsimile
Confirmation No. (313)225-1671, or to such other address as may be designated
by the Company or the Bank by notice to the other party hereto. All notices
and other communications shall be deemed to have been given at the time of
actual delivery thereof to such address, or, unless sooner delivered, (i) if
sent by certified or registered mail, postage prepaid, to such address, on the
third day after the date of mailing, (ii) if sent by telex, upon receipt of the
appropriate answerback, or (iii) if sent by facsimile transmission, upon
confirmation of receipt by telephone at the number specified for confirmation,
provided, however, that notices to the Bank shall not be effective until
received.
(b) Notices by the Company to the Bank with
respect to terminations or reductions of the Commitment pursuant to Section
2.2, requests for Advances pursuant to Section 2.4, requests for continuations
or conversions of Loans pursuant to Section 2.7 and notices of prepayment
pursuant to Section 3.1 shall be irrevocable and binding on the Company.
LOAN AGREEMENT Page 44
<PAGE> 50
(c) Any notice to be given by the Company to
the Bank pursuant to Sections 2.4, 2.7 or 3.1 and any notice to be given by the
Bank hereunder, may be given by telephone, and all such notices given by the
Company must be immediately confirmed in writing in the manner provided in
Section 7.2(a). Any such notice given by telephone shall be deemed effective
upon receipt thereof by the party to whom such notice is to be given. The
Company shall indemnify and hold harmless the Bank from any and all losses,
damages, liabilities and claims arising from its good faith reliance on any
such telephone notice.
7.3 No Waiver By Conduct; Remedies Cumulative. No course
of dealing on the part of the Bank, nor any delay or failure on the part of the
Bank in exercising any right, power or privilege hereunder shall operate as a
waiver of such right, power or privilege or otherwise prejudice the Bank's
rights and remedies hereunder; nor shall any single or partial exercise thereof
preclude any further exercise thereof or the exercise of any other right, power
or privilege. No right or remedy conferred upon or reserved to the Bank under
this Agreement, the Note or any Security Document is intended to be exclusive
of any other right or remedy, and every right and remedy shall be cumulative
and in addition to every other right or remedy granted thereunder or now or
hereafter existing under any applicable law. Every right and remedy granted by
this Agreement, the Note or any Security Document or by applicable law to the
Bank may be exercised from time to time and as often as may be deemed expedient
by the Bank and, unless contrary to the express provisions of this Agreement,
the Note or any Security Document, irrespective of the occurrence or
continuance of any Default or Event of Default.
7.4 Reliance on and Survival of Various Provisions. All
terms, covenants, agreements, representations and warranties of the Company or
any Guarantor made herein or in any Security Document or in any certificate,
report, financial statement or other document furnished by or on behalf of the
Company or any Guarantor in connection with this Agreement shall be deemed to
be material and to have been relied upon by the Bank, notwithstanding any
investigation heretofore or hereafter made by any Bank or on the Bank's behalf,
and those covenants and agreements of the Company set forth in Section 3.7, 3.9
and 7.5 hereof shall survive the repayment in full of the Advances and the
termination of the Commitment.
7.5 Expenses; Indemnification. (a) The Company agrees to
pay, or reimburse the Bank for the payment of, on demand, (i) the reasonable
fees and expenses of counsel to the Bank, including without limitation the fees
and expenses of Messrs. Dickinson, Wright, Moon, Van Dusen & Freeman, in
connection with the preparation, execution, delivery and administration of this
Agreement, the Notes, the Security Documents and in connection with advising
the Bank as to its rights and responsibilities with respect thereto, and in
connection with any amendments, waivers or consents in connection therewith,
and (ii) all stamp and other taxes and fees payable or determined to be payable
in connection with the execution, delivery, filing or recording of this
Agreement, Notes, the Security Documents (or the verification of filing,
recording, perfection or priority thereof) or the consummation of the
transactions contemplated hereby, and any and all liabilities with respect to
or resulting from any delay in paying or omitting to pay such taxes or fees,
and (iii) all reasonable costs and expenses of the Bank (including reasonable
fees and
LOAN AGREEMENT Page 45
<PAGE> 51
expenses of counsel and whether incurred through negotiations, legal
proceedings or otherwise)) in connection with any Default or Event of Default
or the enforcement of, or the exercise or preservation of any rights under,
this Agreement or the Note or any Security Document or in connection with any
refinancing or restructuring of the credit arrangements provided under this
Agreement and (iv) all reasonable costs and expenses of the Bank (including
reasonable fees and expenses of counsel) in connection with any action or
proceeding relating to a court order, injunction or other process or decree
restraining or seeking to restrain the Bank from paying any amount under, or
otherwise relating in any way to, any Letter of Credit and any and all costs
and expenses which any of them may incur relative to any payment under any
Letter of Credit.
(b) The Company hereby indemnifies and agrees
to hold harmless the Bank, and its officers, directors, employees and agents,
harmless from and against any and all claims, damages, losses, liabilities,
costs or expenses of any kind or nature whatsoever which the Bank or any such
person may incur or which may be claimed against any of them by reason of or in
connection with any Letter of Credit, and neither the Bank nor any of its
officers, directors, employees or agents shall be liable or responsible for:
(i) the use which may be made of any Letter of Credit or for any acts or
omissions of any beneficiary in connection therewith; (ii) the validity,
sufficiency or genuineness of documents or of any endorsement thereon, even if
such documents should in fact prove to be in any or all respects invalid,
insufficient, fraudulent or forged; (iii) payment by the Bank to the
beneficiary under any Letter of Credit against presentation of documents which
do not comply with the terms of any Letter of Credit, including failure of any
documents to bear any reference or adequate reference to such Letter of Credit;
(iv) any error, omission, interruption or delay in transmission, dispatch or
delivery of any message or advice, however transmitted, in connection with any
Letter of Credit; or (v) any other event or circumstance whatsoever arising in
connection with any Letter of Credit; provided, however, that the Company shall
not be required to indemnify the Bank and such other persons, and the Bank
shall be liable to the Company to the extent, but only to the extent, of any
direct, as opposed to consequential or incidental, damages suffered by the
Company which were caused by (A) the Bank's wrongful dishonor of any Letter of
Credit after the presentation to it by the beneficiary thereunder of a draft or
other demand for payment and other documentation strictly complying with the
terms and conditions of such Letter of Credit, or (B) the Bank's payment by the
Bank to the beneficiary under any Letter of Credit against presentation of
documents which do not comply with the terms of the Letter of Credit to the
extent, but only to the extent, that such payment constitutes gross negligence
of wilful misconduct of the Bank. It is understood that in making any payment
under a Letter of Credit the Bank will rely on documents presented to it under
such Letter of Credit as to any and all matters set forth therein without
further investigation and regardless of any notice or information to the
contrary, and such reliance and payment against documents presented under a
Letter of Credit substantially complying with the terms thereof shall not be
deemed gross negligence or wilful misconduct of the Bank in connection with
such payment. It is further acknowledged and agreed that the Company may have
rights against the beneficiary or others in connection with any Letter of
Credit with respect to which the Bank is alleged to be liable and it shall be a
precondition of the assertion of any liability of the Bank under this Section
that the Company shall first have exhausted all reasonable
LOAN AGREEMENT Page 46
<PAGE> 52
remedies in respect of the alleged loss against such beneficiary and any other
parties obligated or liable in connection with such Letter of Credit and any
related transactions.
(c) The Company agrees to indemnify the Bank,
its affiliates and its directors, officers, agents and employees (each an
"Indemnitee") and hold each Indemnitee harmless from and against any and all
liabilities, losses, damages, costs and expenses of any kind, including,
without limitation, the reasonable fees and disbursements of counsel, which may
be incurred at any time by such Indemnitee in connection with any
investigative, administrative or judicial proceeding (whether or not such
Indemnitee shall be designated a party thereto) brought or threatened relating
to or arising out of this Agreement, the transaction contemplated hereby or by
the Purchase Agreements or any actual or proposed use of proceeds of the
Advances hereunder or any Environmental Laws; provided that no Indemnitee shall
have the right to be indemnified hereunder for such Indemnitee's own gross
negligence or willful misconduct.
7.6 Successors and Assigns. (a) This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, provided that the Company may not, without
the prior consent of the Bank, assign its rights or obligations hereunder or
under the Note or any Security Document and the Bank shall not be obligated to
make any Advance hereunder to any entity other than the Company.
(b) The Bank from time to time in its sole
discretion may appoint agents for the purpose of servicing and administering
this Agreement and the transactions contemplated hereby and enforcing or
exercising any rights or remedies of the Bank provided under this Agreement,
the Notes, any Security Documents or otherwise. In furtherance of such agency,
the Bank may from time to time direct that the Company provide notices, reports
and other documents contemplated by this Agreement (or duplicates thereof) to
such agent. The Company hereby consents to the appointment of such agent and
agrees to provide all such notices, reports and other documents and to
otherwise deal with such agent acting on behalf of the Bank in the same manner
as would be required if dealing with the Bank itself.
7.7 Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and
the same instrument, and any of the parties hereto may execute this Agreement
by signing any such counterpart.
7.8 Governing Law. This Agreement is a contract made
under, and shall be governed by and construed in accordance with, the law of
the State of Michigan applicable to contracts made and to be performed entirely
within such State and without giving effect to choice of law principles of such
State. The Company and the Bank further agree that any legal or equitable
action or proceeding with respect to this Agreement, the Notes or any Security
Document or the transactions contemplated hereby shall be brought in any court
of the State of Michigan, or in any court of the United States of America
sitting in Michigan, and the Company and each Guarantor and the Bank hereby
submits to and accepts generally and unconditionally the jurisdiction of those
courts with respect to its person and property, and, in the case of the
LOAN AGREEMENT Page 47
<PAGE> 53
Company irrevocably appoints Alan J. Kaufman, whose address in Michigan is
___________________________, as its agent for service of process and
irrevocably consents to the service of process in connection with any such
action or proceeding by personal delivery to such agent or to the Company or by
the mailing thereof by registered or certified mail, postage prepaid to the
Company at its address for notices pursuant to Section 7.2. The Company shall
at all times maintain such an agent in Michigan for such purpose and shall
notify the Bank of such agent's address in Michigan within ten days of any
change of address. Nothing in this paragraph shall affect the right of the
Bank to serve process in any other manner permitted by law or limit the right
of the Bank to bring any such action or proceeding against the Company or any
Guarantor or property in the courts of any other jurisdiction. The Company and
the Bank hereby irrevocably waives any objection to the laying of venue of any
such action or proceeding in the above described courts.
7.9 Table of Contents and Headings. The table of
contents and the headings of the various subdivisions hereof are for the
convenience of reference only and shall in no way modify any of the terms or
provisions hereof.
7.10 Construction of Certain Provisions. If any provision
of this Agreement refers to any action to be taken by any person, or which such
person is prohibited from taking, such provision shall be applicable whether
such action is taken directly or indirectly by such person, whether or not
expressly specified in such provision.
7.11 Integration and Severability. This Agreement, the
Notes, and the Security Documents embodies the entire agreement and
understanding between the Company, the Guarantors and the Bank, and supersede
all prior agreements and understandings, relating to the subject matter hereof.
In case any one or more of the obligations of the Company or any Guarantor
under this Agreement, the Notes or any Security Document shall be invalid,
illegal or unenforceable in any jurisdiction, the validity, legality and
enforceability of the remaining obligations of the Company and the Guarantors
shall not in any way be affected or impaired thereby, and such invalidity,
illegality or unenforceability in one jurisdiction shall not affect the
validity, legality or enforceability of the obligations of the Company or any
Guarantor under this Agreement, the Notes or any Security Document in any other
jurisdiction.
7.12 Independence of Covenants. All covenants hereunder
shall be given independent effect so that if a particular action or condition
is not permitted by any such covenant, the fact that it would be permitted by
an exception to, or would be otherwise within the limitations of, another
covenant shall not avoid the occurrence of a Default or an Event of Default if
such action is taken or such condition exists.
7.13 Interest Rate Limitation. Notwithstanding any
provisions of this Agreement, the Notes or any Security Document, in no event
shall the amount of interest paid or agreed to be paid by the Company exceed an
amount computed at the highest rate of interest permissible under applicable
law. If, from any circumstances whatsoever, fulfillment of any
LOAN AGREEMENT Page 48
<PAGE> 54
provision of this Agreement, the Notes or any Security Document at the time
performance of such provision shall be due, shall involve exceeding the
interest rate limitation validly prescribed by law which a court of competent
jurisdiction may deem applicable hereto, then, ipso facto, the obligations to
be fulfilled shall be reduced to an amount computed at the highest rate of
interest permissible under applicable law, and if for any reason whatsoever
the Bank shall ever receive as interest an amount which would be deemed
unlawful under such applicable law such interest shall be automatically applied
to the payment of principal of the Advances outstanding hereunder (whether or
not then due and payable) and not to the payment of interest, or shall be
refunded to the Company if such principal and all other obligations of the
Company to the Bank have been paid in full.
7.14 Waiver of Jury Trial. The Bank and the Company,
after consulting or having had the opportunity to consult with counsel,
knowingly, voluntarily and intentionally waive any right each of them may have
to a trial by jury in any litigation based upon or arising out of this
Agreement or any related instrument or agreement or any of the transactions
contemplated by this Agreement or any course of conduct, dealing, statements
(whether oral or written) or actions of any of them. Neither the Bank nor the
Company shall seek to consolidate, by counterclaim or otherwise, any such
action in which a jury trial has been waived with any other action in which a
jury trial cannot be or has not been waived. These provisions shall not be
deemed to have been modified in any respect or relinquished by any party hereto
except by a written instrument executed by such party.
LOAN AGREEMENT Page 49
<PAGE> 55
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered on the ____ day of _________, 1995,
which shall be the Effective Date of this Agreement.
AJK ENTERPRISES, INC.
By_________________________________
Its________________________________
NBD BANK
By_________________________________
Its________________________________
LOAN AGREEMENT Page 50
<PAGE> 56
DRAFT DATED
AUGUST 31, 1995
EXHIBIT A
GUARANTY AGREEMENT
THIS GUARANTY AGREEMENT, dated as of _______, 1995 (this "Guaranty"),
is made by ALAN J. KAUFMAN (the "Guarantor"), in favor of NBD BANK, a Michigan
banking corporation (the "Bank").
RECITALS
A. AJK ENTERPRISES, INC., a Michigan corporation ("AJK"), has entered
into a Loan Agreement of even date herewith (as amended or modified from time
to time, the "Loan Agreement"), with the Bank pursuant to which the Bank may
make Advances to AJK in an aggregate principal amount not to exceed
$20,000,000, as evidenced by a revolving credit note and a term note in favor
of the Bank (the "AJK Notes").
B. ROYAL BUDGET PREMIUM, INC., a Michigan corporation ("Royal Budget"
and, together with AJK, the "Borrowers") has entered into a letter loan
agreement of even date herewith (as amended or modified from time to time, the
"Letter Agreement" and, together with the Loan Agreement, the "Agreements")
with the Bank pursuant to which the Bank may make Loans to Royal Budget in an
aggregate principal amount not to exceed $3,000,000, as evidenced by a demand
note in favor of the Bank (the "Royal Budget Note" and, together with the AJK
Notes, the "Notes").
C. As a condition to the effectiveness of the obligations of the Bank
under the Agreements, the Guarantor is required to guarantee, among other
things, the obligations of the Borrowers in respect of the Advances, Loans and
other obligations of the Borrowers under the Agreements up to the limit set
forth in Section 1(b) hereof.
D. The Guarantor has reviewed the Agreements and all notes and other
documents, agreements, instruments and certificates furnished by or on behalf
of the Borrowers in connection therewith (all of the foregoing, as amended or
modified from time to time and together with any agreements or instruments in
replacement thereof, being herein collectively referred to as the "Operative
Documents"), and the Guarantor has determined that it is in his interest and to
his financial benefit that the parties to the Operative Documents enter into
the transactions contemplated thereby.
For valuable consideration, the receipt of which is hereby acknowledged
and as further consideration, and as an inducement to the Bank to maintain the
credit facilities established by the Operative Documents, the Guarantor agrees
with the Bank as follows:
1. Guarantee of Obligations. (a) The Guarantor hereby (i) guarantees,
as principal obligor and not as surety only, to the Bank the prompt payment of
the principal of and any and
<PAGE> 57
all accrued and unpaid interest (including interest which otherwise may cease
to accrue by operation of any insolvency law, rule, regulation or
interpretation thereof) on the Advances and Loans and all other obligations of
the Borrowers to the Bank under the Agreements when due, whether by scheduled
maturity, acceleration or otherwise, all in accordance with the terms of the
Agreements and the Notes, including, without limitation, default interest,
indemnification payments and all reasonable costs and expenses incurred by the
Bank in connection with enforcing any obligations of the Borrowers hereunder,
including without limitation the reasonable fees and disbursements of counsel,
(ii) guarantees the prompt and punctual performance and observance of each and
every term, covenant or agreement contained in the Agreements and the Notes to
be performed or observed on the part of the Borrowers and (iii) agrees to make
prompt payment, on demand, of any and all reasonable costs and expenses
incurred by the Bank in connection with enforcing the obligations of the
Guarantor hereunder, including, without limitation, the reasonable fees and
disbursements of counsel (all of the foregoing being collectively referred to
as the "Guaranteed Obligations").
(b) Notwithstanding anything expressed to the contrary above the
liability of the Guarantor to the Bank under this Agreement shall not exceed
the aggregate sum of (i) any and all reasonable costs and expenses incurred by
the Bank in connection with enforcing the obligations of the Guarantor
hereunder, including, without limitation, the reasonable fees and disbursements
of counsel, plus (ii) at any time the Total Debt to EBITDA Ratio exceeds
3.01:1.00, and the conditions specified in the following clauses (y) or (z) are
not satisfied, $750,000; (y) at any time the Total Debt to EBITDA Ratio is less
than 3.00:1.00 but more than 2.50:1.00 and no Default or Event of Defaults
exists, $500,000, and (z) at any time the Total Debt to EBITDA Ratio is less
than 2.50:1.00 and no Default or Event of Defaults exists, $0, plus (iii) The
Pledged Stock.
2. Nature of Guaranty. The obligations of the Guarantor hereunder
constitutes an absolute and unconditional and irrevocable guaranty of payment
and not a guaranty of collection and are wholly independent of and in addition
to other rights and remedies of the Bank and are not contingent upon the
pursuit by the Bank of any such rights and remedies, such pursuit being hereby
waived by the Guarantor.
3. Waivers and Other Agreements. The Guarantor hereby unconditionally
(a) waives any requirement that the Bank, upon the occurrence of an Event of
Default first make demand upon, or seek to enforce remedies against either
Borrower before demanding payment under or seeking to enforce the obligations
of the Guarantor hereunder, (b) covenants that the obligations of the Guarantor
hereunder will not be discharged except by complete performance of all
obligations of the Borrowers to the Bank, (c) agrees that the obligations of
the Guarantor hereunder shall remain in full force and effect without regard
to, and shall not be affected or impaired, without limitation, by any
invalidity, irregularity or unenforceability in whole or in part of the
Agreements or any Operative Document, or any limitation on the liability of
either Borrower thereunder, or any limitation on the method or terms of payment
thereunder which may or hereafter be caused or imposed in any manner whatsoever
(including, without limitation, usury laws), (d) waives diligence, presentment
and protest with respect to, and any notice of default or
GUARANTY AGREEMENT Page 2
<PAGE> 58
dishonor in the payment of any amount at any time payable by either Borrower
under or in connection with the Agreements or the Notes, and further waives any
requirement of notice of acceptance of, or other formality relating to, the
obligations of the Guarantor hereunder and (e) agrees that the Guaranteed
Obligations shall include any amounts paid by either Borrower to the Bank which
may be required to be returned to such Borrower or to its representative or to
a trustee, custodian or receiver for such Borrower.
4. Obligations Absolute. The obligations, covenants, agreements and
duties of the Guarantor under this Agreement shall not be released, affected or
impaired by any of the following whether or not undertaken with notice to or
consent of the Guarantor: (a) an assignment or transfer, in whole or in part,
of the Advances and/or Loans made to either Borrower or of the Agreements or
any Note although made without notice to or consent of the Guarantor, or (b)
any waiver by the Bank or by any other person, of the performance or observance
by either Borrower of any of the agreements, covenants, terms or conditions
contained in the Agreements or in the other Operative Documents, or (c) any
indulgence in or the extension of the time for payment by either Borrower of
any amounts payable under or in connection with the Agreements or any other
Operative Document, or of the time for performance by either Borrower of any
other obligations under or arising out of this Agreement or any other Loan
Document, or the extension or renewal thereof, or (d) the modification,
amendment or waiver (whether material or otherwise) of any duty, agreement or
obligation of either Borrower set forth in the Agreements or any other
Operative Documents (the modification, amendment or waiver from time to time of
the Agreements and the other Operative Documents being expressly authorized
without further notice to or consent of the Guarantor), or (e) the voluntary or
involuntary liquidation, sale or other disposition of all or substantially all
of the assets of either of either Borrower or any receivership, insolvency,
bankruptcy, reorganization, or other similar proceedings, affecting the either
of the Borrowers or any of their respective assets, or (f) the merger or
consolidation of either of the Borrowers with any other person, or (g) the
release of discharge of either Borrower from the performance or observance of
any agreement, covenant, term or condition contained in the Agreements or any
other Operative Document, by operation of law, or (h) any other cause whether
similar or dissimilar to the foregoing which would release, affect or impair
the obligations, covenants, agreements or duties of the Guarantor hereunder.
5. No Investigation by Bank. The Guarantor hereby waives
unconditionally any obligation which, in the absence of such provision, the
Bank might otherwise have to investigate or to assure that there has been
compliance with the law of any jurisdiction with respect to the Guaranteed
Obligations recognizing that, to save both time and expense, the Guarantor has
requested that the Bank not undertake such investigation. The Guarantor hereby
expressly confirms that the obligations of the Guarantor hereunder shall remain
in full force and effect without regard to compliance or noncompliance with any
such law and irrespective of any investigation or knowledge of the Bank of any
such law.
6. Indemnity. As a separate, additional and continuing obligation, the
Guarantor unconditionally and irrevocably undertakes and agrees with the Bank
that, should the Guaranteed Obligations not be recoverable from the Guarantor
under paragraph 1 hereof for any reason
GUARANTY AGREEMENT Page 3
<PAGE> 59
whatsoever (including, without limitation, by reason of any provision of this
Agreement or the Notes or any other agreement or instrument executed in
connection herewith being or becoming void, unenforceable, or otherwise invalid
under any applicable law) then, notwithstanding any knowledge thereof by the
Bank at any time, the Guarantor as sole, original and independent obligor, upon
demand by the Bank, will make payment to the Bank of the Guaranteed Obligations
by way of a full indemnity in such currency and otherwise in such manner as is
provided in this Agreement and the Notes.
7. Subordination, Subrogation, Etc. The Guarantor agrees that any
present or future indebtedness, obligations or liabilities of either of the
Borrowers to the Guarantor shall be fully subordinate and junior in right and
priority of payment to any present or future indebtedness, obligations or
liabilities of either Borrower to the Bank. The Guarantor waives any right of
subrogation to the rights of the Bank against either Borrower or any other
person obligated for payment of the Guaranteed Obligations and any right of
reimbursement or indemnity whatsoever arising or accruing out of any payment
which the Guarantor may make pursuant to this Agreement and the Notes, and any
right of recourse to security for the debts and obligations of the Borrowers,
unless and until the entire principal balance of and interest on the Guaranteed
Obligations shall have been paid in full.
8. Waiver. To the extent that he lawfully may, the Guarantor agrees
that he will not at any time insist upon or plead, or in any manner whatsoever
claim or take any benefit or advantage of any applicable present or future
stay, extension or moratorium law, which may affect observance or performance
of the provisions of this Agreement or the Notes; nor will he claim, take or
insist upon any benefit or advantage of any present or future law providing for
the evaluation or appraisal of any security for its obligations hereunder or
either of the Borrowers under the Agreements and under the Notes prior to any
sale or sales thereof which may be made under or by virtue of any instrument
governing the same; nor will it, after any such sale or sales claim or exercise
any right, under any applicable law, to redeem any portion of such security so
sold.
9. Representations and Warranties. The Guarantor represents and
warrants that (a) the execution and delivery and performance by the Guarantor
of this Guaranty does not contravene, or constitute a default under, any
provision of applicable law or regulation or of any agreement, judgment,
injunction, order, decree or other instrument binding upon the Guarantor or his
property; (b) this Guaranty constitutes a legal, valid and binding obligation
of the Guarantor, enforceable against the Guarantor in accordance with its
terms; (c) as of the date hereof, each of the following is true and correct for
the Guarantor: (i) the fair saleable value and the fair valuation of the
Guarantor's property is greater than the total amount of liabilities (including
contingent liabilities) and greater than the amount that would be required to
pay its probable aggregate liability on its existing debts as they become
absolute and matured, (ii) the Guarantor's capital is not unreasonably small in
relation to his current and/or contemplated business or other undertaken
transactions, and (iii) the Guarantor does not intend to incur, or believe that
he will incur, debt beyond his ability to pay such debts as they become due;
and (d)
GUARANTY AGREEMENT Page 4
<PAGE> 60
he owns assets in his own name with a fair market value of at least $________
net of any liabilities.
10. Amendments, Etc. This Guaranty may be amended from time to time
and any provision hereof may be waived in accordance with the requirements of
the Agreements. No such amendment or waiver of any provision of this Guaranty
nor consent to any departure by the Guarantor therefrom shall in any event be
effective unless the same shall be in writing and signed by the Bank and then
such amendment, waiver of consent shall be effective only in the specific
instance and for the specific purpose for which given.
11. Notices. All notices, demands, requests, consents and other
communications hereunder shall be in writing and made in accordance with the
Loan Agreement.
12. Conduct No Waiver; Remedies Cumulative. The obligations of the
Guarantor under this Guaranty are continuing obligations and a separate and
independent cause of action shall arise in respect of each enforcement
hereunder and default hereunder or under the Agreements. No course of dealing
on the part of the Bank, nor any delay or failure on the part of the Bank in
exercising any right, power or privilege hereunder shall operate as a waiver of
such right, power or privilege or otherwise prejudice the rights and remedies
of the Bank hereunder; nor shall any single or partial exercise thereof
preclude any further exercise thereof or the exercise of any other right, power
or privilege. No right or remedy conferred upon or reserved to the Bank under
this Guaranty is intended to be exclusive of any other right or remedy, and
every right and remedy shall be cumulative and in addition to every other right
or remedy given hereunder or now or hereafter existing under any applicable
law. Every right and remedy given by this Guaranty or by applicable law to the
Bank may be exercised from time to time and as often as may be deemed expedient
by them.
13. Reliance on and Survival of Various Provisions. All terms,
covenants, agreements, representations and warranties of the Guarantor made
herein or in any certificate or other document delivered pursuant hereto shall
be deemed to be material and to have been relied upon by the Bank,
notwithstanding any investigation heretofore or hereafter made by the Bank or
on its behalf.
14. Successors and Assign. The rights and remedies of the Bank
hereunder shall inure to the benefit of the Bank and their respective
successors and assigns, and the duties and obligations of the Guarantor
hereunder shall be binding upon the Guarantor and his successors and assigns.
15. Governing Law; Consent to Jurisdiction. This Guaranty is a
contract made under, and the rights and obligations of the parties hereunder,
shall be governed by and construed in accordance with, the laws of the State of
Michigan applicable to contracts to be made and to be performed entirely with
such State. The Guarantor further agrees that any legal action or proceeding
brought with respect to this Guaranty or the transactions contemplated hereby
may be brought in any court of the State of Michigan, or any court of the
United States of America
GUARANTY AGREEMENT Page 5
<PAGE> 61
sitting in Michigan, and the Guarantor hereby irrevocably submits to and
accepts generally and unconditionally the jurisdiction of those courts with
respect to his person and property.
16. Definitions; Headings. Terms used but not defined herein shall
have the respective meanings ascribed thereto in the Loan Agreement. The
headings of the various subdivisions hereof are for convenience of reference
only and shall in no way modify any of the terms or provisions hereof.
17. Integration; Severability; Enforceability. This Guaranty embodies
the entire agreement and understanding between the Guarantor and the Bank, and
supersedes all prior agreements and understandings, relating to the subject
matter hereof. If any one or more provisions of this Guaranty should be
invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein shall not in any
way be affected, impaired, prejudiced or disturbed thereby. If at any time any
portion of the obligations of the Guarantor under this Guaranty shall be
determined by a court of competent jurisdiction to be invalid, unenforceable or
avoidable, the remaining portion of the obligations of the Guarantor under this
Guaranty shall not in any way be affected, impaired, prejudiced or disturbed
thereby and shall remain valid and enforceable to the fullest extent permitted
by applicable law.
18. Termination. This Guaranty shall terminate when all Guaranteed
Obligations are paid in full and such payment is subject to any possibility or
revocation or recession and all Agreements and other Operative Documents have
expired or been terminated.
19. Reinstatement. This Guaranty shall remain in full force and
effect and continue to be effective in the event any petition be filed by or
against either Borrower or the Guarantor for liquidation or reorganization, in
the event either Borrower or the Guarantor becomes insolvent or makes an
assignment for the benefit of creditors or in the event a receiver or trustee
be appointed for all or any significant part of either Borrower's or the
Guarantor's assets, and shall continue to be effective or be reinstated, as the
case may be, if at any time payment and performance of the Guaranteed
Obligations, or any part thereof, is, pursuant to applicable law, rescinded or
reduced in amount, or must otherwise be restored or returned by the Bank,
whether as a "voidable preference", "fraudulent conveyance", or otherwise, all
as though such payment or performance had not been made. In the event that any
payment, or any part thereof, is rescinded, reduced, restored or returned, the
Guaranteed Obligations shall be reinstated and deemed reduced only by such
amount paid and not so rescinded, reduced, restored or returned.
20. WAIVER OF JURY TRIAL. THE BANK, IN ACCEPTING THIS GUARANTY, AND
THE GUARANTOR, AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT WITH
COUNSEL, KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT EITHER OF
THEM MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION BASED UPON OR ARISING OUT OF
THIS GUARANTY OR ANY RELATED INSTRUMENT OR AGREEMENT OR ANY OF THE TRANSACTIONS
CONTEMPLATED BY THIS GUARANTY OR ANY COURSE OF CONDUCT, DEALING, STATEMENTS
(WHETHER ORAL OR WRITTEN) OR ACTIONS OF EITHER OF THEM. NEITHER THE
GUARANTY AGREEMENT Page 6
<PAGE> 62
BANK NOR THE GUARANTOR SHALL SEEK TO CONSOLIDATE, BY COUNTERCLAIM OR OTHERWISE,
ANY SUCH ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER ACTION IN
WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THESE PROVISIONS SHALL
NOT BE DEEMED TO HAVE BEEN MODIFIED IN ANY RESPECT OR RELINQUISHED BY EITHER
THE BANK OR THE GUARANTOR EXCEPT BY A WRITTEN INSTRUMENT EXECUTED BY BOTH OF
THEM.
THIS GUARANTY IS FREELY AND VOLUNTARILY GIVEN TO THE BANK BY THE GUARANTOR
WITHOUT ANY DURESS OR COERCION, AND AFTER THE GUARANTOR HAS EITHER CONSULTED
WITH COUNSEL OR BEEN GIVEN AN OPPORTUNITY TO DO SO. THE GUARANTOR HAS
CAREFULLY AND COMPLETELY READ ALL OF THE TERMS AND PROVISIONS OF THIS GUARANTY
AND OF EACH AGREEMENT.
EXECUTED and effective as of the _____ day of ______________, 1995.
________________________________________
ALAN J. KAUFMAN
Address: _____________________________
_____________________________
_____________________________
Telecopy No.____________________________
GUARANTY AGREEMENT Page 7
<PAGE> 63
STATE OF _____)
) SS.
COUNTY OF ____)
On this ______ day of _______________, 1995, before me, a notary public in
and for said county, appeared Alan J. Kaufman to me personally known, who, by
me duly sworn, did say that he was the individual named in the within
instrument, and that said instrument was executed by him and that said
execution of said instrument was his free act and deed.
_________________________________
Notary Public, __________________
Acting in__________________County
My Commission Expires: __________
GUARANTY AGREEMENT Page 8
<PAGE> 64
EXHIBIT B
GUARANTOR'S PLEDGE AGREEMENT AND IRREVOCABLE PROXY
THIS PLEDGE AGREEMENT dated as of __________, 1995 (this "Pledge
Agreement"), is given by Alan J. Kaufman (the "Guarantor") in favor of NBD
Bank, a Michigan banking corporation (the "Bank").
RECITALS
A. AJK ENTERPRISES, INC., a Michigan corporation ("AJK"), has entered
into a Loan Agreement of even date herewith (as amended or modified from time
to time, the "Loan Agreement"), with the Bank pursuant to which the Bank may
make loans to, and issue letters of credit for the account of, AJK
B. ROYAL BUDGET PREMIUM, INC., a Michigan corporation ("Royal Budget"
and, together with AJK, the "Borrowers") has entered into a letter loan
agreement of even date herewith (as amended or modified from time to time, the
"Letter Agreement" and, together with the Loan Agreement, all present and
future promissory notes issued at any time pursuant to the Letter Agreement or
the Loan Agreement and any pledge agreements, security agreements,
reimbursement agreement and other agreements and documents executed pursuant to
the Letter Agreement or the Loan Agreement collectively referred to as the
"Agreements") with the Bank pursuant to which the Bank may make loans to Royal
Budget.
C. As a condition to the effectiveness of the obligations of the Bank
under the Agreements, the Guarantor has agreed to guarantee, among other
things, the obligations of the Borrowers in respect of the Advances, Loans and
other obligations of the Borrowers under the Agreements pursuant to a Guaranty
dated on or about the date hereof (as amended or modified from time to time,
and together with any guarantee issue and replacement therefore the
"Guarantee").
D. As security for the Guaranty and the Borrower's Indebtedness under
the Agreements, the Guarantor has agreed to pledge to the Bank, and create a
first-priority security interest to the Bank, in and to the Collateral
described herein and to execute this Pledge Agreement.
For value received and pursuant to the Agreements, the Guarantor hereby
grants a first-priority security interest to the Bank, in and to all of the
outstanding capital stock of (said shares of stock, together with any other
shares and securities from time to time receivable or otherwise distributed in
respect of or in exchange for any or all of such shares, being called the
"Pledged Stock"), to secure, (a) the prompt and complete payment of all
indebtedness and other obligations of the Borrowers, or either of them, now or
hereafter owing to the Bank under or on account of the Agreements, (b) the
performance of the Borrower's covenants under the Agreements and any monies
expended by the Bank in connection therewith, and (c) the prompt and complete
payment of all obligations and performance of all covenants of the Guarantor
now or hereafter owing to
<PAGE> 65
the Bank in connection with the Guarantee other obligations of the Borrowers
now or hereafter owing to the Bank under or on account of the Agreements, and
(d) the prompt and complete payment of all obligations and performance of all
covenants of the Borrowers under any interest rate or currency swap agreements
or similar transactions with the Bank (all of the aforesaid indebtedness,
obligations and liabilities of the Borrowers and their Subsidiaries being
herein called the "Secured Obligations", and all of the documents, agreements
and instruments among the Borrowers, their Subsidiaries, the Bank, or any of
them, evidencing or securing the repayment of, or otherwise pertaining to, the
Secured Obligations, including without limitation the Agreements, being herein
collectively called the "Operative Documents"). The Guarantor is herewith
delivering to the Bank originals of all stock certificates of the Pledged Stock
or taking such other action acceptable to the Bank to perfect the security
interest in the Pledged Stock granted hereby.
The Guarantor further represents and warrants to, and agrees with, the
Bank as follows:
1. Representations and Warranties. The Guarantor represents and
warrants that the Pledged Stock is represented by the stock certificate or
certificates or shares described on Schedule A hereto, and that such stock
certificate or certificates, accompanied by an instrument of assignment or
transfer duly executed in blank by the Guarantor as the owner named in such
stock certificate or certificates, have been delivered to the Bank by the
Guarantor. The Guarantor further represents and warrants that (a) the Pledged
Stock is duly authorized and validly issued, fully paid and nonassessable and
constitutes 100% of all of the issued and outstanding shares of the capital
stock of AJK, (b) the Guarantor is the legal and beneficial owner of the
Pledged Stock, free and clear of all Liens other than the Lien of the Bank
hereunder, with full right and power to deliver, pledge and assign the Pledged
Stock to the Bank hereunder, and (c) the pledge of the Pledged Stock pursuant
to this Pledge Agreement creates in favor of the Bank a valid and perfected
first priority security interest in the Pledged Stock enforceable against the
Guarantor and all third parties and securing the payment of the Secured
Obligations.
2. Title; Stock Rights, Dividends, Etc. The Guarantor will warrant
and defend the Bank's title to the Pledged Stock, and the security interest
herein created, against all claims of all persons, and will maintain and
preserve such security interest. It is understood and agreed that the
collateral hereunder includes any stock rights, stock dividends, liquidating
dividends, new securities, payments, distributions and proceeds (including cash
dividends and sale proceeds) and other property to which the Guarantor may
become entitled by reason of the ownership of the Pledged Stock during the
existence of this Pledge Agreement, and any such property received by the
Guarantor shall be held in trust and forthwith delivered to the Bank to be held
hereunder in accordance with the terms of this Pledge Agreement.
3. Registration Rights. If AJK at any time or from time to time
proposes to register any of its securities under the Securities Act of 1933,
the Guarantor will at each such time give
GUARANTOR'S PLEDGE AGREEMENT AND IRREVOCABLE PROXY
- 2 -
<PAGE> 66
notice to the Bank of AJK's intentions so to do. Upon the request of the Bank
given 30 days after receipt of such notice, the Guarantor will cause all
Pledged Stock of AJK to be included in the registration statement proposed to
be filed, all to the extent requisite to permit the public sale or other public
disposition of such Pledged Stock so registered by the holders thereof. The
costs and expenses of all such registrations and qualifications under said Act
shall be paid by the Guarantor or AJK, except that underwriting discounts and
commissions in respect of any Pledged Stock sold pursuant to any such
registration statement shall be borne by the sellers thereof. As expeditiously
as possible after the effective date of any such registration statement, the
Guarantor will deliver in exchange for any certificates representing shares of
Pledged Stock so registered pursuant to such registration, which bear any
restrictive legend, new Pledged Stock certificates not bearing such legend or
any similar legend. In the event of any such registration, the Guarantor
hereby agrees to indemnify and hold harmless the Bank as pledgee of the Pledged
Stock against any losses, claims, damages or liabilities to which the Bank may
become subject to the extent that such losses, claims, damages or liabilities
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in any such registration statement, and any
preliminary prospectus or filed prospectus, or in any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and will reimburse the Bank for any
legal or other expenses reasonably incurred by the Bank in connection with
investigating or defending any such loss, claim, damage or liability. The
indemnifications contained in this paragraph shall include each person, if any,
who controls the Bank.
4. Events of Default; Remedies. (a) Upon the occurrence of any Event
of Default under either of the Agreements, an Event of Default shall be deemed
to have occurred hereunder and the Bank shall have all of the rights and
remedies provided by law and/or by this Pledge Agreement, including but not
limited to all of the rights and remedies of a secured party under the Michigan
Uniform Commercial Code, and the Guarantor hereby authorizes the Bank to sell
all or any part of the Pledged Stock at public or private sale and to apply the
proceeds of such sale to the costs and expenses thereof (including the
reasonable attorneys' fees and disbursements incurred by the Bank) and then to
the payment of the other Secured Obligations. Any requirement of reasonable
notice shall be met if the Bank sends such notice to the Guarantor, by
registered or certified mail, at least 5 days prior to the date of sale,
disposition or other event giving rise to the required notice. The Bank may be
the purchaser at any such sale. The Guarantor expressly authorizes such sale
or sales of the Pledged Stock in advance of and to the exclusion of any sale or
sales of or other realization upon any other collateral securing indebtedness
or other obligations owed to the Bank. The Bank shall be under no obligation
to preserve rights against prior parties.
(b) The Guarantor hereby waives as to the Bank any right of subrogation
or marshalling of such stock and other collateral for indebtedness or other
obligations owed to the
GUARANTOR'S PLEDGE AGREEMENT AND IRREVOCABLE PROXY
- 3 -
<PAGE> 67
Bank. To this end, the Guarantor hereby expressly agrees that any such
collateral or other security of the Guarantor or any other party which the Bank
may hold, or which may come to its possession, may be dealt with in all
respects and particulars as though this Pledge Agreement were not in existence.
The Guarantor agrees and acknowledges that because of applicable securities
laws, the Bank may not be able to effect a public sale of the Pledged Stock and
sales at a private sale may be on terms less favorable than if such securities
were sold at a public sale and may be at a price less favorable than a public
sale. The Guarantor agrees that all such private sales made under the
foregoing circumstances shall be deemed to have been made in a commercially
reasonable manner.
(c) The Guarantor irrevocably designates, makes, constitutes and
appoints the Bank (and all persons designated by the Bank) as its true and
lawful attorney (and agent-in-fact) and the Bank, or the Bank's agent, may,
upon and after an Event of Default hereunder which has not been waived, with
notice to the Guarantor if the Secured Obligations have not been accelerated
and without notice if the Secured Obligations have been accelerated, take any
action as the Bank reasonably deems necessary under the circumstances to
enforce or otherwise take action in respect to the Pledged Stock as required
hereby, or to carry out any other obligation or duty of the Guarantor under
this Pledge Agreement. The Guarantor shall pay all reasonable fees and
expenses, including reasonable attorneys' fees and expenses, incurred by the
Bank in connection with such action.
5. Additional Remedies; Irrevocable Proxy. (a) Upon the occurrence
of any Event of Default, the Bank shall have also the right to vote the Pledged
Stock on all questions after giving notice to the Guarantor of its election to
exercise such rights. In the absence of any such Event of Default, the
Guarantor shall have the right to vote the Pledged Stock on all questions,
provided that voting by the Guarantor of the Pledged Stock shall be in
conformity with performance of the obligations of the Guarantor under the
Operative Documents.
(b) Whenever an Event of Default has occurred, the Bank may
transfer into its name, or into the name of its nominee or nominees, any or
all of the Pledged Stock and, as provided above, may vote any or all of the
Pledged Stock (whether or not so transferred) and may otherwise act with
respect thereto as though it were the outright owner thereof, the Guarantor
hereby irrevocably constituting and appointing the Bank as the proxy and
attorney-in-fact of the Guarantor, with full power of substitution, to do so.
(c) In furtherance of the foregoing, it is acknowledged that the
Bank may vote the Pledged Stock to remove the directors and officers of AJK,
and to elect new directors and officers of AJK, who thereafter shall manage the
affairs of AJK, operate its properties and carry on its business and otherwise
take any action with respect to the business, properties and affairs of AJK
which such new directors shall deem necessary or appropriate, including, but
not limited to, the maintenance, repair, renewal or alteration of any or all of
the properties of AJK, the
GUARANTOR'S PLEDGE AGREEMENT AND IRREVOCABLE PROXY
- 4 -
<PAGE> 68
leasing, subleasing, sale or other disposition of any or all of such
properties, the borrowing of money on the credit of AJK, and the employment of
attorneys, agents or other employees deemed by such new directors to be
necessary for the proper operation, conduct, winding up or liquidation of the
business, properties and affairs of AJK, and all revenues from the operation,
conduct, winding up or liquidation of the business, properties and affairs of
AJK after the payment of expenses thereof shall be applied to the payment of
the Secured Obligations.
(d) The Guarantor agrees that the proxy granted in this paragraph
5 is coupled with an interest and is and shall be both valid and irrevocable
so long as the Pledged Stock is subject to this Pledge Agreement. The Guarantor
further acknowledges that the term of said proxy may exceed three years from
the date hereof.
6. Remedies Cumulative. No right or remedy conferred upon or
reserved to the Bank under any Operative Document is intended to be exclusive
of any other right or remedy, and every right and remedy shall be cumulative in
addition to every other right or remedy given hereunder or now or hereafter
existing under any applicable law. Every right and remedy of the Bank under
any Operative Document or under applicable law may be exercised from time to
time and as often as may be deemed expedient by the Bank. To the extent that
he lawfully may, the Guarantor agrees that he will not at any time insist upon,
plead, or in any manner whatever claim or take any benefit or advantage of any
applicable present or future stay, extension or moratorium law, which may
affect observance or performance of any provisions of any Operative Document;
nor will he claim, take or insist upon any benefit or advantage of any present
or future law providing for the valuation or appraisal of any security for its
obligations under any Operative Document prior to any sale or sales thereof
which may be made under or by virtue of any instrument governing the same; nor
will he, after any such sale or sales, claim or exercise any right, under any
applicable law to redeem any portion of such security so sold.
7. Conduct No Waiver. No waiver of default shall be effective unless
in writing executed by the Bank and waiver of any default or forbearance on the
part of the Bank in enforcing any of its rights under this Pledge Agreement
shall not operate as a waiver of any other default or of the same default on a
future occasion or of such right.
8. Governing Law; Definitions. This Pledge Agreement is a contract
made under, and shall be governed by and construed in accordance with, the law
of the State of Michigan applicable to contracts made and to be performed
entirely within such State and without giving effect to choice of law
principles of such State. The Guarantor agrees that any legal action or
proceeding with respect to this Pledge Agreement or the transactions
contemplated hereby may be brought in any court of the State of Michigan, or in
any court of the United States of America sitting in Michigan, and the
Guarantor hereby submits to and accepts generally and unconditionally the
jurisdiction of those courts with respect to his person and property, and
irrevocably appoints the Chief Financial Officer of AJK, at AJK's address set
forth in the Loan
GUARANTOR'S PLEDGE AGREEMENT AND IRREVOCABLE PROXY
- 5 -
<PAGE> 69
Agreement, as its agent for service of process and irrevocably consents to the
service of process in connection with any such action or proceeding by personal
delivery to such agent or to the Guarantor or by the mailing thereof by
registered or certified mail, postage prepaid to the Guarantor at this address.
Nothing in this paragraph shall affect the right of the Bank to serve process
in any other manner permitted by law or limit the right of the Bank to bring
any such action or proceeding against the Guarantor or his property in the
courts of any other jurisdiction. The Guarantor hereby irrevocably waives any
objection to the laying of venue of any such suit or proceeding in the above
described courts. Terms used but not defined herein shall have the respective
meanings ascribed thereto in the Agreements, in the case of any conflict
between the two Agreements, however, the Loan Agreement shall control. Unless
otherwise defined herein or in the Agreements, terms used in Article 9 of the
Uniform Commercial Code in the State of Michigan are used herein as therein
defined on the date hereof. The headings of the various subdivisions hereof
are for convenience of reference only and shall in no way modify any of the
terms or provisions hereof.
9. Notices. All notices, demands, requests, consents and other
communications hereunder shall be delivered in the manner described in the Loan
Agreement.
10. Rights Not Construed as Duties. The Bank neither assumes nor shall
it have any duty of performance or other responsibility under any contracts in
which the Bank has or obtains a security interest hereunder. If the Guarantor
fails to perform any agreement contained herein, the Bank may but is in no way
obligated to itself perform, or cause performance of, such agreement, and the
reasonable expenses of the Bank incurred in connection therewith shall be
payable by the Guarantor under paragraph 13. The powers conferred on the Bank
hereunder are solely to protect its interests in the Pledged Stock and shall
not impose any duty upon it to exercise any such powers. Except for the safe
custody of any Pledged Stock in its possession and accounting for monies
actually received by it hereunder, the Bank shall have no duty as to any
Pledged Stock or as to the taking of any necessary steps to preserve rights
against prior parties or any other rights pertaining to any Pledged Stock.
11. Amendments. None of the terms and provisions of this Pledge
Agreement may be modified or amended in any way except by an instrument in
writing executed by each of the parties hereto.
12. Severability. If any one or more provisions of this Pledge
Agreement should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected, impaired or prejudiced thereby.
13. Expenses. (a) The Guarantor agrees to indemnify the Bank from and
against any and all claims, losses and liabilities growing out of or resulting
from this Pledge Agreement
GUARANTOR'S PLEDGE AGREEMENT AND IRREVOCABLE PROXY
- 6 -
<PAGE> 70
(including, without limitation, enforcement of this Pledge Agreement), except
claims, losses or liabilities resulting from the Bank's gross negligence or
willful misconduct.
(b) The Guarantor will, upon demand, pay to the Bank an amount of
any and all reasonable expenses, including the reasonable fees and
disbursements of its counsel and of any experts and agents, which the Bank may
incur in connection with (i) the administration of this Pledge Agreement, (ii)
the custody, preservation, use or operation of, or the sale of, collection from
or other realization upon, any of the Pledged Stock, (iii) the exercise or
enforcement of any of the rights of the Bank hereunder or under the Operative
Documents, or (iv) the failure of the Guarantor to perform or observe any of
the provisions hereof.
14. Successors and Assigns; Termination. This Pledge Agreement shall
create a continuing security interest in the Pledged Stock and shall be binding
upon the Guarantor, his successors and assigns, and inure, together with the
rights and remedies of the Bank hereunder, to the benefit of the Bank and its
successors, transferee and assigns. Upon the payment in full in immediately
available funds of all of the Secured Obligations and the termination of all
commitments to lend under the Operative Documents, the security interest
granted hereunder shall terminate and upon such termination the Bank shall
assign, transfer and deliver without recourse and without warranty the Pledged
Stock to the Guarantor (and any property received in respect thereof) as has
not theretofore been sold or otherwise applied pursuant to the provisions of
this Pledge Agreement.
15. Waiver of Jury Trial. The Bank, in accepting this Pledge
Agreement, and the Guarantor, after consulting or having had the opportunity to
consult with counsel, knowingly, voluntarily and intentionally waive any right
either of them may have to a trial by jury in any litigation based upon or
arising out of this Pledge Agreement or any related instrument or agreement or
any of the transactions contemplated by this Pledge Agreement or any course of
conduct, dealing, statements (whether oral or written) or actions of any of
them. Neither the Bank nor the Guarantor shall seek to consolidate, by
counterclaim or otherwise, any such action in which a jury trial has been
waived with any other action in which a jury trial cannot be or has not been
waived. These provisions shall not be deemed to have been modified in any
respect or relinquished by the Bank or the Guarantor except by a written
instrument executed by both of them.
IN WITNESS WHEREOF, the Guarantor has caused this Pledge Agreement to
be duly executed as of the day and year first above written.
________________________________
Alan J. Kaufman
GUARANTOR'S PLEDGE AGREEMENT AND IRREVOCABLE PROXY
- 7 -
<PAGE> 71
Accepted and Agreed:
NBD BANK
By: ________________________________
Its: _____________________________
GUARANTOR'S PLEDGE AGREEMENT AND IRREVOCABLE PROXY
- 8 -
<PAGE> 72
SCHEDULE 1
<TABLE>
<CAPTION>
Percentage
Jurisdiction Number of Number of Stock of total
of Issued Stock Ownership shares of Percentage
Incorporation Shares Certificates Owned By AJK Owned
------------- --------- ------------ --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Alan J. 100% 100%
Kaufman
</TABLE>
GUARANTOR'S PLEDGE AGREEMENT AND IRREVOCABLE PROXY
- 9 -
<PAGE> 73
EXHIBIT C
REVOLVING CREDIT NOTE
$15,000,000 ______________ __, 1995
Detroit, Michigan
FOR VALUE RECEIVED, AJK ENTERPRISES, INC., a Michigan
corporation (the "Company"), hereby unconditionally promises to pay to the
order of NBD Bank, a Michigan banking corporation (the "Bank"), at the
principal banking office of the Bank in lawful money of the United States of
America and in immediately available funds, the principal sum of Fifteen
Million Dollars ($15,000,000), or such lesser amount as is recorded on the
schedule attached hereto, or in the books and records of the Bank, on the
Termination Date; and to pay interest on the unpaid principal balance hereof
from time to time outstanding, in like money and funds, for the period from the
date hereof until the Revolving Credit Loans evidenced hereby shall be paid in
full, at the rates per annum and on the dates provided in the Loan Agreement
referred to below.
The Bank is hereby authorized by the Company to record on the
schedule attached to this Revolving Credit Note, or on its books and records,
the date, amount and type of each Revolving Credit Loan, the duration of the
related Interest Period (if applicable), the amount of each payment or
prepayment of principal thereon and the other information provided for on such
schedule, which schedule or such books and records, as the case may be, shall
constitute prima facie evidence of the information so recorded, provided,
however, that any failure by the Bank to record any such information shall not
relieve the Company of its obligation to repay the outstanding principal amount
of such Revolving Credit Loans, all accrued interest thereon and any amount
payable with respect thereto in accordance with the terms of this Revolving
Credit Note and the Loan Agreement.
The Company and each endorser or guarantor hereof waives
demand, presentment, protest, diligence, notice of dishonor and any other
formality in connection with this Revolving Credit Note. Should the
indebtedness evidenced by this Revolving Credit Note or any part thereof be
collected in any proceeding or be placed in the hands of attorneys for
collection, the Company agrees to pay, in addition to the principal, interest
and other sums due and payable hereon, all costs of collecting this Revolving
Credit Note, including attorneys' fees and expenses.
This Revolving Credit Note evidences one or more Revolving
Credit Loans made under a Loan Agreement of even date herewith (as amended or
modified from time to time, the
REVOLVING CREDIT NOTE PAGE 1
<PAGE> 74
"Loan Agreement"), by and between the Company and the Bank to which reference
is hereby made for a statement of the circumstances under which this Revolving
Credit Note is subject to prepayment and under which its due date may be
accelerated and for a description of the collateral and security securing this
Revolving Credit Note. Capitalized terms used but not defined in this
Revolving Credit Note shall have the respective meanings assigned to them in
the Loan Agreement.
This Revolving Credit Note is made under, and shall be
governed by and construed in accordance with, the laws of the State of Michigan
in the same manner applicable to contracts made and to be performed entirely
within such State and without giving effect to choice of law principles of such
State.
AJK ENTERPRISES, INC.
By:__________________________________
Its:_________________________________
REVOLVING CREDIT NOTE Page 2
<PAGE> 75
Schedule to Revolving Credit Note, dated
_____________ ___, 1995, made by AJK Enterprises, Inc.
in favor of NBD Bank
<TABLE>
<CAPTION>
Principal
Amount
Trans- Principal Type Interest Paid, Pre- Principal
action Amount of of Interest Period (if paid or Balance Notation
Date Loan Loan* Rate applicable) Converted Outstanding Made by
------- --------- ---- -------- ----------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
_________________________
* E - Eurodollar Rate
F - Floating Rate
N - Negotiated Rate
REVOLVING CREDIT NOTE Page 3
<PAGE> 76
EXHIBIT D
SUBORDINATION AGREEMENT
LILLIAN KAUFMAN (the "Junior Creditor"), AJK ENTERPRISES, INC. (the
"Borrower") and NBD BANK (the "Bank") agree as follows:
1. As used herein, the following terms shall have the
following respective meanings:
"Lien" shall mean any security interest, mortgage, pledge,
claim, lien or other encumbrance.
"Senior Debt" shall mean any and all indebtedness,
obligations and liabilities of the Borrower or any of its Subsidiaries to the
Bank, whether direct or indirect, absolute or contingent, secured or unsecured,
now existing or hereafter arising, due or to become due, and howsoever
evidenced, together with any renewals or expansions or increases thereof,
including without limitation all reimbursement obligations pursuant to any
letters of credit, all amounts accruing after the filing of any petition in
bankruptcy or similar laws, whether or not such any amount is an allowable
claim, all guaranties for any of the foregoing and all rights and remedies of
the Bank with respect thereto, and further including without limitation, all
future and present indebtedness, obligations and liabilities owing by the
Borrower to the Bank pursuant to the Loan Agreement dated as of _____________,
1995 (as amended or modified from time to time the "Loan Agreement") between
the Borrower and the Bank and all documents and instruments executed in
connection therewith.
"Subordinated Debt" shall mean any and all indebtedness,
obligations and liabilities of the Borrower or any of its Subsidiaries to the
Junior Creditor, whether direct or indirect, absolute or contingent, secured or
unsecured, now existing or hereafter arising, due or to become due, and
howsoever evidenced, together with any renewals or increases in the amount
thereof, all guaranties for any of the foregoing and all rights and remedies of
the Junior Creditor with respect thereto.
2. All Subordinated Debt shall be subordinate and junior in
right of payment and all other respects to all Senior Debt, in the manner
hereinafter set forth. No payment of all or any part of the Subordinated Debt,
whether in cash or other property, by setoff, realizing upon collateral or
otherwise, and whether directly or indirectly, or the exercising of any rights
or remedies by the Junior Creditor, shall be made, exercised, given or
received, unless and until the Senior Debt shall have been paid in full, except
that the Junior Creditor may receive accrued interest payments and scheduled
principal payments when due on the Subordinated Note in the form attached
hereto, with giving effect to any amendment or modification or acceleration of
the Subordinated Note or any other agreement or documents relating to the
Subordinating Debt, and without giving effect to any default or overdue
interest rate or other change in the interest rate (the "Scheduled Payments"),
and the Junior Creditor agrees that it may not receive any other payment;
provided, however, that the Scheduled Payments (whether in cash or property, by
setoff
<PAGE> 77
realizing upon collateral otherwise, and whether directly or indirectly) also
may not be made if (a) there is any event of default or other default
(including without limitation in any Event of Default or Default under the Loan
Agreement) in connection with any Senior Debt, (b) there is any event which
might become such an event of default or other default after the lapse of time
or the giving of notice or both or (c) such payment would cause any such event
described in the foregoing clauses (a) or (b). For purposes of this Agreement,
the Senior Debt shall not be deemed to have been paid in full until all Senior
Debt has been irrevocably paid in full in immediately available funds and all
credit facilities and letters of credit have expired or been terminated. If for
any reason the Junior Creditor receives any payment on account of the
Subordinated Debt contrary to the terms of this Agreement, such payments will
be held by the Junior Creditor in trust for the Bank and will be immediately
turned over to the Bank to be credited against the Senior Debt.
3. In the event of any bankruptcy, insolvency, liquidation,
arrangement, reorganization, receivership or similar proceedings or upon an
assignment for the benefit of creditors or any other marshalling of the assets
and liabilities of the Borrower or any of its Subsidiaries or otherwise, any
payment or distribution of any kind (whether in cash, securities or other
property) which otherwise would be payable or deliverable with respect to the
Subordinated Debt shall be paid or delivered directly to the Bank, for
application to the Senior Debt until the Senior Debt shall have been paid in
full. The Bank shall have the full power to act in the place of the Junior
Creditor, including the right to make, present, file and vote proofs of claim
against the Borrower or any guarantor on account of any part of the
Subordinated Debt as the Bank may deem advisable, including without limitation
to vote claims comprising the Subordinated Debt to accept and reject any plan
of partial or complete liquidation, reorganization, arrangement, composition or
extension and to receive and collect any and all dividends, distributions or
other payments made on the Subordinated Debt and to apply such funds to the
balance due on the Senior Debt.
4. The Junior Creditor and the Borrower each hereby represents
and warrants to the Bank that: (a) attached hereto as Schedule A is a true,
correct and complete copy of all instruments presently evidencing the
Subordinated Debt (the "Subordinated Note"), and the sole original of the
Subordinated Note has been conspicuously imprinted with legend required by
paragraph 4(c) hereof, all other documents, agreements or instruments
evidencing, securing or relating in any way to the Subordinated Debt are
attached hereto as Schedule B (all such documents, agreements and instruments,
together with the Subordinated Note, collectively referred to herein as the
"Subordinated Debt Documents"), and there are no other documents, agreements or
instruments evidencing, securing or relating in any way to the Subordinated
Debt other than those attached hereto as Schedules A and B; (b) as of the date
hereof, the total principal balance of the Subordinated Note is $_______, there
is no accrued interest thereon and all Subordinated Debt is owed solely by the
Borrower; (c) the following shall be conspicuously imprinted on the
Subordinated Note: "rights of the holder of this instrument to receive payment
hereunder and other rights of the holder of this instrument are subject and
subordinate to the prior payment of all indebtedness, obligations and
liabilities of the maker of this instrument to NBD Bank pursuant
SUBORDINATION AGREEMENT Page 2
<PAGE> 78
to the terms of a Subordination Agreement among NBD Bank, the payee of this
instrument and the maker of this instrument"; (d) no security or collateral of
any kind has been taken by the Junior Creditor to secure any of the
Subordinated Debt, whether from the Borrower, any of its Subsidiaries or
otherwise, and there are no Liens on or with respect to any of the Borrower's
or any of its Subsidiary's assets to secure any part of the Subordinated Debt,
and any such Lien shall null and void; (e) the Junior Creditor has not relied
and will not rely on any representation or information of any nature made by or
received from the Bank relative to the Borrower or any of its Subsidiaries in
deciding to execute this Agreement or to permit it to continue in effect; (f)
the Junior Creditor will be the lawful owner of all future Subordinated Debt,
and no part thereof will be subject to any defense, offset or counterclaim; (g)
the Junior Creditor has not heretofore assigned or transferred any of the
Subordinated Debt, any interest therein or any other rights pertaining thereto;
(h) the Junior Creditor has not heretofore given any subordination in respect
of the Subordinated Debt; and (i) this Agreement constitutes the legal, valid
and binding obligation of each of them, enforceable against each in accordance
with its terms.
5. Until all of the Senior Debt has been paid in full, unless
otherwise consented to by the Bank in writing: (a) the Junior Creditor will
not ask, demand, sue for, take or receive from the Borrower or any of its
Subsidiaries, whether directly or indirectly, by way of setoff or in any other
manner, all or any part of the Subordinated Debt or otherwise enforce any of
its rights or remedies in connection with the Subordinated Debt, including
without limitation with respect to any collateral or guaranty therefor, and the
Borrower agrees not to make, and not to allow any of its Subsidiaries to make,
any payment on the Subordinated Debt, whether directly or indirectly or in any
other manner, except as expressly permitted by paragraph 2 hereof; (b) the
Junior Creditor and the Borrower shall not (and the Borrower shall not permit
any of its Subsidiaries to) assign, transfer, hypothecate or modify, terminate,
amend or supplement, or consent to any cancellation, modification, termination,
amendment or supplement of, any Subordinated Debt Document or any of the other
terms of the Subordinated Debt, provided that the Junior Creditor may assign
the Subordinated Debt to her children or to a trust controlled by her,
provided, further, that such children or trust agree in witing to be bound by
all of the terms and provisions of this Agreement prior to any such assignment
and no further assignment shall be permitted; (c) the Junior Creditor shall not
hereafter give any subordination in respect to the Subordinated Debt or convert
any or all of the Subordinated Debt to capital stock or other securities of the
Borrower or any of its Subsidiaries, including without limitation any
securities exchangeable for or convertible into capital stock or any warrants,
rights or other options to purchase or otherwise acquire capital stock or such
securities of the Borrower or any of its Subsidiaries; (d) the Borrower will
not hereafter (and the Borrower shall not permit any of its Subsidiaries to)
issue any instrument, agreement or other writing evidencing or securing any
part of the Subordinated Debt or allow any Liens on or with respect to any of
its assets to secure any part of the Subordinated Debt, and the Junior Creditor
will not receive any such instrument, security or other writing or any such
Liens, and any such instrument, security or other writing and any such Lien
shall be null and void; (e) the Junior Creditor will not commence or join with
any other creditors of the Borrower or any of its Subsidiaries in commencing
any bankruptcy, reorganization, receivership or insolvency proceeding against
the Borrower or any of its
SUBORDINATION AGREEMENT Page 3
<PAGE> 79
Subsidiaries; (f) the Junior Creditor and the Borrower shall give the Bank
prompt notice of any default under the Subordinated Debt, and any such default
shall be an event of default under the Senior Debt; and (g) neither the
Borrower nor the Junior Creditor otherwise shall take or permit any action
prejudicial to or inconsistent with the Bank's priority position over the
Junior Creditor that is created by this Agreement.
6. This Agreement shall constitute a continuing agreement of
subordination which shall remain in effect until such time as the Senior Debt
is paid in full. The rights granted to the Bank in this Agreement are solely
for its protection and nothing herein contained imposes on the Bank any duties
with respect to any property of the Borrower or the Junior Creditor heretofore
or hereafter received by the Bank except for return of the Subordinated Note.
The Junior Creditor and the Borrower shall execute and deliver to the Bank such
further documents, agreements and instruments and shall take such further
action as the Bank may at any time or times reasonably request in order to
carry out the provisions and intent of this Agreement. The Junior Creditor and
the Borrower agree to jointly and severally pay to the Bank on demand all costs
and expenses of every kind, including without limitation all reasonable
attorneys' fees, that the Bank may incur in enforcing any of its rights under
this Agreement.
7. Without notice to or the consent of the Junior Creditor,
the Bank may, at any time and from time to time and without impairing or
releasing the subordination herein made, do any one or more of the following:
(a) change the manner, place or terms of payment, or change or extend the time
of payment, of the Senior Debt, or amend or supplement in any manner the
documentation evidencing, securing or relating to the Senior Debt, or increase
without limit the amount of the Senior Debt; (b) release any person liable in
any manner for the payment or collection of the Senior Debt; (c) exercise or
refrain from exercising any rights with respect to the Senior Debt against the
Borrower, any of its Subsidiaries, any guarantor of the Senior Debt or any
other person; (d) apply any monies or other property paid by any person or
otherwise available to the Senior Debt; (e) accept or release, or fail to
perfect an interest in, any collateral or security for the Senior Debt; or (f)
take or omit to take any other action with respect to the Senior Debt which may
impair or adversely affect the subordination herein made.
8. This Agreement shall be binding upon the Borrower and the
Junior Creditor and their successors and assigns and shall inure to the benefit
of the Bank and its successors and assigns. The Borrower and the Junior
Creditor are entering into this Agreement in consideration of advances and
other financial accommodations made and/or to be made by the Bank to the
Borrower. This Agreement constitutes the entire understanding among the
Borrower, the Junior Creditor and the Bank regarding the subject matter
provided for in this Agreement. This Agreement may only be modified by writing
signed by the Borrower, the Junior Creditor and the Bank. This Agreement shall
be governed by and construed in accordance with the laws of the State of
Michigan, without giving effect to choice of law principles of such State.
9. The Junior Creditor, the Borrower and the Bank, after
consulting or having had the opportunity to consult with counsel, each
knowingly, voluntarily, and intentionally waive any
SUBORDINATION AGREEMENT Page 4
<PAGE> 80
right any of them may have to a trial by jury in any litigation based upon or
arising out of this Agreement or any related instrument or agreement or any of
the transactions contemplated by this Agreement or any course of conduct,
dealing, statements (whether oral or written), or actions of any of them.
Neither the Junior Creditor, the Borrower nor the Bank shall seek to
consolidate, by counterclaim or otherwise, any such action in which a jury
trial has been waived with any other action in which a jury trial cannot be or
has not been waived. This Agreement is freely and voluntarily entered into by
the Junior Creditor and the Borrower without any duress or coercion, and after
the Junior Creditor and the Borrower have either consulted with counsel or been
given the opportunity to do so, and the Junior Creditor and the Borrower have
carefully and completely read all of the terms and provisions hereof.
WITNESS the due execution of this Agreement as of ___________, 1995.
_____________________________ NBD BANK
LILLIAN KAUFMAN
By:___________________________
Its:____________________
AJK ENTERPRISES, INC.
By:__________________________
Its:_____________________
SUBORDINATION AGREEMENT Page 5
<PAGE> 81
SCHEDULE A
Copy of Subordinated Note
SUBORDINATION AGREEMENT Page 6
<PAGE> 82
SCHEDULE B
Copy of all Subordinated Debt Documents
SUBORDINATION AGREEMENT Page 7
<PAGE> 83
EXHIBIT E
TERM NOTE
$5,000,000 __________ __, 1995
Detroit, Michigan
FOR VALUE RECEIVED, AJK ENTERPRISES, INC., a Michigan corporation
(the "Company"), hereby unconditionally promises to pay to the order of NBD
Bank, a Michigan banking corporation (the "Bank"), at the principal banking
office of the Bank in lawful money of the United States of America and in
immediately available funds, the principal sum of Five Million Dollars
($5,000,000), or such lesser amount as is recorded on the schedule attached
hereto or in the books and records of the Bank in 20 equal quarterly
installments in the amount of $250,000 payable on the last Business Day of each
March, June September and December commencing on the last Business Day of
December, 1995 to and including the Maturity Date when the entire outstanding
principal amount of the Term Loan evidenced hereby, and all accrued interest
thereon, shall be due and payable; and to pay interest on the unpaid principal
balance hereof from time to time outstanding, in like money and funds, for the
period from the date hereof until the Term Loan evidenced hereby shall be paid
in full, at the rates per annum and on the dates provided in the Loan Agreement
referred to below
The Bank is hereby authorized by the Company to record on the
schedule attached to this Term Note, or on its books and records, the date and
the amount of the Term Loan, the applicable interest rate and type and the
duration of the related Interest Period (if applicable), the amount of each
payment or prepayment of principal thereon, and the other information provided
for on such schedule, which schedule or such books and records, as the case may
be, shall constitute prime facie evidence of the information so recorded,
provided, however, that any failure by the Bank to record any such notation
shall not relieve the Company of its obligation to repay the outstanding
principal amount of this Term Loan, all accrued interest hereon and any amount
payable with respect hereto in accordance with the terms of this Term Note and
the Loan Agreement.
The Company and each endorser or guarantor hereof waives
presentment, protest, notice of dishonor and any other formality in connection
with this Term Note. Should the indebtedness evidenced by this Term Note or
any part thereof be collected in any proceeding or be placed in the hands of
attorneys for collecting, the Company agrees to pay, in addition to the
principal, interest and other sums due and payable hereon, all costs of
collection this Term Note, including attorneys' fees and expenses.
This Term Note evidences a Term Loan made under a Loan Agreement
of even date herewith (as amended or modified from time to time, the "Loan
Agreement"), by and between the Company and the Bank, to which reference is
hereby a statement of the circumstances under which this Term Note is subject
to prepayment which its due date may be accelerated and a description of the
collateral and security securing this Term Note. Capitalized terms used but
not
<PAGE> 84
not defined in this Term Note shall have the respective meanings assigned to
them in the Loan Agreement.
This Term Note is made under, and shall be governed by and
construed in accordance with, the laws of the State of Michigan in the same
manner applicable to contracts made and to be performed entirely within such
State and without giving effect to choice to law principles of such State.
AJK ENTERPRISES, INC.
By:_______________________________
Its:__________________________
TERM NOTE
2
<PAGE> 85
Schedule to Term Note dated _________ ___, 1995
made by AJK Enterprises, Inc.
in favor of NBD Bank
<TABLE>
<CAPTION>
Principal Principal Principal
Transaction Amount of Type of Applicable Interest Amount Paid Balance Notation
Date Loan Loan* Interest Rate Period or Prepaid Outstanding Made By
----------- ---------- ------- ------------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
_______________________
* E - Eurodollar Rate
F - Floating Rate
N - Negotiated Rate
TERM NOTE
3
<PAGE> 86
EXHIBIT F
REQUEST FOR ADVANCE
NBD Bank
611 Woodward Avenue
Detroit, Michigan 48226
Attention: Michigan Bank Division
AJK Enterprises, Inc., a Michigan corporation (the "Company") hereby
requests a [insert Revolving Credit Loan, Term Loan or Letter of Credit
Advance] pursuant to Section 2.4 of the Loan Agreement, dated as of __________
__, 1995 (as amended or modified from time to time, the "Loan Agreement"),
between the Company and you (the "Bank").
[A [Term] [Revolving Credit] Loan is requested to be made in the amount
of $_________, to be made on ____________, 19__ and evidenced by the Company's
Revolving Credit Note or Term Note, as the case may be. Such Loan shall be a
[insert Eurodollar Rate Loan, Negotiated Rate Loan, or Floating Rate Loan] and
the initial Interest Period, if such requested Loan is a Eurodollar Rate Loan
or a Negotiated Rate Loan, shall be [insert permitted Interest Period].]
[Such Letter of Credit Advance shall be made by the issuance by the
Bank of its Letter of Credit for the account of the Company in the maximum
stated amount of $____________ to and for the benefit of __________________
with a stated expiry date of __________________ 199__, and containing the
further terms and conditions set forth in the attached letter of credit
application to the Bank.]
In support of this request, the Company hereby represents and warrants
to the Bank that:
1. The representations and warranties contained in Article IV of the
Loan Agreement and in the Security Documents are true and correct in all
material respects on and as of the date hereof, and will be true and correct in
all material respects on the date such Advance is made (both before and after
such Advance is made), as if such representations and warranties were made on
and as of such dates.
2. No Event of Default or Default has occurred and is continuing or
will exist on the date such Advance is made and such Advance shall not cause an
Event of Default or Default.
Acceptance of the proceeds of such Advance by the Company shall be
deemed to be a further representation and warranty that the representations and
warranties made herein are true and correct in all material respects at the
time such proceeds are disbursed.
<PAGE> 87
Capitalized terms used but not defined herein shall have the respective
meanings assigned to them in the Loan Agreement.
AJK ENTERPRISES, INC.
By:_________________________
Its: ______________________
Dated: ________________, 19___
REQUEST FOR ADVANCE
-2-
<PAGE> 88
EXHIBIT G
REQUEST FOR CONTINUATION OR
CONVERSION OF LOAN
[Date]
NBD Bank
611 Woodward Avenue
Detroit, Michigan 48226
Attention: Michigan Banking Division
AJK Enterprises, Inc., a Michigan corporation (the "Company"),
hereby requests that $____________ of the principal amount of the [Revolving
Credit][Term] Loan originally made on ____________, 1995, which [Revolving
Credit][Term] Loan is currently a [insert type of Loan], be continued as or
converted to, as the case may be, a [insert type of Loan requested] on
______________, 19__. If such Loan is requested to be converted to a
[Eurodollar Rate Loan][Negotiated Rate Loan], the Company hereby elects an
Interest Period for such Loan of [insert permitted Interest Period].
In support of this request, the Company hereby represents and
warrants to the Bank that:
1. The representations and warranties contained in
Article IV of the Loan Agreement and in the Security Documents are true and
correct in all material respects on and as of the date hereof, and will be true
and correct in all material respects on the date such Loan is
[continued][converted] (both before and after such Loan is
[continued][converted]), as if such representations and warranties were made on
and as of such dates.
2. No Event of Default or Default has occurred and is
continuing or will exist on the date such Loan is [continued[converted]
(whether before or after such Loan is [continued][converted]).
Acceptance of the proceeds of such [continued][converted] Loan by the Company
shall be deemed to be a further representation and warranty that the
representations and warranties made herein are true and correct in all material
respects at the time of such [continuation] [conversion].
<PAGE> 89
Capitalized terms used but not defined herein shall have the
respective meanings assigned to them in the Loan Agreement, dated as of
_____________ ___, 1995 between the Company and you.
AJK ENTERPRISES, INC.
By: __________________________________
Its: _______________________________
REQUEST FOR CONTINUATION OR
CONVERSION OF LOAN
- 2 -
<PAGE> 90
EXHIBIT 17(A)(2)
SUBORDINATED NOTE
$4,000,000.00 _________________, 1995
Farmington Hills, Michigan
For value received, AJK ENTERPRISES, INC., a Michigan corporation
("Company"), hereby promises to pay to the order of LILLIAN KAUFMAN, in lawful
money of the United States of America and in immediately available funds, the
principal sum of Four Million ($4,000,000.00) Dollars, payable in twenty (20)
equal quarterly installments in the amount of Two Hundred Thousand ($200,000.00)
Dollars, payable on the last business day of each October, January, April and
July, commencing on the last business day of January, 2001, to and including
the last business day of October, 2005, when the entire outstanding principal
amount evidenced hereunder shall become due and payable and all accrued
interest thereon shall become due and payable; and to pay interest on the
unpaid principal balance hereof from time to time outstanding, in like money
and funds, for the period from the date hereof until the principal amount
hereunder shall be paid in full, at the rate of nine percent (9%) per annum,
such interest payments to be paid quarterly on the last business day of each
October, January, April and July, commencing on the last business day of
January, 1996.
RIGHTS OF THE HOLDER OF THIS INSTRUMENT TO RECEIVE PAYMENT HEREUNDER
AND OTHER RIGHTS OF THE HOLDER OF THIS INSTRUMENT ARE SUBJECT AND SUBORDINATE
TO THE PRIOR PAYMENT OF ALL INDEBTEDNESS, OBLIGATIONS AND LIABILITIES OF THE
MAKER OF THIS INSTRUMENT TO NBD BANK PURSUANT TO THE TERMS OF A SUBORDINATION
AGREEMENT EXECUTED SIMULTANEOUSLY HEREWITH AMONG NBD BANK, THE PAYEE OF THIS
INSTRUMENT AND THE MAKER OF THIS INSTRUMENT (THE "SUBORDINATION AGREEMENT"), A
COPY OF THE SUBORDINATION AGREEMENT BEING ATTACHED TO AND BEING MADE A PART OF
THIS SUBORDINATED NOTE. THE PAYEE OF THIS INSTRUMENT IS DESIGNATED AS THE
"JUNIOR CREDITOR," THE MAKER OF THIS INSTRUMENT IS DESIGNATED AS THE
"BORROWER", AND NBD BANK IS DESIGNATED AS THE "BANK" UNDER THE SUBORDINATION
AGREEMENT. THIS SUBORDINATED NOTE IS ISSUED SUBJECT TO THE TERMS OF THE
SUBORDINATION AGREEMENT AND EACH HOLDER OF THIS SUBORDINATED NOTE, BY ACCEPTING
THE SAME, AGREES TO AND SHALL BE BOUND BY THE TERMS OF THE SUBORDINATION
AGREEMENT.
In the event of any default in payment of any installment of interest
or principal hereunder, which default is not cured within ten (10) days after
the Company has received written notice of such default from the holder of this
Subordinated Note, the holder of this Subordinated Note may thereupon
accelerate the payment of the remaining unpaid principal balance hereunder,
which shall thereupon become due and payable, subject to the terms of the
Subordination Agreement. Should the indebtedness evidenced by this Subordinated
Note or any part thereof be collected in any proceeding or be placed in the
hands of attorneys for collecting, the Company agrees to pay, in addition the
principal and interest due and payable hereon, all costs of collection of this
Subordinated Note, including attorneys' fees and expenses, subject to the terms
of the Subordination Agreement.
The Company shall have the right to prepay this Subordinated Note in
whole or in part at any time without premium or penalty, provided, however,
that if the Subordination Agreement is then in effect, no prepayment of
principal may occur without the prior consent of NBD Bank prior to January 1,
1998, and the total principal prepayments cannot exceed $1,000,000.00 in each
of calendar years 1998, 1999 and 2000. In the event of any such principal
prepayments hereunder, such principal prepayments shall be applied against (and
be deemed a principal
<PAGE> 91
payment applicable to) the immediately next quarterly installment(s) of
principal which would otherwise be payable hereunder, in the required order of
payments following such prepayment.
This Subordinated Note is made under, and shall be governed by and
construed in accordance with, the laws of the State of Michigan in the same
manner applicable to contracts made and to be performed entirely within such
State and without giving effect to choice of law principles of such State.
AJK ENTERPRISES, INC.,
a Michigan corporation
By:__________________________
Its:_________________
-2-
<PAGE> 92
SUBORDINATION AGREEMENT
LILLIAN KAUFMAN (the "Junior Creditor"), AJK ENTERPRISES, INC. (the
"Borrower") and NBD BANK (the "Bank") agree as follows:
1. As used herein, the following terms shall have the following
respective meanings:
"Lien" shall mean any security interest, mortgage, pledge,
claim, lien or other encumbrance.
"Senior Debt" shall mean any and all indebtedness, obligations
and liabilities of the Borrower or any of its Subsidiaries to the Bank, whether
direct or indirect, absolute or contingent, secured or unsecured, now existing
or hereafter arising, due or to become due, and howsoever evidenced, together
with any renewals or expansions or increases thereof, including without
limitation all reimbursement obligations pursuant to any letters of credit,
all amounts accruing after the filing of any petition in bankruptcy or similar
laws, whether or not any such amount is an allowable claim, all guaranties for
any of the foregoing and all rights and remedies of the Bank with respect
thereto, and further including without limitation, all future and present
indebtedness, obligations and liabilities owing by the Borrower to the Bank
pursuant to the Loan Agreement dated as of _______________, 1995 (as amended or
modified from time to time the "Loan Agreement") between the Borrower and the
Bank and all documents and instruments executed in connection therewith.
"Subordinated Debt" shall mean any and all indebtedness,
obligations and liabilities of the Borrower or any of its Subsidiaries to the
Junior Creditor, whether direct or indirect, absolute or contingent, secured or
unsecured, now existing or hereafter arising, due or to become due, and
howsoever evidenced, together with any renewals or increases in the amount
thereof, all guaranties for any of the foregoing and all rights and remedies of
the Junior Creditor with respect thereto.
2. All Subordinated Debt shall be subordinate and junior in right
of payment and all other respects to all Senior Debt, in the manner hereinafter
set forth. No payment of all or any part of the Subordinated Debt, whether in
cash or other property, by setoff, realizing upon collateral or otherwise, and
whether directly or indirectly, or the exercising of any rights or remedies by
the Junior Creditor, shall be made, exercised, given or received, unless and
until the Senior Debt shall have been paid in full, except that the Junior
Creditor may receive accrued interest payments and scheduled principal payments
when due on the Subordinated Note in the form attached hereto, with giving
effect to any amendment or modification or acceleration of the Subordinated
Note or any other agreement or documents relating to the Subordinated Debt, and
without giving effect to any default or overdue interest rate or other change in
the interest rate (the "Scheduled Payments"), and the Junior Creditor agrees
that it may not receive any other payment; provided, however, that the
Scheduled Payments (whether in cash or property, by setoff,
<PAGE> 93
realizing upon collateral or otherwise, and whether directly or indirectly)
also may not be made if (a) there is any event of default or other default
(including without limitation any Event of Default or Default under the Loan
Agreement) in connection with any Senior Debt, (b) there is any event which
might become such an event of default or other default after the lapse of time
or the giving of notice or both or (c) such payment would cause any such event
described in the foregoing clauses (a) or (b). For purposes of this Agreement,
the Senior Debt shall not be deemed to have been paid in full until all Senior
Debt has been irrevocably paid in full in immediately available funds and all
credit facilities and letters of credit have expired or been terminated. If for
any reason the Junior Creditor receives any payment on account of the
Subordinated Debt contrary to the terms of this Agreement, such payments will be
held by the Junior Creditor in trust for the Bank and will be immediately
turned over to the Bank to be credited against the Senior Debt.
3. In the event of any bankruptcy, insolvency, liquidation,
arrangement, reorganization, receivership or similar proceedings or upon an
assignment for the benefit of creditors or any other marshalling of the assets
and liabilities of the Borrower or any of its Subsidiaries or otherwise, any
payment or distribution of any kind (whether in cash, securities or other
property) which otherwise would be payable or deliverable with respect to the
Subordinated Debt shall be paid or delivered directly to the Bank, for
application to the Senior Debt until the Senior Debt shall have been paid in
full. The Bank shall have the full power to act in the place of the Junior
Creditor, including the right to make, present, file and vote proofs of claim
against the Borrower or any guarantor on account of any part of the
Subordinated Debt as the Bank may deem advisable, including without limitation
to vote claims comprising the Subordinated Debt, to accept and reject any plan
of partial or complete liquidation, reorganization, arrangement, composition or
extension and to receive and collect any and all dividends, distributions or
other payments made on the Subordinated Debt and to apply such funds to the
balance due on the Senior Debt.
4. The Junior Creditor and the Borrower each hereby represents and
warrants to the Bank that: (a) attached hereto as Schedule A is a true, correct
and complete copy of all instruments presently evidencing the Subordinated Debt
(the "Subordinated Note"), and the sole original of the Subordinated Note has
been conspicuously imprinted with legend required by paragraph 4(c) hereof, all
other documents, agreements or instruments evidencing, securing or relating in
any way to the Subordinated Debt are attached hereto as Schedule B (all such
documents, agreements and instruments, together with the Subordinated Note,
collectively referred to herein as the "Subordinated Debt Documents"), and there
are no other documents, agreements or instruments evidencing, securing or
relating in any way to the Subordinated Debt other than those attached hereto
as Schedules A and B; (b) as of the date hereof, the total principal balance of
the Subordinated Note is $______, there is no accrued interest thereon and all
Subordinated Debt is owed solely by the Borrower; (c) the following shall be
conspicuously imprinted on the Subordinated Note: "rights of the holder of this
instrument to receive payment hereunder and other rights of the holder of this
instrument are subject and subordinate to the prior payment of all
indebtedness, obligations and liabilities of the maker of this instrument to
NBD Bank pursuant
SUBORDINATION AGREEMENT Page 2
<PAGE> 94
to the terms of a Subordination Agreement among NBD Bank, the payee of this
instrument and the maker of this instrument"; (d) no security or collateral of
any kind has been taken by the Junior Creditor to secure any of the
Subordinated Debt, whether from the Borrower, any of its Subsidiaries or
otherwise, and there are no Liens on or with respect to any of the Borrower's
or any of its Subsidiary's assets to secure any part of the Subordinated Debt,
and any such Lien shall be null and void; (e) the Junior Creditor has not
relied and will not rely on any representation or information of any nature
made by or received from the Bank relative to the Borrower or any
of its Subsidiaries in deciding to execute this Agreement or to permit it to
continue in effect; (f) the Junior Creditor will be the lawful owner of all
future Subordinated Debt, and no part thereof will be subject to any defense,
offset or counterclaim; (g) the Junior Creditor has not heretofore assigned or
transferred any of the Subordinated Debt, any interest therein or any other
rights pertaining thereto; (h) the Junior Creditor has not heretofore given any
subordination in respect of the Subordinated Debt; and (i) this Agreement
constitutes the legal, valid and binding obligation of each of them,
enforceable against each in accordance with its terms.
5. Until all of the Senior Debt has been paid in full, unless
otherwise consented to by the Bank in writing: (a) the Junior Creditor will not
ask, demand, sue for, take or receive from the Borrower or any of its
Subsidiaries, whether directly or indirectly, by way of setoff or in any other
manner, all or any part of the Subordinated Debt or otherwise enforce any of
its rights or remedies in connection with the Subordinated Debt, including
without limitation with respect to any collateral or guaranty therefor, and the
Borrower agrees not to make, and not to allow any of its Subsidiaries to make,
any payment on the Subordinated Debt, whether directly or indirectly or in any
other manner, except as expressly permitted by paragraph 2 hereof; (b) the
Junior Creditor and the Borrower shall not (and the Borrower shall not permit
any of its Subsidiaries to) assign, transfer, hypothecate or modify, terminate,
amend or supplement, or consent to any cancellation, modification, termination,
amendment or supplement of, any Subordinated Debt Document or any of the other
terms of the Subordinated Debt, provided that the Junior Creditor may assign
the Subordinated Debt to her children or to a trust controlled by her,
provided, further, that such children or trust agree in writing to be bound by
all of the terms and provisions of this Agreement prior to any such assignment
and no further assignment shall be permitted; (c) the Junior Creditor shall not
hereafter give any subordination in respect to the Subordinated Debt or convert
any or all of the Subordinated Debt to capital stock or other securities of the
Borrower or any of its Subsidiaries, including without limitation any
securities exchangeable for or convertible into capital stock or any warrants,
rights or other options to purchase or otherwise acquire capital stock or
such securities of the Borrower or any of its Subsidiaries; (d) the
Borrower will not hereafter (and the Borrower shall not permit any of its
Subsidiaries to) issue any instrument, agreement or other writing evidencing or
securing any part of the Subordinated Debt or allow any Liens on or with
respect to any of its assets to secure any part of the Subordinated Debt, and
the Junior Creditor will not receive any such instrument, security or other
writing or any such Liens, and any such instrument, security or other writing
and any such Lien shall be null and void; (e) the Junior Creditor will not
commence or join with any other creditors of the Borrower or any of its
Subsidiaries in commencing any bankruptcy,
SUBORDINATION AGREEMENT Page 3
<PAGE> 95
reorganization, receivership or insolvency proceeding against the Borrower or
any of its Subsidiaries; (f) the Junior Creditor and the Borrower shall give
the Bank prompt notice of any default under the Subordinated Debt, and any
such default shall be an event of default under the Senior Debt; and (g)
neither the Borrower nor the Junior Creditor otherwise shall take or permit any
action prejudicial to or inconsistent with the Bank's priority position over
the Junior Creditor that is created by this Agreement.
6. This Agreement shall constitute a continuing agreement of
subordination which shall remain in effect until such time as the Senior Debt
is paid in full. The rights granted to the Bank in this Agreement are solely
for its protection and nothing herein contained imposes on the Bank any duties
with respect to any property of the Borrower or the Junior Creditor heretofore
or hereafter received by the Bank except for return of the Subordinated Note.
The Junior Creditor and the Borrower shall execute and deliver to the Bank such
further documents, agreements and instruments and shall take such further
action as the Bank may at any time or times reasonably request in order to
carry out the provisions and intent of this Agreement. The Junior Creditor and
the Borrower agree to jointly and severally pay to the Bank on demand all costs
and expenses of every kind, including without limitation all reasonable
attorneys' fees, that the Bank may incur in enforcing any of its rights under
this Agreement.
7. Without notice to or the consent of the Junior Creditor, the
Bank may, at any time and from time to time and without impairing or releasing
the subordination herein made, do any one or more of the following: (a) change
the manner, place or terms of payment, or change or extend the time of payment,
of the Senior Debt, or amend or supplement in any manner the documentation
evidencing, securing or relating to the Senior Debt, or increase without limit
the amount of the Senior Debt; (b) release any person liable in any manner for
the payment or collection of the Senior Debt; (c) exercise or refrain from
exercising any rights with respect to the Senior Debt against the Borrower, any
of its Subsidiaries, any guarantor of the Senior Debt or any other person; (d)
apply any monies or other property paid by any person or otherwise available to
the Senior Debt; (e) accept or release, or fail to perfect an interest in, any
collateral or security for the Senior Debt; or (f) take or omit to take any
other action with respect to the Senior Debt which may impair or adversely
affect the subordination herein made.
8. This Agreement shall be binding upon the Borrower and the
Junior Creditor and their successors and assigns and shall inure to the benefit
of the Bank and its successors and assigns. The Borrower and the Junior
Creditor are entering into this Agreement in consideration of advances and
other financial accommodations made and/or to be made by the Bank to the
Borrower. This Agreement constitutes the entire understanding among the
Borrower, the Junior Creditor and the Bank regarding the subject matter
provided for in this Agreement. This Agreement may only be modified by writing
signed by the Borrower, the Junior Creditor and the Bank. This Agreement shall
be governed by and construed in accordance with the laws of the State of
Michigan, without giving effect to choice of law principles of such State.
SUBORDINATION AGREEMENT Page 4
<PAGE> 96
9. The Junior Creditor, the Borrower and the Bank, after
consulting or having had the opportunity to consult with counsel, each
knowingly, voluntarily, and intentionally waive any right any of them may have
to a trial by jury in any litigation based upon or arising out of this
Agreement or any related instrument or agreement or any of the transactions
contemplated by this Agreement or any course of conduct, dealing, statements
(whether oral or written), or actions of any of them. Neither the Junior
Creditor, the Borrower nor the Bank shall seek to consolidate, by counterclaim
or otherwise, any such action in which a jury trial has been waived with any
other action in which a jury trial cannot be or has not been waived. This
Agreement is freely and voluntarily entered into by the Junior Creditor and the
Borrower without any duress or coercion, and after the Junior Creditor and the
Borrower have either consulted with counsel or been given the opportunity to do
so, and the Junior Creditor and the Borrower have carefully and completely read
all of the terms and provisions hereof.
WITNESS the due execution of this Agreement as of _________, 1995.
__________________________ NBD BANK
LILLIAN KAUFMAN
By:_____________________
Its:______________
AJK ENTERPRISES, INC.
By:_______________________
Its:_______________
SUBORDINATION AGREEMENT Page 5
<PAGE> 1
RONEY & CO.
INVESTMENT BANKING
ONE GRISWOLD
DETROIT, MICHIGAN 48226
May 26, 1995
The Board of Directors
H.W. Kaufman Financial Group, Inc.
30833 Northwestern Highway, Suite 220
Farmington Hills, MI 48334
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, of the proposed consideration to be received by the shareholders of
H.W. Kaufman Financial Group, Inc. ("H.W. Kaufman" or the "Company") in a
proposed buyout offer from Alan Kaufman more fully described in a draft
Agreement and Plan of Reorganization (the "Agreement"). Pursuant to the terms of
the draft Agreement, we understand that the shareholders of the Company would
receive a price of $8.20 per share, in cash, for each share of H.W. Kaufman
owned by them.
Roney & Co. is a regional investment banking firm of recognized standing.
As part of our investment banking services, we are regularly engaged in the
valuation of corporate securities in connection with public offerings,
valuations and merger and acquisition transactions.
In arriving at the opinion as set forth below, we have, among other things:
Reviewed a draft copy of the Agreement dated May 2, 1995;
Reviewed the Company's Annual Reports on form 10K and related
financial information for the five (5) fiscal years ended December 31, 1994
and the quarterly Reports on Form 10-Q for the periods ended March 31,
1995, September 30, 1994, and June 30, 1994 and certain internal financial
information related thereto;
Reviewed the Company's Annual Reports to shareholders and related
financial information for the three years ended December 31, 1994;
Reviewed other selected financial information for the quarterly
periods ended March 31, 1995, December 31, 1994 and September 30, 1994;
Reviewed the relevant market information regarding the shares of
common stock of the Company including historical trading activity, prices
and volume;
Compared certain financial characteristics of the Company to other
publicly held companies in the insurance industry we deemed to be relevant;
Reviewed selected information concerning current industry conditions
and trends relating to the valuation of recent mergers within the insurance
brokerage industry;
Compared the proposed terms of the offer contemplated in the draft
Agreement with the financial terms of certain other mergers and
acquisitions which we deemed to be relevant;
Conducted discussions with members of senior management of the Company
concerning the business, operations, recent financial condition and future
prospects of the Company;
Appendix B-1
<PAGE> 2
Reviewed the Company's internal forecast for the fiscal years 1995
through 1999;
Prepared a discounted cash flow analysis of the Company and an
estimate of the value of the Company under three different scenarios;
Reviewed such other financial and industry data and performed such
other analysis and took into account such other matters as we deemed
appropriate.
In preparing our opinion, we have relied upon the accuracy and completeness
of all financial and other information supplied or otherwise made available to
us by the Company and we have not independently verified such information or
undertaken an independent evaluation or appraisal of the assets of the Company.
On the basis of, and subject to, the foregoing, we are of the opinion that,
as of the date hereof, the consideration to be received by the shareholders of
the Company, as proposed by the draft Agreement, is fair from a financial point
of view, to the shareholders of the Company.
Sincerely,
RONEY & CO.
Roney & Co.
<PAGE> 3
RONEY & CO.
INVESTMENT BANKING
ONE GRISWOLD
DETROIT, MICHIGAN 48226
May 26, 1995
The Board of Directors
H.W. Kaufman Financial Group, Inc.
30833 Northwestern Highway, Suite 220
Farmington Hills, MI 48334
Gentlemen:
The Special Committee of the Board of Directors of H.W. Kaufman Financial
Group, Inc. (the "Company") has engaged Roney to prepare a Valuation as to the
fair market value of the common stock of the Company as of the date hereof. In
this capacity Roney was asked to advise the Special Committee of the Board of
Directors as to the value of the Company's shares if the company were to be
acquired.
Roney & Co. is a regional investment banking firm of recognized standing.
As part of our investment banking services, we are regularly engaged in the
valuation of corporate securities in connection with public offerings,
valuations and merger and acquisition transactions. Roney was chosen on the
basis of its familiarity with the financial services industry and its
qualifications, ability, previous experience, and reputation. No limitations
were imposed by the Company's Board of Directors upon Roney with respect to the
investigations made or procedures followed by Roney in preparing its Valuation.
In arriving at our Valuation we have considered a number of factors
including the trading values of publicly traded insurance brokerage stocks, the
terms of certain mergers and acquisitions within the insurance brokerage
industry and a discounted cash flow analysis of the Company. We have not placed
any specific weight to any one of the above methodologies.
Based on the foregoing, and our analysis as described in the Roney
presentation delivered to the Board of Directors dated May 26, 1995, it is our
opinion that the fair market value of the Company's common stock, as of the date
hereof, is $8.00 to $9.00 per share based on 3,435,347 shares issued and
outstanding.
Sincerely,
RONEY & CO.
Roney & Co.
Appendix B-2
<PAGE> 1
AGREEMENT AND PLAN OF MERGER dated as of May 26, 1995, among AJK
ENTERPRISES, INC., a Michigan corporation ("Parent"), AJK ACQUISITION COMPANY, a
Michigan corporation and a wholly owned subsidiary of Parent ("Sub"), and H.W.
KAUFMAN FINANCIAL GROUP, INC., a Michigan corporation (the "Company").
WHEREAS the respective Boards of Directors of Parent, Sub and the Company
have approved the merger of Sub into the Company (the "Merger"), upon the terms
and subject to the conditions set forth in this Agreement, whereby each issued
and outstanding share of common stock, par value $.0025 per share, of the
Company ("Company Common Stock"), not owned directly or indirectly by Parent or
the Company, will be converted into the right to receive $8.20 in cash;
WHEREAS the Merger requires the approval by an affirmative vote of the
holders of a majority of the outstanding shares of Company Common Stock entitled
to vote thereon ("Company Shareholder Approval"); and
WHEREAS Parent, Sub and the Company desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and also to
prescribe various conditions to the Merger.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE I
THE MERGER
SECTION 1.01. The Merger. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with the Michigan Business
Corporation Act (the "MBCA"), Sub shall be merged with and into the Company at
the Effective Time (as defined in Section 1.03). Following the Merger, the
separate corporate existence of Sub shall cease and the Company shall continue
as the surviving corporation (the "Surviving Corporation") and shall succeed to
and assume all the rights and obligations of Sub in accordance with the MBCA.
Notwithstanding the foregoing, Parent may elect at any time prior to the mailing
of the Proxy Statement (as defined herein), instead of merging Sub into the
Company as provided above, to merge the Company with and into Sub; provided,
however, that the Company shall not be deemed to have breached any of its
representations, warranties, covenants or agreements set forth in this Agreement
solely by reason of such election; provided, further, that no such election may
be made if it would alter or change the amount or kind of Merger Consideration
(as defined in Section 2.01(c)) to be received by holders of Company Common
Stock pursuant to Article II, or be reasonably likely to materially delay or
impede consummation of the transactions contemplated hereby. In such event, the
parties agree to execute an appropriate amendment to this Agreement in order to
reflect the foregoing and, where appropriate, to provide that Sub shall be the
Surviving Corporation and shall continue under the name "H.W. Kaufman Financial
Group, Inc."
SECTION 1.02. Closing. The closing of the Merger (the "Closing") will take
place at 10:00 a.m. on a date to be specified by the parties, which shall be no
later than the later of (i) the third business day or (ii) the first business
day of the month, in either case following the satisfaction (or waiver) of all
the conditions set forth in Article VI (the "Closing Date"), at the offices of
the Company, unless another time, date or place is agreed to in writing by the
parties hereto.
SECTION 1.03. Effective Time. Subject to the provisions of this Agreement,
as soon as practicable on the Closing Date, a certificate of merger or other
appropriate documents (in any such case, the "Certificate of Merger") shall be
duly prepared, executed, acknowledged and filed by the parties in accordance
with the relevant provisions of the MBCA with the Department of Commerce of the
State of Michigan. The Merger shall become effective upon the filing of the
Certificate of Merger with the Department of Commerce of the State of Michigan
or at such time thereafter as is provided in the Certificate of Merger (the time
the Merger becomes effective being hereinafter referred to as the "Effective
Time").
SECTION 1.04. Effects of the Merger. The Merger shall have the effects set
forth in Section 724 of the MBCA.
A-1
Appendix A
<PAGE> 2
SECTION 1.05. Articles of Incorporation and By-Laws. (a) The articles of
incorporation of the Company as in effect immediately prior to the Effective
Time shall be the articles of incorporation of the Surviving Corporation, until
thereafter changed or amended as provided therein or by applicable law.
(b) The by-laws of the Company as in effect immediately prior to the
Effective Time shall be the by-laws of the Surviving Corporation, until
thereafter changed or amended as provided therein or by applicable law.
SECTION 1.06. Directors. The directors of Sub at the Effective Time shall
become the directors of the Surviving Corporation, until the earlier of their
resignation or removal or until their respective successors are duly elected and
qualified, as the case may be.
SECTION 1.07. Officers. The officers of the Company immediately prior to
the Effective Time shall be the officers of the Surviving Corporation, until the
earlier of their resignation or removal or until their respective successors are
duly elected and qualified, as the case may be.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
SECTION 2.01. Effect on Capital Stock. As of the Effective Time, by virtue
of the Merger and without any action on the part of the holder of any shares of
Company Common Stock or any shares of capital stock of Sub:
(a) Capital Stock of Sub. Each issued and outstanding share of capital
stock of Sub shall be converted into and become one fully paid and
nonassessable share of Common Stock, par value $.0025 per share, of the
Surviving Corporation.
(b) Cancellation of Company and Parent Owned Stock. Each share of
Company Common Stock that is owned by the Company or by any subsidiary of
the Company and each share of Company Common Stock that is owned by Parent,
Sub or any other subsidiary of Parent (other than, in each case, shares in
trust accounts, managed accounts, custodial accounts and the like that are
beneficially owned by third parties (any such shares, "Trust Account
Shares")) shall be automatically cancelled and retired and shall cease to
exist, and no consideration shall be delivered in exchange therefor.
(c) Conversion of Company Common Stock. Each issued and outstanding
share of Company Common Stock (other than shares to be cancelled in
accordance with Section 2.01(b)) shall be converted into the right to
receive from the Surviving Corporation in cash, without interest, $8.20
(the "Merger Consideration"). As of the Effective Time, all such shares of
Company Common Stock shall no longer be outstanding and shall automatically
be cancelled and retired and shall cease to exist, and each holder of a
certificate previously representing any such shares shall cease to have any
rights with respect thereto, except the right to receive the Merger
Consideration, without interest.
SECTION 2.02. Exchange of Certificates. (a) Paying Agent. Prior to the
Effective Time, Parent shall designate a bank or trust company reasonably
acceptable to the Company, to act as paying agent (the "Paying Agent") for the
payment of the Merger Consideration upon surrender of certificates representing
Company Common Stock.
(b) Parent To Provide Funds. Parent shall take all steps necessary to
enable and cause Sub, or the Surviving Corporation, to provide to the Paying
Agent on a timely basis, as and when needed on and after the Effective Time,
funds necessary to pay for the shares of Company Common Stock as part of the
Merger pursuant to Section 2.01.
(c) Exchange Procedures. As soon as reasonably practicable (and in any
event no later than 10 days) after the Effective Time, Parent shall cause the
Paying Agent to mail to each holder of record of a certificate or certificates
which immediately prior to the Effective Time represented outstanding shares of
Company Common Stock (the "Certificates") whose shares were converted into the
right to receive the Merger
A-2
<PAGE> 3
Consideration pursuant to Section 2.01 (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Paying
Agent and shall be in such form and have such other customary provisions as
Parent may reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for the Merger Consideration. Upon
surrender of a Certificate for cancellation to the Paying Agent or to such other
agent or agents as may be appointed by Parent, together with such letter of
transmittal, duly executed, and such other customary documents as may be
reasonably required by the Paying Agent, the holder of such Certificate shall be
entitled to receive in exchange therefor the amount of cash into which the
shares of Company Common Stock theretofore represented by such Certificate shall
have been converted pursuant to Section 2.01, and the Certificate so surrendered
shall forthwith be cancelled. In the event of a transfer of ownership of Company
Common Stock which is not registered in the transfer records of the Company,
payment may be made to a person other than the person in whose name the
Certificate so surrendered is registered, if such Certificate shall be properly
endorsed or otherwise be in proper form for transfer and the person requesting
such payment shall pay any transfer or other taxes required by reason of the
payment to a person other than the registered holder of such Certificate or
establish to the satisfaction of the Surviving Corporation that such tax has
been paid or is not applicable. Until surrendered as contemplated by this
Section 2.02, each Certificate shall be deemed at any time after the Effective
Time to represent only the right to receive upon such surrender the amount of
cash, without interest, into which the shares of Company Common Stock
theretofore represented by such Certificate shall have been converted pursuant
to Section 2.01. No interest shall be paid or will accrue on the cash payable
upon the surrender of any Certificate.
(d) No Further Ownership Rights in Company Common Stock. All cash paid upon
the surrender of Certificates in accordance with the terms hereof shall be
deemed to have been paid in full satisfaction of all rights pertaining to the
shares of Company Common Stock theretofore represented by such Certificates, and
there shall be no further registration of transfers on the stock transfer books
of the Surviving Corporation of the shares of Company Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation for any reason,
they shall be cancelled and exchanged as provided in this Article II.
(e) No Liability. None of Parent, Sub, the Company or the Paying Agent
shall be liable to any person in respect of any cash delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
If any Certificates shall not have been surrendered prior to seven years after
the Effective Time (or immediately prior to such earlier date on which any
payment pursuant to this Article II would otherwise escheat to or become the
property of any Governmental Entity (as defined in Section 3.0l(c)), the cash
payment in respect of such Certificate shall, to the extent permitted by
applicable law, become the property of the Surviving Corporation, free and clear
of all claims or interests of any person previously entitled thereto.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01. Representations and Warranties of the Company. Except as set
forth on the Disclosure Schedule delivered by the Company to Parent prior to the
execution of this Agreement (the "Company Disclosure Schedule"), the Company
represents and warrants to Parent and Sub as follows:
(a) Organization and Authority. Each of the Company and its subsidiaries is
a corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation or organization, has all requisite
corporate power and authority to own, lease and operate its properties and to
carry on its business as now being conducted and is duly qualified and in good
standing to do business in each jurisdiction in which the nature of its business
or the ownership or leasing of its properties makes such qualification necessary
except where the failure so to qualify would not have a Material Adverse Effect
(as defined in Section 8.03(a)) on the Company or such subsidiary.
(b) Capital Structure. (i) The authorized capital stock of the Company
consists of 7,500,000 shares of Company Common Stock. At the close of business
on the date preceding the date of this Agreement,
A-3
<PAGE> 4
(1) 3,435,114 shares of Company Common Stock were outstanding, (2) 10,890 shares
of Company Common Stock were reserved for issuance with respect to outstanding
options issued under the Company's 1989 Stock Option and Incentive Plan ("1989
Stock Option Plan"), (3) 447,700 shares of Company Common Stock were reserved
for issuance in connection with the 1989 Stock Option Plan, and (4) shares of
Company Common Stock were reserved for issuance on June 30, 1995 in connection
with the Company's Employee Stock Purchase Plan ("Employee Stock Purchase
Plan"). Except as set forth above, at the close of business on the date
preceding the date of this Agreement, no shares of capital stock or other voting
securities of the Company were issued, reserved for issuance or outstanding.
(ii) All outstanding shares of the Company capital stock are, and any
shares of Company Common Stock which may be issued upon exercise of Company
Stock Options (as defined in Section 5.04) or on June 30, 1995 pursuant to the
Employee Stock Purchase Plan, will be, validly issued, fully paid and
nonassessable and will be delivered free and clear of all claims, liens,
encumbrances, charges, pledges or security interests of any kind or nature
whatsoever (collectively, "Liens") and not subject to preemptive rights.
(iii) Except for this Agreement, the 1989 Stock Option Plan, and the
Employee Stock Purchase Plan, there are no outstanding securities, options,
warrants, calls, rights, commitments, agreements, arrangements or undertakings
of any kind to which the Company or any subsidiary of the Company is a party or
by which it is bound obligating the Company or any subsidiary of the Company to
issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of capital stock of the Company or of any subsidiary of the Company or
obligating the Company or any subsidiary of the Company to issue, grant, extend
or enter into any such security, option, warrant, call, right, commitment,
agreement, arrangement or undertaking. There are no outstanding contractual
obligations (A) of the Company or any of its subsidiaries to repurchase, redeem
or otherwise acquire any shares of capital stock of the Company or any of its
subsidiaries, or (B) of the Company to vote or to dispose of any shares of the
capital stock of any of its subsidiaries.
(c) Authorization. (i) The Company has all requisite corporate power and
authority to enter into this Agreement and, subject in the case of this
Agreement to the Company Shareholder Approval, to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby and thereby have
been duly authorized by all necessary corporate action on the part of the
Company, subject in the case of this Agreement to the Company Shareholder
Approval. This Agreement has been duly executed and delivered by the Company and
constitutes a valid and binding obligation of the Company, enforceable against
the Company in accordance with its terms.
(ii) The execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby will not, and compliance by
the Company with any of the provisions hereof will not, (A) conflict with, or
result in any breach or violation of, or default (with or without notice or
lapse of time or both) under, or result in the termination of, or accelerate the
performance required by, or give rise to a right of termination, cancellation or
acceleration of any obligation or the loss of a material benefit under, or the
creation of a Lien (any such conflict, breach, violation, default, termination,
acceleration, right of termination, cancellation or acceleration, loss or
creation, a "Violation") pursuant to, any provision of the articles of
incorporation or by-laws of the Company, or any subsidiary of the Company or (B)
result in any Violation of any loan or credit agreement, note, mortgage,
indenture, lease, or other agreement, obligation, instrument, permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the Company, or any subsidiary of
the Company or their respective properties or assets, which Violation under this
clause (B) could reasonably be expected to have, individually or in the
aggregate with other such Violations, a Material Adverse Effect on the Company
or such subsidiary.
(iii) No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality, domestic or foreign (a
"Governmental Entity"), is required by or with respect to the Company or any
subsidiary of the Company in connection with the execution and delivery of this
Agreement by the Company, or the consummation by the Company of the transactions
contemplated hereby, the failure to obtain which could, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on the
Company, except for (A) the
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filing with the Securities and Exchange Commission ("SEC") of (1) a proxy
statement in definitive form (as amended or supplemented from time to time, the
"Proxy Statement") relating to the meeting of the Company's shareholders at
which a vote is held on the Merger (the "Company Shareholders Meeting") and (2)
such reports under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as may be required in connection with this Agreement, and the
transactions contemplated hereby and the obtaining from the SEC of such orders
as may be required in connection therewith, (B) the filing of the Certificate of
Merger with the Department of Commerce of the State of Michigan and appropriate
documents with the relevant authorities of other states in which the Company is
qualified to do business, (C) notices, if any, under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and (D) filings,
notifications and approvals, if any, under state insurance laws and regulations.
(d) SEC Documents; Financial Statements; Reports. (i) The Company has made
available to Parent a true and complete copy of each report, schedule,
registration statement and definitive proxy statement filed by the Company with
the SEC since January 1, 1993 (the "Company SEC Documents"), which are all the
documents (other than preliminary material and reports required pursuant to
Section 13(d) or 13(g) of the Exchange Act) that the Company was required to
file with the SEC since such date. As of their respective dates, the Company SEC
Documents complied in all material respects with the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act,
as the case may be, and the rules and regulations of the SEC thereunder
applicable to such Company SEC Documents. All material agreements, contracts and
other documents required to be filed as exhibits to any of the Company SEC
Documents have been so filed. Except to the extent that information contained in
any Company SEC Document has been revised or superseded by a later filed Company
SEC Document, none of the Company SEC Documents contains any untrue statement of
a material fact or omits to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(ii) The financial statements of the Company included in the Company SEC
Documents comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis ("GAAP") during the periods
involved (except as may be indicated in the notes thereto or, in the case of the
unaudited statements, as permitted by Form 10-Q of the SEC) and fairly present
the consolidated financial position of the Company and its consolidated
subsidiaries as at the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended.
(e) Information Supplied. None of the information supplied or to be
supplied by the Company for inclusion or incorporation by reference in the Proxy
Statement will, at the date of mailing to shareholders and at the time of the
Company Shareholders Meeting, 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 were made, not misleading. The Proxy Statement will comply as to form in
all material respects with the provisions of the Exchange Act and the rules and
regulations thereunder, except that no representation or warranty is made by the
Company with respect to statements made or incorporated by reference therein
based on information supplied by Parent or Sub specifically for inclusion or
incorporation by reference therein.
(f) Compliance with Applicable Laws. (i) The Company and its subsidiaries
hold all permits, licenses, variances, exemptions, authorizations, orders and
approvals of all Governmental Entities (the "Company Permits") that are required
for them to own, lease or operate their properties and assets and to carry on
their businesses as presently conducted, and there has occurred no default under
any such Company Permit which individually or in the aggregate would have a
Material Adverse Effect on the Company or such subsidiary. The Company and its
subsidiaries are in compliance in all material respects with all applicable
statutes, laws, ordinances, rules, orders and regulations of any Governmental
Entity.
(ii) Neither the Company nor any of its subsidiaries has received any
written notification or communication which has not been fully and finally
resolved from any Regulatory Authorities asserting that the Company
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or any of its subsidiaries is not in substantial compliance with any of the
statutes, regulations, ordinances or guidelines which such Regulatory Authority
enforces or administers.
(iii) Each of the Company and its subsidiaries is, and has been, and each
of the Company's former subsidiaries, while subsidiaries of the Company, was in
compliance with all applicable Environmental Laws (as defined below), except for
possible noncompliance which individually or in the aggregate would not have a
Material Adverse Effect on the Company or such subsidiary. The term
"Environmental Laws" means any Federal, state, local or foreign statute,
ordinance, rule, regulation, policy, permit, consent, approval, license,
judgment, order, decree, injunction or other authorization relating to: (A)
Releases (as defined in 42 U.S.C. Section 9601(22)) or threatened Releases of
Hazardous Material (as defined below) into the environment; or (B) the
generation, treatment, storage, disposal, use, handling, manufacturing,
transportation or shipment of any Hazardous Material. The term "Hazardous
Material" means (1) hazardous substances (as defined in 42 U.S.C. Section
9601(14)), (2) petroleum, including crude oil and any fractions thereof, (3)
natural gas, synthetic gas and any mixtures thereof, (4) asbestos and/or
asbestos-containing material and (5) polychlorinated biphenyls ("PCBs"), or
materials containing PCBs in excess of 50 ppm. Neither the Company nor any of
its subsidiaries has any contingent liabilities in connection with any Hazardous
Materials, including claims of liability for cleanup of Hazardous Materials
related to any of the Company, its subsidiaries or any of the Company's former
subsidiaries that, individually or in the aggregate, would have a Material
Adverse Effect on the Company or such subsidiary.
(g) Litigation. Except as disclosed in the Company Filed SEC Documents,
there is no suit, action or proceeding pending or, to the knowledge of the
Company or any subsidiary of the Company, threatened, against or affecting the
Company or any subsidiary of the Company (including any such suit, action or
proceeding under the Securities Act or the Exchange Act, or by any shareholder
or former shareholder of the Company or any subsidiary of the Company) that
could reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect on the Company or such subsidiary or that could
reasonably be expected to threaten, impede or delay the consummation of the
Merger. There is no judgment, decree, injunction, rule or order of any
Governmental Entity or arbitrator outstanding against the Company or any
subsidiary of the Company having, or which could reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on the Company or
such subsidiary or that could reasonably be expected to threaten, impede or
delay the consummation of the Merger.
(h) Taxes. (i) (A) The Company and its subsidiaries have filed, been
included in or sent all returns, declarations and reports and information
returns and statements required to be filed or sent (including in each case
extensions) by or relating to any of them relating to any taxes with respect to
any income, properties or operations of the Company or any such subsidiary prior
to the Effective Time (collectively, "Company Returns"), (B) as of the time of
filing, the Company Returns correctly reflected in all material respects the
facts regarding the income, business, assets, operations, activities and status
of the Company and its subsidiaries and any other information required to be
shown therein, (C) the Company and its subsidiaries have timely paid or made
provision for all taxes that have been shown as due and payable on the Company
Returns that have been filed, (D) the Company and its subsidiaries have made or
will make provision for all taxes payable for any periods that end before the
Effective Time for which no Company Returns have yet been filed and for any
periods that begin before the Effective Time and end after the Effective Time to
the extent such taxes are attributable to the portion of any such period ending
at the Effective Time, (E) the charges, accruals and reserves for taxes
reflected on the books of the Company and its subsidiaries are adequate to cover
the tax liabilities accruing or payable by the Company and its subsidiaries in
respect of periods prior to the date hereof, (F) neither the Company nor any
subsidiary is delinquent in the payment of any taxes or has requested any
extension of time within which to file or send any Company Return, which Company
Return has not since been filed or sent, (G) no deficiency for any taxes has
been proposed, asserted or assessed in writing against the Company or any of its
subsidiaries other than those taxes being contested in good faith, (H) the
Federal income tax returns of the Company or any consolidated group to which it
belongs have been examined by and settled with the United States Internal
Revenue Service (the "IRS") for all years through December 31, 1991, (I) neither
the Company nor any subsidiary has granted any extension of the limitation
period applicable to any tax claims (which period has not since lapsed), other
than those taxes being contested
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in good faith, and (J) neither the Company nor any subsidiary has any
contractual obligations under any tax sharing agreement with any corporation
which, as of the Effective Time, is not a member of a consolidated group of
which all of and only the Company and its subsidiaries are members.
(ii) The disallowance of a deduction under Section 162(m) of the Code for
employee remuneration will not apply to any amount paid or payable by the
Company or any subsidiary of the Company under any contract, plan, program,
arrangement or understanding.
(iii) For the purpose of this Agreement, the term "tax" (including, with
correlative meaning, the terms "taxes" and "taxable") shall include, except
where the context otherwise requires, all Federal, state, local and foreign
income, profits, franchise, gross receipts, payroll, sales, employment, use,
property, withholding, excise, occupancy and other taxes, duties or assessments
of any nature whatsoever (including the Michigan single business tax), together
with all interest, penalties and additions imposed with respect to such amounts.
(i) Certain Agreements. (i) Except as disclosed in the Company Filed SEC
Documents, as of the date of this Agreement, neither the Company nor any of its
subsidiaries is a party or subject to, or has amended or waived any rights
under, any of the following (whether written or oral, express or implied):
(A) any agreement, arrangement or commitment not made in the ordinary
course of business that is material to the Company or such subsidiary, or
any contract, agreement or understanding relating to the sale or
disposition by the Company or any of its subsidiaries of any significant
assets or businesses of the Company or any of its subsidiaries; or
(B) any other contract or agreement that would be required to be
disclosed as an exhibit to the Company's annual report on Form 10-K and
which has not been so disclosed.
(ii) Neither the Company nor any of its subsidiaries is in default under
any material agreement, commitment, arrangement, lease, contract with any
insurance carrier or insurance agency, insurance policy or other instrument,
whether entered into in the ordinary course of business or otherwise and whether
written or oral, and there has not occurred any event that, with the giving of
notice or the lapse of time or both, would constitute such a default, except in
all cases where such default would not, individually or in the aggregate, have a
Material Adverse Effect on the Company or such subsidiary.
(j) Absence of Changes in Benefit Plans. Except as disclosed in the Company
Filed SEC Documents, since the date of the most recent audited financial
statements included in the Company Filed SEC Documents, there has not been any
adoption or amendment in any material respect by the Company or any of its
subsidiaries of any bonus, pension, profit sharing, deferred compensation,
incentive compensation, stock ownership, stock purchase, stock option, phantom
stock, retirement, vacation, severance, disability, death benefit,
hospitalization, medical or other plan, arrangement or understanding (whether or
not legally binding) providing benefits to any current or former employee,
officer or director of the Company or any of its subsidiaries. Except as
disclosed in the Company Filed SEC Documents, there exist no employment,
consulting, severance, termination or indemnification agreements, arrangements
or understandings between the Company or any of its subsidiaries and any current
or former employee, officer or director of the Company or any of its
subsidiaries.
(k) ERISA Compliance. (i) The Company Disclosure Schedule contains a list
of each "employee pension benefit plan" (as defined in Section 3(2) of the
Employee Retirement Income Security Act of 1974, as amended ('ERISA')), each
"employee welfare benefit plan" (as defined in Section 3(1) of ERISA) and each
stock option, stock purchase, deferred compensation plan or arrangement and each
other employee fringe benefit plan or arrangement maintained, contributed to or
required to be maintained or contributed to by the Company, any of its
subsidiaries or any other person or entity that, together with the Company, is
treated as a single employer under Section 414(b), (c), (m) or (o) of the
Internal Revenue Code of 1986, as amended (the "Code"), for the benefit of any
current or former employees, officers, agents, directors or independent
contractors of the Company or any of its subsidiaries (collectively, "Company
Benefit Plans").
(ii) Each Company Benefit Plan has been administered in all material
respects in accordance with its terms. The Company, its subsidiaries and all the
Company Benefit Plans are all in compliance in all material
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respects with the applicable provisions of ERISA and the Code. To the best
knowledge of the Company, there are no investigations, proceedings or other
claims by the IRS, the Department of Labor, or any other Governmental Entity
involving any Company Benefit Plan that could give rise to any material
liability.
(iii) No employee of the Company or any subsidiary of the Company will be
entitled to any additional benefits or any acceleration of the time of payment
or vesting of any benefits under any Company Benefit Plan as a result of the
transactions contemplated by this Agreement.
(l) Subsidiaries. The Company Disclosure Schedule sets forth all of the
subsidiaries of the Company as of the date of this Agreement and indicates for
each such subsidiary as of such date the jurisdiction of incorporation. All the
shares of capital stock of each of the subsidiaries of the Company are fully
paid and nonassessable and (except for directors' qualifying shares, if any) are
owned by the Company or another subsidiary of the Company free and clear of all
Liens. Except for the capital stock of its subsidiaries, the Company does not
own, directly or indirectly, any capital stock or other ownership interest in
any corporation, partnership, joint venture or other entity except for its
investment of cash reserves made in the ordinary course of business.
(m) Absence of Certain Changes or Events. Except as disclosed in the
Company Filed SEC Documents, since December 31, 1993, the Company and its
subsidiaries have conducted their businesses only in the ordinary course of
business consistent with past practice and have not incurred any material
liability, except in the ordinary course of their business consistent with their
past practices, nor has there been any change, or any event involving a
prospective change, in the business, assets, financial condition or results of
operations of the Company or any of its subsidiaries, which in any such case has
had, or is reasonably likely to have, a Material Adverse Effect on the Company
or such subsidiary.
(n) State Takeover Statutes. The Board of Directors of the Company has
approved the Merger and this Agreement and/or has taken such other action, and
such approval and/or actions sufficient, to render inapplicable to the Merger,
this Agreement, and the transactions contemplated by this Agreement the
provisions of Chapters 7A and 7B of the MBCA. To the best of the Company's
knowledge, no other state takeover statute or similar statute or regulation
applies or purports to apply to the Merger, this Agreement, and the transactions
contemplated by this Agreement.
(o) Vote Required. The Company Shareholder Approval is the only vote of the
holders of any class or series of the Company capital stock necessary to approve
this Agreement and the transactions contemplated hereby.
(p) Material Interests of Certain Persons. Except as disclosed in the
Company Filed SEC Documents, no officer or director of the Company or any
"associate" (as such term is defined in Rule 14a-1 under the Exchange Act) of
any such officer or director has any material interest in any material contract
or property, real or personal, tangible or intangible, that is used in or
pertains to the business of the Company or any of its subsidiaries.
(q) Brokers and Finders; Schedule of Fees and Expenses. No broker,
investment banker, financial advisor or other person is entitled to any
broker's, finder's, financial advisor's or other similar fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Company other than Roney & Company. The
estimated fees and expenses incurred and to be incurred by the Company in
connection with this Agreement and the transactions contemplated by this
Agreement (including the fees of the Company's advisors and legal counsel) are
set forth in the Company Disclosure Schedule.
(r) Opinion of Financial Advisor. The Company has received the opinion of
Roney & Company dated the date of this Agreement to the effect that, as of such
date, the Merger Consideration to be received by the Company's shareholders is
fair to the Company's shareholders from a financial point of view, and a signed
copy of such opinion has been delivered to Parent.
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SECTION 3.02. Representations and Warranties of Parent and Sub. Parent and
Sub represent and warrant to the Company as follows:
(a) Organization and Authority. Each of Parent and Sub is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Michigan and has the requisite power and authority to own, lease and
operate its properties and to carry on its business as now being conducted. Sub
is a wholly owned subsidiary of Parent.
(b) Authorization. (i) Parent and Sub have all requisite corporate power
and authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Parent and Sub. This Agreement
has been duly executed and delivered by Parent and Sub and constitutes a valid
and binding obligation of Parent and Sub, enforceable against Parent and Sub in
accordance with its terms.
(ii) The execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby will not, and compliance by
Parent and Sub with any of the provisions hereof will not, (A) result in any
Violation pursuant to any provision of the articles of incorporation or by-laws
of Parent or Sub, (B) result in any Violation of any loan or credit agreement,
note, mortgage, indenture, lease, benefit plan or other agreement, obligation,
instrument, permit, concession, franchise, license, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to Parent or Sub or any
other subsidiary of Parent or their respective properties or assets, which
Violation under this clause (B) could reasonably be expected to have,
individually or in the aggregate with other such Violations, a Material Adverse
Effect on Parent or Sub.
(c) Information Supplied. None of the information supplied or to be
supplied by Parent or Sub for inclusion or incorporation by reference in the
Proxy Statement will, at the date of mailing to shareholders and at the time of
the Company Shareholders Meeting, 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 were made, no misleading. The Proxy Statement will comply as to
form in all material respects with the provisions of the Exchange Act and the
rules and regulations thereunder, except that no representation or warranty is
made by Parent or Sub with respect to statements made or incorporated by
reference therein based on information supplied by the Company specifically for
inclusion or incorporation by reference therein.
(d) Brokers and Finders. No broker, investment banker, financial advisor or
other person, other than Coopers & Lybrand, L.L.P., the fees and expenses of
which will be paid by Parent, is entitled to any broker's, finder's, financial
advisor's or other similar fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
Parent and Sub.
(e) Financing. Parent has received assurances from unaffiliated lending
institutions that Parent will have sufficient funds to consummate the Merger on
the terms contemplated by this Agreement at the Effective Time.
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ARTICLE IV
COVENANTS RELATING TO CONDUCT OF THE COMPANY'S BUSINESS
SECTION 4.01. Covenants of the Company. During the period from the date of
this Agreement until the Effective Time, the Company agrees as to itself and its
subsidiaries that (except as expressly contemplated or permitted by this
Agreement or as set forth in the Company Disclosure Schedule or except as
approved in writing by Parent):
(a) Ordinary Course. The Company and its subsidiaries shall carry on
their respective businesses in the usual, regular and ordinary course and
use their best efforts to preserve intact their present business
organizations, maintain their rights and franchises, keep available the
services of their current officers and employees and preserve their
relationships with insurance agents, insurance carriers, customers,
suppliers and others having business dealings with them to the end that
their goodwill and ongoing businesses shall not be impaired in any material
respect at the Effective Time. The Company shall not, nor shall it permit
any of its subsidiaries to, (i) enter into any new material line of
business; (ii) except as required by law, regulation, GAAP or regulatory
policies or guidelines, change its or its subsidiaries' accounting
practices or policies, liability management and insurance practices in any
respect which is material to the Company or such subsidiary; or (iii) incur
or commit to any capital expenditures, or any obligations or liabilities in
connection therewith, other than capital expenditures and obligations or
liabilities incurred or committed to that are approved in accordance with
the Company capital expenditure approval policies as adopted by the
Company's board of directors, and that are not (A) individually in excess
of $1,000,000 and (B) in the aggregate in excess of the amount identified
as capital expenditures in the Company's 1995 operating budget as in effect
on the date hereof, which budget shall not be amended without the prior
written consent of Parent and which amount shall in no event exceed
$2,000,000.
(b) Dividends; Changes in Stock. The Company shall not, nor shall it
permit any of its subsidiaries to, nor shall it propose to, (i) declare,
set aside or pay any dividends (whether in cash, shares of stock or
otherwise) on or make other distributions in respect of, directly or
indirectly, any of its capital stock other than the annual cash dividend
declared in the first fiscal quarter of each year, (ii) adjust, split,
combine or reclassify any of its capital stock or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock or (iii) repurchase, redeem
or otherwise acquire, or permit any subsidiary to purchase or otherwise
acquire, any shares of its capital stock.
(c) Issuance of Securities. The Company shall not, nor shall it permit
any of its subsidiaries to, issue, deliver or sell, or authorize or propose
the issuance, delivery or sale of, any shares of its or any of its
subsidiaries' capital stock of any class, or any rights, warrants or
options to acquire, any such shares, or enter into any agreement with
respect to any of the foregoing other than pursuant to the existing stock
options under the 1989 Stock Option Plan and shares to be issued on June
30, 1995 pursuant to the Employee Stock Purchase Plan.
(d) Governing Documents. The Company shall not amend or propose to
amend, nor shall it permit any of its subsidiaries to amend, the articles
of incorporation (or similar constitutive documents) or by-laws of the
Company or any of its subsidiaries, except as required by Section 3.01(n).
(e) No Acquisitions. The Company shall not, nor shall it permit any of
its subsidiaries to, acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial equity interest in or a
substantial portion of the assets of, or by any other manner, any business
or any corporation, partnership, association or other business organization
or division thereof or otherwise acquire or agree to acquire any assets, in
each case which exceed $1,000,000 individually or $2,000,000 in the
aggregate. Without limiting the generality of the foregoing, the Company
shall not, nor shall it permit any of its subsidiaries to, make any
investment either by purchase or stock or securities, contributions to
capital, property transfers or purchase, of any property or assets of any
other individual, corporation or other entity, except for transactions in
the ordinary course of business consistent with Company's practice of
investing excess cash in marketable equity securities and debt securities.
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(f) No Dispositions. The Company shall not, nor shall it permit any of
its subsidiaries to, sell, lease, mortgage, encumber or otherwise dispose
of, any of its assets (including capital stock of subsidiaries), which are
material, individually or in the aggregate, to the Company or such
subsidiary.
(g) Indebtedness. The Company shall not, nor shall it permit any of
its subsidiaries to, incur any indebtedness for borrowed money or guarantee
any such indebtedness or issue or sell any debt securities or warrants or
rights to acquire any debt securities of the Company or any of its
subsidiaries or guarantee any debt securities of others, other than
short-term indebtedness incurred to refinance existing short-term
indebtedness and other than indebtedness in connection with an acquisition
permitted under Section 4.01(e).
(h) Other Actions. The Company shall not, nor shall it permit any of
its subsidiaries to, take any action that would, or reasonably could be
expected to, result in any of its representations and warranties set forth
in this Agreement that are qualified as to materiality, being or becoming
untrue.
(i) Advice of Changes; Filings. The Company shall confer on a regular
and frequent basis with Parent, report on operational matters and promptly
advise Parent orally and in writing of any change or event having, or
which, insofar as can reasonably be foreseen, could have, individually or
in the aggregate a Material Adverse Effect on the Company or any
subsidiary, or which would cause or constitute a material breach of any of
the representations, warranties or covenants of the Company contained
herein. The Company shall file all reports required to be filed by it with
the SEC or American Stock Exchange between the date of this Agreement and
the Effective Time and shall deliver to Parent copies of all such reports
promptly after the same are filed.
(j) Compensation; Benefit Plans. Neither the Company nor any of its
subsidiaries shall (i) enter into, adopt, amend or terminate any Company
Benefit Plan or any other employee benefit plan or any agreement,
arrangement, plan or policy between such party and one or more of its
directors or officers, in each case so as to increase benefits thereunder,
or (ii) increase in any manner the compensation or fringe benefits of any
of its directors, officers or employees or provide any other benefit not
required by any plan and arrangement as in effect as of the date hereof
(including the granting of stock options, stock appreciation rights,
restricted stock, restricted stock units or performance units or shares),
except for normal salary compensation increases, benefit changes or cash
bonus payments in the ordinary course of business consistent with past
practice and except as provided in Section 6.03(c). Notwithstanding the
foregoing, the Company's Board of Directors shall terminate the Employee
Stock Purchase Plan, effective at the close of business on June 30, 1995.
(k) Tax Matters. From the date hereof until the Effective Time, (i)
the Company and its subsidiaries shall file all Company Returns required to
be filed with any taxing authority in accordance with all applicable laws,
and (ii) the Company and its subsidiaries shall timely pay all taxes shown
as due and payable on the respective Company Returns that are so filed and
as of the time of filing, the Company Returns shall correctly reflect the
facts regarding the income, business, assets, operations, activities and
the status of the Company and its subsidiaries in all material respects.
(l) Settlements, etc. The Company shall not, nor shall it permit any
of its subsidiaries to, pay, discharge, settle or satisfy any claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge, settlement or
satisfaction, in the ordinary course of business consistent or in
accordance with their terms, of liabilities reflected or reserved against
in, or contemplated by, the most recent consolidated financial statements
(or the notes thereto) of the Company included in the Company Filed SEC
Documents or incurred since the date of such financial statements in the
ordinary course of business.
(m) Material Contracts. Except in the ordinary course of business, the
Company shall not, nor shall it permit any of its subsidiaries to, modify,
amend or terminate any material contract, lease or agreement to which the
Company or any subsidiary is a party or waive, release or assign any
materials rights or claims thereunder.
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SECTION 4.02. No Solicitation. (a) The Company shall not, nor shall it
permit any of its subsidiaries to, nor shall it authorize or permit any officer,
director or employee of, or any investment banker, attorney or other advisor or
representative of, the Company or any of its subsidiaries to, (i) solicit or
initiate the submission of any takeover proposal or (ii) participate in any
discussions or negotiations regarding, or furnish to any person any non-public
information with respect to, or take any other action to facilitate any
inquiries or the making of any proposal that constitutes, or may reasonably be
expected to lead to, any takeover proposal; provided, however, that prior to
receipt of the Company Shareholder Approval, to the extent required by the
fiduciary obligations of the Board of Directors of the Company, as determined in
good faith by the Board of Directors based on the advice of independent counsel,
the Company may, (A) in response to an unsolicited takeover proposal and subject
to compliance with Section 4.02(c), furnish information with respect to the
Company and its subsidiaries to any person pursuant to a customary
confidentiality agreement (as determined by the Company's independent counsel)
and discuss such information with such person and (B) upon receipt by the
Company of an unsolicited takeover proposal and subject to compliance with
Section 4.02(c), participate in negotiations regarding such takeover proposal.
For purposes of this Section 4.02, an unsolicited takeover proposal shall mean a
proposal not solicited or initiated after the date of this Agreement by the
Company or any subsidiary or any officer, director or employee of, or any
investment banker, attorney or other advisor or representative of, the Company
or any of its subsidiaries. Without limiting the foregoing, it is understood
that any violation of the restrictions set forth in the preceding sentence by
any director, executive officer or employee of the Company or any of its
subsidiaries or any investment banker, attorney or other advisor or
representative of the Company or any of its subsidiaries, whether or not such
person is purporting to act on behalf of the Company or any of its subsidiaries
or otherwise, shall be deemed to be a breach of this Section 4.02(a) by the
Company. For purposes of this Agreement, "takeover proposal" means any inquiry,
proposal or offer from any person relating to any direct or indirect acquisition
or purchase of a substantial amount of the assets of the Company or any of its
subsidiaries, other than the transactions contemplated by this Agreement, or of
20% or more of the equity securities of the Company or any of its subsidiaries
or any tender offer or exchange offer that if consummated would result in any
person beneficially owning 20% or more of any class of equity securities of the
Company or any of its subsidiaries, or any merger, consolidation, business
combination, sale of substantially all assets, recapitalization, liquidation,
dissolution or similar transaction involving the Company or any of its
subsidiaries other than the transactions contemplated by this Agreement.
(b) Except as set forth herein, neither the Board of Directors of the
Company nor any committee thereof shall (i) withdraw or modify, or propose to
withdraw or modify, in a manner adverse to Parent or Sub, the approval or
recommendation by such Board of Directors or any such committee of this
Agreement or the Merger, (ii) approve or recommend, or propose to approve or
recommend, any takeover proposal or (iii) enter into any agreement with respect
to any takeover proposal. Notwithstanding the foregoing, prior to the receipt of
the Company Shareholder Approval, the Board of Directors of the Company, to the
extent required by its fiduciary obligations, as determined in good faith by the
Board of Directors based on the advice of independent counsel, may (subject to
the following sentences) withdraw or modify its approval or recommendation of
this Agreement or the Merger, approve or recommend any superior proposal (as
defined below), enter into an agreement with respect to such superior proposal
or terminate this Agreement, in each case at any time after the second business
day following Parent's receipt of written notice advising Parent that the Board
of Directors has received a superior proposal, specifying the material terms and
conditions of such superior proposal and identifying the person making such
superior proposal (it being understood that any amendment to a superior proposal
shall necessitate an additional two business day period). In addition, if the
Company proposes to enter into an agreement with respect to any takeover
proposal, it shall concurrently with entering into such agreement pay, or cause
to be paid, to Parent the Expenses (as defined in Section 5.05(b)). For purposes
of this Agreement, "superior proposal" means any bona fide takeover proposal
made by a third party on terms which the Board of Directors of the Company
determines in its good faith judgment (based on the advice of a financial
advisor of recognized reputation) to be more favorable to the Company's
shareholders than the Merger and for which financing, to the extent required, is
then committed or which, in the good faith judgment of such Board of Directors,
is reasonably capable of being financed by such third party.
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<PAGE> 13
(c) In addition to the obligations of the Company set forth in paragraph
(b) above, the Company promptly shall advise Parent orally and in writing of any
request for information or of any takeover proposal, or any inquiry with respect
to or which could lead to any takeover proposal, the material terms and
conditions of such request, takeover proposal or inquiry and the identity of the
person making any such request, takeover proposal or inquiry. The Company will
keep Parent fully informed of the status and details (including amendments or
proposed amendments) of any such request, takeover proposal or inquiry.
(d) Nothing contained in this Section 4.02 shall prohibit the Company from
taking and disclosing to its shareholders a position contemplated by Rule
14e-2(a) promulgated under the Exchange Act or from making any disclosure to the
Company's shareholders if, in the good faith judgment of the Board of Directors
of the Company based on the recommendation of independent counsel, failure to do
so would be inconsistent with applicable laws; provided that the Company does
not, except as permitted by Section 4.02(b), withdraw or modify, or propose to
withdraw or modify, its position with respect to the Merger or approve or
recommend, or propose to approve or recommend, a takeover proposal.
ARTICLE V
ADDITIONAL AGREEMENTS
Section 5.01. Preparation of the Proxy Statement. The Company shall, as
soon as practicable following the date of this Agreement, prepare and file a
preliminary Proxy Statement with the SEC and shall use all reasonable efforts to
respond to any comments of the SEC or its staff and to cause the Proxy Statement
to be mailed to the Company shareholders as promptly as practicable after
responding to all such comments to the satisfaction of the SEC or its staff. The
Company shall notify Parent promptly of the receipt of any comments from the SEC
or its staff and of any request by the SEC or its staff for amendments or
supplements to the Proxy Statement or for additional information and shall
supply Parent with copies of all correspondence between the Company or any of
its representatives, on the one hand, and the SEC or its staff, on the other
hand, with respect to the Proxy Statement or the Merger. If at any time prior to
the Company Shareholders Meeting there shall occur any event that should be set
forth in an amendment or supplement to the Proxy Statement, the Company shall
promptly prepare and mail to its shareholders such an amendment or supplement.
The Company shall not mail any Proxy Statement, or any amendment or supplement
thereto, to which Parent reasonably objects.
SECTION 5.02. Access to Information. The Company shall, and shall cause
each of its subsidiaries to, afford to Parent and to the officers, employees,
accountants, lenders counsel and other representatives of Parent, reasonable
access, during normal business hours during the period prior to the Effective
Time, to all their respective properties, books, contracts, commitments,
personnel and records. Parent shall, and shall cause its advisors and
representatives to, hold any such information which is nonpublic in confidence
to the extent required by, and in accordance with, the terms of the existing
Confidentiality Agreement between the Company and Parent (the "Confidentiality
Agreement"). No investigation by either Parent or Sub shall affect the
representations and warranties of the Company, and each such representation and
warranty shall survive such investigation. Parent shall promptly advise Company
upon learning of any representations, warranties or covenants of Company
hereunder that could be deemed to be materially incorrect. During the period
from the date of this Agreement to the Effective Time, the Company shall
promptly furnish to Parent copies of all monthly and quarterly interim financial
statements (including any budgets and variances from budgets) as the same become
available.
SECTION 5.03. Company Shareholders Meeting. The Company shall duly call,
give notice of, convene and hold the Company Shareholders Meeting for the
purpose of obtaining the Company Shareholder Approval as soon as practicable
after the date on which the definitive Proxy Statement has been mailed to the
Company's shareholders. Subject to Section 4.02, the Company shall, through its
Board of Directors, recommend to its shareholders that they grant the Company
Shareholder Approval.
SECTION 5.04. Stock Options. (a) As soon as practicable following the date
of this Agreement the Board of Directors of the Company (or, if appropriate, any
committee administering the 1989 Stock Option
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<PAGE> 14
Plan) shall adopt such resolutions or take such other actions as are required to
provide for the cancellation of all outstanding employee stock options to
purchase shares of Company Common Stock ("Company Stock Options") heretofore
granted under the 1989 Stock Option Plan to provide that each Company Stock
Option, whether vested or not, outstanding immediately prior to the Effective
Time, shall be exchanged for a cash payment by the Company of an amount equal to
(i) the excess, if any of (x) the Merger Consideration per share over (y) the
exercise price per share of Company Common Stock subject to such Company Stock
Option, multiplied by (ii) the number of shares of Company Common Stock subject
to such Company Stock Options for which such Company Stock Option shall not
theretofore have been exercised. The Company shall use its best efforts to
obtain all consents of the holders of the Company Stock Options as shall be
necessary to effectuate the foregoing. Notwithstanding anything to the contrary
contained in this Agreement, payment shall, at Parent's request, be withheld in
respect of any Company Stock Option until all necessary consents with respect to
such Company Stock Options are obtained.
(b) All amounts payable pursuant to this Section 5.04 shall be subject to
any required withholding of taxes and shall be paid without interest.
SECTION 5.05 Fees and Expenses. (a) Whether or not the Merger is
consummated, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the party incurring
such expense, except (i) as otherwise provided below in this Section 5.05 and
(ii) that filing fees and legal and all other expenses incurred in connection
with the filing, printing and mailing of the Proxy Statement shall be borne by
the Company.
(b) If this Agreement is terminated pursuant to its terms, other than by
Parent or the Company pursuant to Section 7.01(b)(i) or (ii) or by the Company
pursuant to Section 7.01(b)(iv), and an Acquisition Event shall occur after the
date hereof and prior to the date that is 12 months after the date of such
termination of the Agreement, the Company shall upon demand by Parent, promptly
pay or cause to be paid, in same day funds to Parent all of Parent's Expenses
(as defined below). "Acquisition Event" shall mean any of the following: (x) any
person or group (as defined in Section 13(d)(3) of the Exchange Act), other than
Parent or any of its subsidiaries, shall have consummated or completed a
takeover proposal, or (y) the Company shall have authorized, recommended,
proposed or publicly announced an intention to authorize, recommend or propose,
or shall have entered into, an agreement with any person (other than Parent or a
subsidiary thereof) to effect a takeover proposal. "Expenses" shall mean all
reasonable out-of-pocket fees and expenses incurred or paid by or on behalf of
Parent or any of its affiliates in connection with the Merger or the
consummation of the transactions contemplated by this Agreement, including all
fees and expenses (including commitment, standby and related fees) of counsel,
commercial banks, other lenders, investment banking firms, accountants, experts
and consultants to Parent or any of its affiliates. The amount of Expenses so
payable shall be the amount set forth in an estimate delivered by Parent,
subject to upward or downward adjustment upon delivery of reasonable
documentation therefor.
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.01. Conditions to Each Party's Obligation To Effect the
Merger. The respective obligations of each party to effect the Merger and the
other transactions contemplated hereby shall be subject to the satisfaction or
waiver at or prior to the Effective Time of the following conditions:
(a) Company Stockholder Approval. The Company Shareholder Approval
shall have been obtained.
(b) Other Approvals. Other than the filing provided for by Section
1.03, all authorizations, consents, orders or approvals of, or declarations
or filings with, and all expirations of waiting periods imposed by, any
Governmental Entity (all the foregoing, "Consents") which are necessary for
the consummation of the Merger (including any notices under the HSR Act),
other than Consents the failure to obtain which would not, individually or
in the aggregate, have a Material Adverse Effect on the Surviving
Corporation or which would not, individually or in the aggregate,
materially adversely affect the
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<PAGE> 15
consummation of the transactions contemplated hereby, shall have been
filed, occurred or been obtained (all such Consents and the lapse of all
such waiting periods being referred to as the "Requisite Regulatory
Approvals"), and all such Requisite Regulatory Approvals shall be in full
force and effect.
(c) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order or decree issued
by any court of competent jurisdiction or other legal restraint or
prohibition preventing the consummation of the Merger shall be in effect;
provided, however, that each of the parties shall have used reasonable
efforts to prevent the entry of any such injunction or other order or
restraint and to appeal as promptly as possible any injunction or other
order or restraint that may be entered. There shall not be any action
taken, or any statute, rule, regulation or order enacted, entered, enforced
or deemed applicable to the Merger, which makes the consummation of the
Merger illegal.
SECTION 6.02. Conditions to Obligations of Parent and Sub. The obligations
of Parent and Sub to effect the Merger are subject to the satisfaction of the
following conditions unless waived by Parent and Sub:
(a) Representations and Warranties. The representations and warranties
of the Company set forth in this Agreement shall be true and correct in all
material respects as of the Closing Date, as though made on and as of the
Closing Date, except as otherwise contemplated by this Agreement, and
Parent shall have received a certificate signed on behalf of the Company by
its President or Senior Vice President and its Chief Financial Officer or
other executive performing duties equivalent to those of a "chief financial
officer" to such effect.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Closing Date, and Parent
shall have received a certificate signed on behalf of the Company by its
President or Senior Vice President and its Chief Financial Officer or other
executive officer performing duties equivalent to those of a "chief
financial officer" to such effect.
(c) Financing. Parent shall have available all the funds necessary to
perform its obligations under this Agreement, including consummating the
Merger on the terms contemplated hereby.
(d) Company Stock Options and Employee Stock Purchase Plan. The
Company shall have duly effected, as of the Effective Time, the
cancellation of all outstanding Company Stock Options, whether vested or
not (the holders of which shall then be entitled to receive from Parent the
amounts determined in accordance with Section 5.04(a)), and the deletion of
any provision in any other Company Benefit Plan providing for the issuance,
transfer or grant of any capital stock of the Company or any subsidiary of
the Company or any interest in respect of any capital stock of the Company
or any subsidiary of the Company and the Company shall have terminated the
Employee Stock Purchase Plan so that no employee shall have any right to
purchase any shares of Company Common Stock thereunder.
SECTION 6.03. Conditions to Obligations of the Company. The obligations of
the Company to effect the Merger are subject to the satisfaction of the
following conditions unless waived by the Company:
(a) Representations and Warranties. The representations and warranties
of Parent and Sub set forth in this Agreement shall be true and correct in
all material respects as of the Closing Date as though made on and as of
the Closing Date, except as otherwise contemplated by this Agreement, and
the Company shall have received a certificate signed on behalf of Parent
and Sub by their respective Presidents and their respective Chief Financial
Officers or other executive officers performing duties equivalent to those
of a "chief financial officer" to such effect.
(b) Performance of Obligations of Parent and Sub. Parent and Sub shall
have performed in all material respects all obligations required to be
performed by them under this Agreement at or prior to the Closing Date, and
the Company shall have received a certificate signed on behalf of Parent
and Sub by their respective Presidents and their respective Chief Financial
Officers or other executive officers performing duties equivalent to those
of a "chief financial officer" to such effect.
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<PAGE> 16
(c) Employment Agreements. The Company and its subsidiary, Burns &
Wilcox, Ltd., shall have executed an amendment to existing employment
agreements with executives of the Company and such subsidiary, which shall
provide that the computation of any bonus or profit sharing payment for
such executives shall be determined exclusive of amounts paid for debt
service on any indebtedness incurred by Parent or Company in connection
with the Merger or the transactions contemplated hereunder, and Parent and
Sub shall have agreed to each such amendment.
ARTICLE VII
TERMINATION AND AMENDMENT
SECTION 7.01. Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after the Company Shareholder
Approval is received:
(a) by mutual written consent of Parent and the Company;
(b) by either Parent or the Company upon written notice to the other
party:
(i) if any Governmental Entity of competent jurisdiction shall have
issued a final permanent order enjoining or otherwise prohibiting the
consummation of the Merger and the time for appeal or petition for
reconsideration of such order shall have expired without such appeal or
petition being granted;
(ii) if the Company, on the one hand, or Parent or Sub, on the
other hand, materially breaches any of its representations, warranties,
covenants or obligations hereunder and such breach is not cured after 30
days' written notice thereof is given to the party committing such
breach by the other party;
(iii) if, upon a vote at a duly held Company Shareholders Meeting,
the Company Shareholder Approval shall not have been obtained; or
(iv) if the closing shall not have occurred within 30 days after
Company Shareholder Approval.
(c) by either Parent or Sub upon written notice to the Company:
(i) if, prior to the Company Shareholders Meeting, a takeover
proposal is commenced, publicly proposed, publicly disclosed or
communicated to the Company (or the willingness of any person to make a
takeover proposal is publicly disclosed or communicated to the Company)
and (A) the Company Shareholder Approval is not obtained at the Company
Shareholders Meeting, (B) the Company Shareholders Meeting does not
occur prior to 150 days after the date of this Agreement or (C) the
Board of Directors of the Company or any committee thereof shall have
withdrawn or modified its approval or recommendation of the Merger or
this Agreement, or approved or recommended any takeover proposal;
(ii) if the Company shall have entered into any agreement with
respect to any superior proposal in accordance with Section 4.02(b); or
(iii) if Parent shall not have available all the funds necessary to
perform its obligations under this Agreement, including consummating the
Merger on the terms contemplated hereby.
(d) by the Company in connection with entering into a definitive
agreement in accordance with Section 4.02(b), provided it has complied with
all provisions thereof, including the notice provisions therein, and that
it makes simultaneous payment of the Expenses in accordance with Section
5.05(b).
SECTION 7.02. Effect of Termination. In the event of termination of this
Agreement by either the Company or Parent as provided in Section 7.01, this
Agreement shall forthwith become void and have no effect, and there shall be no
liability or obligation on the part of Parent, Sub, the Company or their
respective officers or directors, except (a) with respect to Section 3.01(q),
Section 3.02(d), the second sentence of
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<PAGE> 17
Section 5.02, Section 5.05, this Section 7.02 and Article VIII, and (b) to the
extent that such termination results from the material breach by the other party
of any of its representations, warranties, covenants or obligations set forth in
this Agreement.
SECTION 7.03. Amendment. This Agreement may be amended by the parties
hereto at any time before or after the Company Shareholder Approval is received,
but, after receipt of the Company Shareholder Approval, no amendment shall be
made which by law requires further approval by such shareholders 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; provided, however, that,
notwithstanding anything to the contrary contained in this Section 7.03, Parent
may from time to time without the consent of the Company increase the amount
(but not change the nature) of the Merger Consideration, and any provisions
inconsistent with such right herein or in any agreement referred to herein are
hereby deemed superseded to the extent of such inconsistency.
SECTION 7.04. Extension; Waiver. At any time prior to the Effective Time,
the parties hereto may, to the extent legally allowed, (a) extend the time for
the performance of any of the obligations or other acts of the other parties
hereto, (b) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto and (c) subject to
the proviso of Section 7.03, waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party. The failure of any party to this
Agreement to assert any of its rights under this Agreement or otherwise shall
not constitute a waiver of those rights.
SECTION 7.05. Procedure for Termination, Amendment, Extension or Waiver. A
termination of this Agreement pursuant to Section 7.01, an amendment of this
Agreement pursuant to Section 7.03 or an extension or waiver pursuant to Section
7.04 shall, in order to be effective, require, in the case of Parent, Sub or the
Company, action by its Board of Directors or the duly authorized designee of its
Board of Directors.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.01. Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time. This Section 8.01
shall not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time.
SECTION 8.02. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, telecopied
(with confirmation) or mailed by registered or certified
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<PAGE> 18
mail (return receipt requested) to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice):
<TABLE>
<S> <C>
(a) if to Parent or Sub, to: AJK Enterprises, Inc.
c/o Alan J. Kaufman, Esq.
Kaufman & Payton, P.C.
30833 Northwestern Highway
Farmington Hills, MI 48334-2551
with copies to: Mark Shaevsky, Esq.
Honigman Miller Schwartz and Cohn
2290 First National Building
Detroit, MI 48226-3583
(b) if to the Company, to: H.W. Kaufman Financial Group, Inc.
30833 Northwestern Highway
Farmington Hills, MI 48334-2551
Attn: Herbert W. Kaufman,
President and Chief
Executive Officer
with a copy to: Stuart Sinai, Esq.
Kemp Klein Umphrey & Endelman, P.C.
201 W. Big Beaver Road,
Suite 600
P. O. Box 4300
Troy, MI 48084-4300
</TABLE>
SECTION 8.03. Definitions; Interpretation. (a) As used in this Agreement,
(i) any reference to any event, change or effect being "material" with respect
to any entity means an event, change or effect which is material in relation to
the businesses, assets, properties, liabilities, results of operations,
financial condition or prospects of such entity, (ii) the term "Material Adverse
Effect" means, with respect to the Company, Parent or Sub, a material adverse
effect on the business, assets, properties, liabilities, results of operations,
financial condition or prospects of such party or on the ability of such party
to perform its obligations hereunder and (iii) the term "person" means an
individual, corporation, partnership, joint venture, association, trust,
unincorporated organization or other entity.
(b) When a reference is made in this Agreement to Articles, Sections,
Exhibits or Schedules, such reference shall be to an Article, Section of or
Exhibit or Schedule to this Agreement unless otherwise indicated. The headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. Whenever the words
"include", "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation". The words "hereof",
"herein" and "hereunder" and words of similar import when used in this Agreement
shall refer to this Agreement as a whole and not to any particular provision of
this Agreement. All terms defined in this Agreement shall have the defined
meanings when used in any certificate or other document made or delivered
pursuant hereto unless otherwise defined herein. The definitions contained in
this Agreement are applicable to the singular as well as the plural forms of
such terms and to the masculine as well as to the feminine and neuter genders of
such term. Any agreement, instrument or statute defined or referred to herein or
in any agreement or instrument that is referred to herein means such agreement,
instrument or statute as from time to time amended, modified or supplemented,
including (in the case of agreements or instruments) by waiver or consent and
(in the case of statutes) by succession of comparable successor statutes and
references to all attachments thereto and instruments incorporated therein.
References to a person are also to its permitted successors and assigns.
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<PAGE> 19
SECTION 8.04. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
SECTION 8.05. Entire Agreement; No Third-Party Beneficiaries; Rights of
Ownership. This Agreement (including the documents and the instruments referred
to herein, including the Confidentiality Agreement, and any other agreement
among the parties entered into contemporaneously herewith) (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
and of the Confidentiality Agreement, provided that the Confidentiality
Agreement shall survive the execution and delivery of this Agreement, and (b)
other than Section 5.04 is not intended to confer upon any person other than the
parties hereto any rights or remedies hereunder.
SECTION 8.06. Governing Law. This Agreement shall be governed and construed
in accordance with the laws of the State of Michigan, without regard to any
applicable principles of conflicts of law.
SECTION 8.07. Publicity. Except as otherwise required by law or the rules
of the American Stock Exchange, so long as this Agreement is in effect, neither
the Company nor Parent shall, or shall permit any of its subsidiaries to, issue
or cause the publication of any press release or other public announcement with
respect to the transactions contemplated by this Agreement without the consent
of the other party, which consent shall not be unreasonably withheld. The
parties agree that the initial press release to be issued with respect to the
transactions contemplated by this Agreement shall be in the form heretofore
agreed to by the parties. Following the closing, Roney & Company and Coopers &
Lybrand, L.L.P. may issue customary public announcements that they have acted as
investment advisors in connection with this transaction.
SECTION 8.08. Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned, in whole or in part, by
any of the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other parties, and any such assignment that is not
so consented to shall be null and void. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.
Parent, Sub and the Company have caused this Agreement to be signed by
their respective officers thereunto duly authorized, all as of the date first
above written.
H.W. KAUFMAN FINANCIAL GROUP, INC.
By:
-----------------------------------
Its:
--------------------------------
"Company"
AJK ENTERPRISES, INC.
a Michigan corporation
By:
-----------------------------------
Its:
--------------------------------
"Parent"
AJK ACQUISITION COMPANY,
a Michigan corporation
By:
-----------------------------------
Its:
--------------------------------
"Sub"
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<PAGE> 1
EXHIBIT 17(D)(1)
H.W. KAUFMAN FINANCIAL GROUP, INC.
30833 NORTHWESTERN HIGHWAY, SUITE 220
FARMINGTON HILLS, MICHIGAN 48334
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders to be
held at 10:00 a.m., local time, on Monday, October 30, 1995, at the headquarters
office of H.W. Kaufman Financial Group, Inc., 30833 Northwestern Highway, Suite
220, Farmington Hills, MI 48334. At the meeting, you will be asked to consider
and vote upon a proposal to approve the merger of the Company (the "Merger")
with a wholly owned subsidiary of AJK Enterprises, Inc. ("AJK") of which Alan J.
Kaufman, a non-employee officer and Director of the Company, is the sole
shareholder. IF THE MERGER IS APPROVED BY THE SHAREHOLDERS AND CONSUMMATED, EACH
HOLDER OF THE COMPANY'S COMMON STOCK WILL RECEIVE, FOR EACH SHARE OF SUCH $.0025
PAR VALUE COMMON STOCK, CASH IN THE AMOUNT OF $8.20.
The Board of Directors of the Company appointed an independent special
committee thereof ("Special Committee"), consisting of two directors who are not
shareholders of AJK or its subsidiary or employed by either AJK or its
subsidiary or the Company except in their capacity as directors of the Company,
to review and consider the proposed Merger. In connection with its review, the
Special Committee retained the investment banking and stock brokerage firm of
Roney & Co. ("Roney & Co."), which delivered an opinion that the consideration
to be paid to the Company's shareholders is fair from a financial point of view.
Based upon the Special Committee's review and consideration of the terms of
the Merger Agreement and the Merger, and, in part, upon the opinion of Roney &
Co., the Special Committee unanimously concluded that the proposed Merger is
fair to the Company's unaffiliated shareholders. The Board of Directors, based
in part on the recommendation of the Special Committee, unanimously approved
(with Mr. Alan J. Kaufman not participating in such vote) the Merger Agreement
and the Merger.
The Board of Directors (with Alan J. Kaufman not participating in such
approval), including all members of the Special Committee, unanimously voted to
recommend and do hereby recommend that you vote FOR the approval and adoption of
the Merger Agreement.
Enclosed with this letter are the Notice of the Special Meeting of
Shareholders and a Proxy Statement that describes the proposed Merger, its
background and other related information. Also enclosed is a form of proxy
solicited by the Board of Directors in connection with the Special Meeting.
We urge you to consider carefully all of the materials in the Proxy
Statement and to sign and return the enclosed proxy card as soon as possible. If
you attend the Special Meeting, you may vote in person if you wish, even though
you have previously returned your proxy.
PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES WITH YOUR PROXY CARD. AFTER
APPROVAL OF THE MERGER BY SHAREHOLDERS, YOU WILL RECEIVE A TRANSMITTAL FORM AND
INSTRUCTIONS FOR THE EXCHANGE OF YOUR SHARES AND FOR THE PAYMENT OF THE $8.20
PER SHARE.
Sincerely,
/s/ Brooke Bothe
Brooke Bothe
Secretary
<PAGE> 2
H.W. KAUFMAN FINANCIAL GROUP, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of H.W.
Kaufman Financial Group, Inc. will be held on Monday, October 30, 1995 at 10:00
a.m., local time, at the headquarters of the Company located at 30833
Northwestern Highway, Suite 220, Farmington Hills, Michigan 48334, for the
following purposes:
1. To consider and vote upon a proposal to approve the Agreement and
Plan of Merger ("Merger Agreement") dated May 26, 1995, among the Company,
AJK Enterprises, Inc. ("AJK") and AJK Acquisition Company ("Acquisition"),
a wholly owned subsidiary of AJK, pursuant to which (i) Acquisition will
merge with and into the Company, with the Company becoming a wholly owned
subsidiary of AJK and (ii) each share of Common Stock of the Company will
be converted into the right to receive $8.20 in cash.
2. To consider and transact such other business as may properly come
before the meeting or any adjournment or postponement thereof.
Only shareholders of record at the close of business on October 2, 1995,
the record date for the Special Meeting, will be entitled to notice of and to
vote at the meeting. A complete list of shareholders entitled to vote at the
meeting will be available for inspection by shareholders at the offices of the
Company, at 30833 Northwestern Highway, Suite 220, Farmington Hills, Michigan
during the 10 days prior to the meeting and will also be available for
inspection at the meeting.
Approval of the Merger requires the favorable vote of the holders of a
majority of the outstanding Shares of the Company. Herbert W. Kaufman,
President, Director and Chief Executive Officer of the Company, will be entitled
to vote, as beneficial holder, approximately 49% of the outstanding shares of
Common Stock at the Special Meeting. He has advised the Company that he intends
to vote his shares for approval of the Merger Agreement. ACCORDINGLY, IF SUCH
SHARES ARE SO VOTED, APPROVAL OF THE MERGER AGREEMENT BY THE SHAREHOLDERS OF THE
COMPANY IS VIRTUALLY ASSURED.
You are cordially invited to attend the Special Meeting in person. Again,
please complete, date and sign the enclosed proxy card and return it promptly in
the enclosed postage-paid return envelope. This action will not limit your right
to vote in person if you wish to attend the Special Meeting and vote personally.
Your proxy may be revoked by following the procedures set forth under
"Introduction -- Proxies" to the accompanying Proxy Statement.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING. THEREFORE,
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE YOUR PROXY AND
RETURN IT IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE
UNITED STATES. PLEASE DO NOT SEND ANY STOCK CERTIFICATES AT THIS TIME. IF YOU
ATTEND THE MEETING AND WISH TO VOTE IN PERSON, YOUR PROXY WILL NOT BE USED.
By Order of the Board of Directors,
/s/ Brooke Bothe
Brooke Bothe
Secretary
Farmington Hills, Michigan
October 9, 1995
<PAGE> 3
H.W. KAUFMAN FINANCIAL GROUP, INC.
30833 NORTHWESTERN HIGHWAY, SUITE 220
FARMINGTON HILLS, MICHIGAN 48334
PROXY STATEMENT
INTRODUCTION
This Proxy Statement is being furnished to the shareholders of H.W. Kaufman
Financial Group, Inc. (the "Company") in connection with the solicitation of
proxies by the Board of Directors of the Company for use at the Company's
Special Meeting of Shareholders to be held Monday, October 30, 1995 and at any
adjournment or postponement thereof (the "Special Meeting"). This Proxy
Statement is first being mailed to shareholders on or about October 9, 1995.
PROPOSAL TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, shareholders will consider and vote upon a proposal
to approve the Agreement and Plan of Merger dated May 26, 1995, (the "Merger
Agreement"), among the Company, AJK Enterprises, Inc. ("AJK") and AJK
Acquisition Company ("Acquisition"), both Michigan corporations, pursuant to
which (i) Acquisition will merge with and into the Company, with the Company
becoming a wholly owned subsidiary of AJK and (ii) each share of $.0025 par
value Common Stock of the Company will be converted into the right to receive
$8.20 in cash (the "Merger").
AJK is a privately held corporation controlled by Alan J. Kaufman who is
the beneficial owner of 15,311 shares of the Company's Common Stock and is a
Director and non-employee Treasurer of the Company. He is the son of Herbert W.
Kaufman, founder, Director and President and Chief Executive Officer of the
Company who is the beneficial holder of 1,684,167 shares, or 49% of the
outstanding shares.
AJK and Acquisition were organized for the purpose of entering into the
transaction set forth in the Merger Agreement. As a result of the Merger, AJK
will acquire control of the entire equity interest in the Company in
consideration of the payment of $8.20 per share for each outstanding share of
Common Stock of the Company. See THE MERGER -- Certain Effects of the Merger."
Mr. Alan J. Kaufman serves on the Board of Directors of the Company, AJK and
Acquisition. It is anticipated that other current officers and other current
members of the Board of Directors will continue as such officers and/or
Directors of the Company but will not be officers or directors of AJK. See "THE
MERGER -- Interests of Certain Persons in the Merger."
It is not anticipated that any other matter will be brought before the
Special Meeting.
A copy of the Merger Agreement is attached to this Proxy Statement as
Appendix A.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
PARTIES TO THE MERGER
The Company was founded in 1969 and is incorporated under the laws of the
State of Michigan. The Company is a nationwide general agent and broker of
specialty insurance products (sometimes referred to as "surplus lines"),
principally property and casualty coverages. In addition, the Company operates a
premium finance subsidiary. For additional information concerning the Company's
business, see "Information Concerning the Company's Business."
i
<PAGE> 4
AJK and Acquisition, both Michigan corporations, were recently organized by
Alan J. Kaufman for the purpose of effecting the Merger. Neither corporation has
engaged in any activities except in connection with the proposed Merger. See,
"DESCRIPTION OF AJK AND ACQUISITION."
VOTING RIGHTS; VOTES REQUIRED FOR APPROVAL
The Board of Directors has fixed the close of business on October 2, 1995
(the "Record Date") as the date for the determination of shareholders entitled
to notice of and to vote at the Special Meeting and any adjournment or
postponement thereof. Accordingly, only holders of record of shares of the
Company's Common Stock on the Record Date will be entitled to notice of and to
vote at the Special Meeting. As of the Record Date, there were 3,440,558 shares
of Common Stock outstanding, held by approximately 679 holders of record. Each
holder of record of shares of Common Stock on the Record Date is entitled to one
vote per share on the Merger at the Special Meeting. The presence, in person or
by properly executed proxy, of the holders of a majority of the outstanding
shares of the Company's Common Stock entitled to vote is necessary to constitute
a quorum at the Special Meeting. Abstentions and broker non-votes (where a
broker or other record holder submits a proxy but does not have authority to
vote the subject shares) will be considered present for purposes of establishing
a quorum but will not be voted, and, accordingly, will have the effect of votes
against the Merger.
Under the Michigan Business Corporation Act (the "MBCA"), the affirmative
vote of the holders of a majority of the outstanding shares of the Company's
Common Stock is required for approval of the Merger. As of the Record Date, all
current Directors and executive officers of the Company who may be deemed to be
beneficial owners of approximately 1,839,977 shares, or approximately 53.5% of
the outstanding shares of the Company's Common Stock (including Herbert W.
Kaufman who is the beneficial holder of approximately 49% of the outstanding
shares) have advised the Company that they intend to vote or direct the vote of
all shares of such stock over which they have voting control for approval of the
Merger. Lillian Kaufman, the former wife of Herbert W. Kaufman, and the mother
of Alan J. Kaufman has also indicated she intends to vote the 878,705 shares she
beneficially owns, approximately 25.5%, in favor of the Merger.
ACCORDINGLY, WITH THE VOTE FOR APPROVAL OF THE MERGER BY THE DIRECTORS AND
EXECUTIVE OFFICERS (INCLUDING HERBERT W. KAUFMAN), AND BY LILLIAN KAUFMAN, THERE
ARE A SUFFICIENT NUMBER OF SHARES TO APPROVE THE MERGER WITHOUT THE AFFIRMATIVE
VOTE OF ANY OTHER SHAREHOLDER OF THE COMPANY.
All members of the Board of Directors of the Company (the "Board of
Directors" or the "Board") (except Alan J. Kaufman who did not participate in
the Board discussions or the vote) and an independent special committee thereof,
consisting of two directors who are not affiliated with AJK, Acquisition or the
Company, or employed by any of them except in their capacity as Directors of the
Company, have unanimously approved the proposed Merger as being fair to the
Company's shareholders. Each of the two members of the Special Committee owns
8,228 and 8,167 shares of the Company, respectively, which includes for each a
presently exercisable option to purchase 6,050 shares of the Company at an
exercise price of $4.96. With respect to the options, upon approval of the
Merger, each will receive the difference between his exercise price and the
Merger Consideration of $8.20 which amounts to $19,602, 2,117 shares each owns.
See "SUMMARY -- Interests of Certain Persons in the Merger; Conflicts of
Interest" and "THE MERGER -- Interests of Certain to each member in addition to
the Merger Consideration for the other 2,178 and Person in the Merger."
Under the MBCA, holders of record of the Company's Common Stock whether
they vote for or against the Merger will have no right to exercise so-called
"Dissenters' Rights," a process by which shareholders otherwise have the right
to have the fair value of their shares of Common Stock determined in judicial
proceedings. See "THE MERGER -- Dissenters' Rights."
ii
<PAGE> 5
PROXIES
All shares of Common Stock that are entitled to vote and are represented at
the Special Meeting by properly executed proxies received prior to or at the
Special Meeting, and not revoked, will be voted at the Special Meeting in
accordance with the instructions indicated on such proxies. If the instruction
is to abstain with respect to the proposal, the shares represented by the proxy
will be deemed to be present at the Special Meeting but will not be voted with
respect to the proposal, thereby having the same effect as a vote against the
proposal. If no instructions are indicated, the proxy will be voted FOR approval
of the proposed Merger. No other substantive matters will be brought before the
Special Meeting.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of the Company, at or before the taking of the vote at the
Special Meeting, a written notice of revocation bearing a later date than the
proxy, (ii) duly executing a later-dated proxy relating to the same shares and
delivering it to the Secretary of the Company before the taking of the vote at
the Special Meeting, or (iii) attending the Special Meeting and voting in person
(although attendance at the Special Meeting will not in and of itself constitute
a revocation of the proxy). Any written notice of revocation or subsequent proxy
should be sent so as to be delivered to the Company at the address set forth
above, or hand delivered to the Secretary of the Company, at or before the
taking of the vote at the Special Meeting.
EXPENSES OF SOLICITATION
The cost of printing and mailing this Proxy Statement will be borne by the
Company. In addition to solicitation by use of the mails, proxies may be
solicited by Directors, officers and employees of the Company in person or by
telephone, telegram or other means of communication. Such Directors, officers
and employees will not be additionally compensated, but may be reimbursed for
reasonable out-of-pocket expenses in connection with such solicitation.
Arrangements will also be made with custodians, nominees and fiduciaries for
forwarding of proxy solicitation materials to beneficial owners of shares held
of record by such custodians, nominees and fiduciaries, and the Company will
reimburse such custodians, nominees and fiduciaries for reasonable expenses
incurred in connection therewith.
INFORMATION CONTAINED IN THE PROXY STATEMENT
All information contained in this Proxy Statement concerning Alan J.
Kaufman, AJK and Acquisition and their plans for the Company after the Merger
was supplied by such person or corporation. Except as otherwise indicated, all
other information contained in this Proxy Statement has been supplied by the
Company. No person has been authorized to give any information or make any
representations other than those contained herein and, if given, or made, such
information or representations must not be relied upon as having been authorized
by the Company, AJK, Acquisition, Alan J. Kaufman or any of their
representatives.
The date of this Proxy Statement is October 9, 1995.
iii
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PAGE
----
SUMMARY................................................................................ 1
THE MERGER............................................................................. 5
Background of and Reasons for the Merger............................................. 5
Recommendation of the Special Committee and the Board; Fairness of the Merger........ 10
Opinion of the Company's Financial Advisor........................................... 12
Analyses Performed by Alan J. Kaufman's Financial Advisor............................ 18
Dissenters' Rights................................................................... 19
Interests of Certain Persons in the Merger........................................... 19
Certain Effects of the Merger........................................................ 20
Tax Withholding...................................................................... 21
Certain Litigation................................................................... 21
Certain Federal Income Tax Consequences of the Merger................................ 21
Plans for Company if Merger Not Consummated.......................................... 22
THE MERGER AGREEMENT................................................................... 23
General.............................................................................. 23
Effective Time....................................................................... 23
Exchange of Shares -- Payment........................................................ 23
Representations and Warranties....................................................... 23
Covenants and Conditions to Consummation of the Merger............................... 24
Financing the Transaction:
Sources and Amounts of Funds...................................................... 25
Amendment and Termination of the Merger Agreement.................................... 27
Expenses............................................................................. 27
Conduct of Business after the Merger................................................. 28
INFORMATION CONCERNING THE COMPANY'S BUSINESS.......................................... 28
General.............................................................................. 28
Insurance Brokerage and General Agency Business...................................... 29
Premium Finance Business............................................................. 30
Competition.......................................................................... 31
Regulation and Licensing............................................................. 31
Employees............................................................................ 31
Properties........................................................................... 31
Legal Proceedings.................................................................... 32
SELECTED FINANCIAL DATA................................................................ 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................................................................... 34
Overview............................................................................. 34
Liquidity and Capital Resources...................................................... 34
Results of Operations................................................................ 35
Acquisitions and Their Results on Operations......................................... 39
</TABLE>
iv
<PAGE> 7
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Effect of Inflation.................................................................. 39
Recent Accounting Pronouncements..................................................... 39
PRICE RANGE OF COMMON STOCK............................................................ 40
Dividends............................................................................ 41
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND CERTAIN
SIGNIFICANT EMPLOYEES................................................................ 42
COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT........................................................................... 44
DESCRIPTION OF AJK AND ACQUISITION..................................................... 45
TRANSACTION OF OTHER BUSINESS.......................................................... 46
INDEPENDENT AUDITORS................................................................... 46
SHAREHOLDER PROPOSALS.................................................................. 46
AVAILABLE INFORMATION.................................................................. 46
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................................ 46
INDEX TO FINANCIAL STATEMENTS.......................................................... F-1
Appendix A -- Agreement and Plan of Merger............................................. A-1
Appendix B-1 -- Opinion of Roney & Co. as to Fairness of the Merger Consideration...... B-1
Appendix B-2 -- Opinion of Roney & Co. as to Valuation of the Common Stock of the
Company.............................................................................. B-2
</TABLE>
v
<PAGE> 8
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement. Certain capitalized terms used in this Summary are
defined elsewhere in this Proxy Statement. Reference is made to the more
detailed information contained in this Proxy Statement, the Appendices hereto
and the documents incorporated by reference in this Proxy Statement.
Time, Place and Date of the Special Meeting. The Special Meeting of
shareholders of the Company will be held at 10:00 a.m., local time, on Monday,
October 30, 1995, at the headquarters of the Company located at 30833
Northwestern Highway, Suite 220, Farmington Hills, Michigan 48334.
Record Date. Holders of Record of the Company's Common Stock at the close
of business on October 2, 1995 (the "Record Date") will be entitled to notice of
and to vote at the Special Meeting. On that date, there were 3,440,558 shares of
Common Stock outstanding, with each share entitled to one vote on the proposal
to be considered at the Special Meeting. See "INTRODUCTION -- Voting Rights;
Vote Required for Approval."
Purpose of the Special Meeting. At the Special Meeting, shareholders will
consider and vote upon a proposal to approve the merger ("Merger") of the
Company with AJK Acquisition Company ("Acquisition") a wholly owned subsidiary
of AJK Enterprises, Inc. ("AJK") in a transaction in which the Company's
shareholders will receive $8.20 in cash (the "Merger Consideration"), in
exchange for each outstanding share of the Company's Common Stock. See
"INTRODUCTION -- Proposal to be Considered at the Special Meeting."
Vote Required. Under Michigan law, the affirmative vote of the holders of a
majority of the outstanding shares of the Company's Common Stock is required for
approval of the Merger. Herbert W. Kaufman, the founder, and a Director,
President and Chief Executive Officer of the Company, who as of the Record Date
was the beneficial holder of approximately 49% of the Common Stock entitled to
vote at the Special Meeting, has advised the Company he intends at the current
time to vote all of his shares in favor of the proposal. Further, Lillian
Kaufman, the former wife of Herbert W. Kaufman and the mother of Alan J. Kaufman
who was at the Record Date the beneficial holder of approximately 25.5% of the
Company's Common Stock, has advised the Company she intends at the current time
to vote all of her shares in favor of the proposal. In addition, certain other
current Directors and officers of the Company (including Alan J. Kaufman who
controls AJK and Acquisition), who as of the Record Date were the beneficial
owners of approximately 4.5% of the Common Stock entitled to vote at the Special
Meeting, have advised the Company that they intend to vote all shares of such
Common Stock over which they have voting control in favor of the proposal. See
"INTRODUCTION -- Voting Rights; Vote Required for Approval," "Interests of
Certain Persons in the Merger; Conflicts of Interest," and "THE MERGER --
Interests of Certain Persons in the Merger." Accordingly, a sufficient number of
shares to approve the Merger without the affirmative vote of any other
shareholder is assured.
Purpose of the Merger. The purpose of the Merger is to sell the Company at
a premium over market prices of the Common Stock that prevailed prior to the
offer. See "THE MERGER -- Background of and Reasons For the Merger" and "PRICE
RANGE OF COMMON STOCK."
Certain Effects of the Merger. Upon consummation of the Merger, each share
of Common Stock will be converted into the right to receive the Merger
Consideration and the Company will become a wholly owned subsidiary of AJK. As a
result, the current holders of the Common Stock will cease to have any ownership
interest in the Company or rights as shareholders and will cease to participate
in the Company's future earnings and growth in value, if any. Similarly, such
shareholders will not face the risk of any decline in the value of the Company
after the Merger.
Special Committee. The Board appointed two of its members as an independent
Special Committee ("Special Committee") to study and analyze the merger proposal
from AJK and Acquisition, to engage investment bankers to render advice and
opinions as to the fairness of the transaction from a financial point of view to
shareholders and as to the value of the Company's shares, and to make
recommendations to the Board of Directors. Aside from their positions as
Directors of the Company, and as the holders of 8,228 and 8,167 shares of the
Company's Common Stock which includes for each presently exercisable options to
buy 6,050
1
<PAGE> 9
shares of the Company, they are not officers or employees of the Company, nor
are they officers, directors, employees or shareholders of AJK or Acquisition.
Further, neither one relies on the Company, AJK or Acquisition, or any of their
affiliates, for any material monetary, consulting or other benefits. Their only
compensation for service to the Special Committee was payment of $500 per each
half day, or any part thereof, devoted to the work of the Special Committee.
Opinion of the Company's Financial Advisor. Roney & Co. ("Roney & Co."),
engaged as investment bankers, rendered a preliminary oral opinion to the
Special Committee of the Board of Directors of the Company on May 19, 1995 to
the effect that the Merger Consideration was fair, from a financial point of
view, to the holders of shares of Common Stock. Roney & Co. rendered its formal
"fairness" opinion to a meeting of the Board of Directors on May 26, 1995. A
copy of a written "fairness" opinion of Roney & Co. dated May 26, 1995
confirming its earlier opinion, setting forth the assumptions made, the matters
considered, the scope and limitations of the review undertaken and the
procedures followed by Roney & Co. in rendering its opinion, is attached hereto
as Appendix B-1. Holders of Common Stock should read carefully the opinion of
Roney & Co. in its entirety including Roney & Co.'s opinion as to the range of
value of the Company's shares of Common Stock, Appendix B-2. See "THE MERGER --
Opinion of the Company's Financial Advisor."
Recommendation of the Board of Directors. The Board of Directors has
unanimously concluded that the Merger is in the best interests of the Company
and its shareholders and that the Merger and the Merger Consideration are fair
to the Company's shareholders and unanimously recommends a vote by shareholders
FOR approval of the Merger. The Board's conclusions were based upon a number of
factors, including the recommendation of the Special Committee that the Merger
Consideration offers a significant premium over recent market prices of the
Common Stock, and the opinion of Roney & Co. that the Merger Consideration is
fair, from a financial point of view, to the Company's shareholders. See "THE
MERGER -- Recommendation of the Board of Directors; Fairness of the Merger."
Alan J. Kaufman did not participate in any discussions or vote of the Board of
Directors in its consideration of the Merger.
Interests of Certain Persons in the Merger; Conflicts of Interest. AJK is a
privately held corporation controlled by Alan J. Kaufman, a Director and
non-employee officer of the Company. He is the beneficial owner of 15,311 shares
or less than 1/2 of 1% of the outstanding shares, of the Company's Common Stock.
Alan J. Kaufman is the son of Herbert W. Kaufman, founder, Director and
President and Chief Executive Officer of the Company. Herbert W. Kaufman
beneficially holds 1,684,167 or approximately 49% of the shares of the Company
and has advised the Company he intends to vote his shares for the Merger.
Herbert W. Kaufman will be retained as the Company's President pursuant to an
existing employment agreement. Lillian Kaufman, who is the mother of Alan J.
Kaufman (and former wife of Herbert W. Kaufman), beneficially owns 878,705
shares, approximately 25.5%, and has also advised she intends to vote her shares
in favor of the Merger. See "COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT."
Certain officers of the Company have been advised they will continue on in
their same positions with amended employment agreements as indicated below in
"Conditions to Consummation of the Merger; Termination." In addition, both Alan
J. Kaufman and Herbert W. Kaufman own an interest in an entity that leases a
property to the Company. The lease will remain in effect following the Merger
under the same terms. See "THE MERGER -- Interests of Certain Persons in the
Merger" for other interests of various parties.
Federal Income Tax Consequences. The receipt of the Merger Consideration in
exchange for the outstanding shares of Common Stock pursuant to the Merger will
be a taxable transaction for federal income tax purposes and may also be a
taxable transaction under applicable state, local, foreign and other tax laws.
See "THE MERGER -- Certain Federal Income Tax Consequences of the Merger."
Effective Time of the Merger. The effective time of the Merger will occur
upon the filing of a certificate of merger with the Department of Commerce of
the State of Michigan ("Effective Time"), which will occur after all conditions
to the Merger contained in the Merger Agreement, including the approval of the
Merger by the shareholders of the Company, have been satisfied or waived. See
"THE MERGER AGREEMENT -- General" and "Covenants and Conditions to Consummation
of the Merger."
2
<PAGE> 10
Conditions to Consummation of the Merger; Termination. The respective
obligations of the Company and Acquisition to consummate the Merger are subject
to satisfaction or waiver at or prior to the Effective Time of the Merger of
various conditions, including the following: (i) accuracy of certain
representations and warranties made by the parties; (ii) compliance by the
parties with their obligations under the Merger Agreement; (iii) the absence of
certain legal proceedings; (iv) approval of the transactions by the shareholders
of the Company; (v) receipt, if required, of certain approvals and
authorizations of governmental authorities; (vi) the execution of amendments to
the existing employment agreements with certain executives of the Company, which
shall provide that bonuses will be determined exclusive of amounts expended or
accrued for debt service on any indebtedness incurred by AJK or Acquisition in
connection with the Merger; and (vii) "financing," that is, AJK or Acquisition
shall have available all the financing necessary to perform its obligations
under the Merger Agreement. The Merger Agreement may be terminated at any time
prior to the closing by either the Company or Acquisition: (i) with the consent
of the other party; (ii) if a court or governmental entity permanently
restrains, enjoins or otherwise prohibits the Merger; (iii) if the other party
commits a material breach of its representations, warranties or covenants in the
Merger Agreement; (iv) if the conditions set forth in the Merger Agreement have
not been satisfied or waived; (v) if the closing shall not have occurred within
30 days after obtaining Company shareholder approval; or (vi) by the Company
under certain limited circumstances, if an unsolicited takeover proposal is
submitted which the Company's Board of Directors in exercising its fiduciary
duties and subject to other conditions, deems to be a superior proposal. See
"THE MERGER AGREEMENT -- Covenants and Conditions to Consummation of the Merger"
and "-- Amendment and Termination of the Merger Agreement."
Financing of the Transaction. AJK and Acquisition have obtained a letter
from a large Detroit financial institution indicating its willingness to advance
the funds necessary to accomplish the cash merger subject to fulfillment of its
own various conditions (the "Commitment Letter"). Even after approval by
shareholders of the Company of the Merger Agreement, should the lending
institution not complete the commitment, neither AJK nor Acquisition will be
able to consummate the proposed Merger. See "THE MERGER AGREEMENT -- Conditions
to Consummation of the Merger" and "-- Amendment and Termination of the Merger
Agreement" and "-- Financing the Transaction: Sources and Amounts of Funds."
Amendment to the Merger Agreement. Subject to applicable law, the Merger
Agreement may be amended, modified or supplemented before or after the vote of
Shareholders by written agreement of the respective Board of Directors of AJK,
Acquisition and the Company or their respective officers authorized by such
Boards of Directors at any time prior to the closing of the Merger with respect
to any of the terms contained in the Merger Agreement but after shareholder
approval no amendment which by law may be made only with shareholder approval
will be made unless that further approval is also obtained. See "THE MERGER" and
"THE MERGER AGREEMENT" -- Amendment and Termination of the Merger Agreement."
Surrender of Share Certificates. Promptly after the Effective Time, a
letter of transmittal ("Letter of Transmittal") with instructions will be mailed
to all shareholders of record at the close of business on the Effective Date of
the Merger for use in surrendering their certificates representing shares and to
receive their Merger Consideration. CERTIFICATES SHOULD NOT BE SURRENDERED UNTIL
THE LETTER OF TRANSMITTAL IS RECEIVED AND COMPLETED. See "THE MERGER AGREEMENT
-- Exchange of Share-Payment."
Dissenters' Rights. Holders of Common Stock who do not vote in favor of, or
who abstain from voting on, the Merger do not have so-called Dissenters' Rights.
If applicable, Section 762 of the MBCA provides the right to have the "fair
value" of a shareholder's shares determined by an appraisal process supervised
by a Michigan Circuit Court. However, one of its exceptions, Section 762(2)(a),
applies to shares listed on a national securities exchange. The Company's shares
of Common Stock are listed on the American Stock Exchange. In addition, Section
762(2)(b) contains an exception in the case of "cash mergers" such as the
transaction proposed here. See "THE MERGER -- Dissenters' Rights."
3
<PAGE> 11
Stock Options. Holders of outstanding stock options shall receive the
difference between the exercise price of each share subject to an option and the
$8.20 per share. As of June 30, 1994 there were unexercised options for 32,670
shares of Common Stock.
Plans for Company if Merger not Consummated. As consummation of the Merger
is subject to fulfillment and satisfaction of certain covenants and conditions,
including AJK having sufficient financing to pay the Merger Consideration and
the Company obtaining shareholder approval of the Merger, there can be no
assurance that the Merger will be consummated. If the Merger is not consummated,
the Company currently plans to continue its existing operations and to evaluate
alternatives as they may arise.
RECENT PRICES OF COMPANY COMMON STOCK
The Company's Common Stock is traded on the American Stock Exchange under
the symbol "HWK." On April 5, 1995, 30 days prior to the public announcement of
the proposal, the closing price per share as represented on the American Stock
Exchange was $4.53. Accordingly, the premium to be paid reflected in the final
$8.20 cash merger price over the unaffected pre-announcement stock price (the
percent increase of the offer price per share over the closing market price 30
days prior to the announcement, the "Premium Over Stock Price") was 81%. On
Friday, April 28, the closing price per share as reported by the American Stock
Exchange was $5.625. The premium reflected over the $8.20 offer price was 46%.
On Monday, May 1, 1995, it also closed at $5.625. On May 2, 1995, the Board of
Directors received Alan J. Kaufman's initial offer of $8.00 and appointed the
Special Committee to begin the process of study and evaluation. No agreements
were executed and no offer had been accepted. On May 4, 1995, the last trading
day preceding public announcement of the proposed Merger, the closing price per
share as reported by the American Stock Exchange was $7 1/8. On October ,
1995, the last trading date prior to the printing of this Proxy Statement, the
price of Common Stock was $ per share. Company shareholders are urged to
consider their investment alternatives. See "PRICE RANGE OF COMMON STOCK --
Dividends."
4
<PAGE> 12
THE MERGER
BACKGROUND OF AND REASONS FOR THE MERGER
The President and Chief Executive Officer of the Company, Herbert W.
Kaufman, founded the Company in 1969, as a successor to a small general
insurance brokerage operation he had operated for several previous years. The
Company now places insurance risks with nearly 400 insurance carriers with which
the Company does business. In addition, the Company places risks through certain
underwriters at Lloyd's of London and other foreign (principally English)
insurance carriers or syndicates which insure specialty risks. The Company's
Common Stock has been listed on the American Stock Exchange since 1990.
Herbert W. Kaufman's son, Alan J. Kaufman, an attorney and a 1975 graduate
of the Notre Dame Law School, with a practice specializing in corporate and
insurance matters, representing a number of carriers in various litigation
matters, has been a non-employee officer and Director of the Company for in
excess of 20 years. Represented by both legal counsel and financial advisors
unassociated with and independent of the Company, Alan J. Kaufman indicated his
desire to buy the Company and all its business operations. Alan J. Kaufman's
interest was unsolicited and no other officer, director or shareholder initiated
the acquisition discussions with him. On February 14, 1995, the Company and Alan
J. Kaufman executed a confidentiality agreement to allow Alan J. Kaufman's
advisors to perform certain due diligence. In addition to containing
confidentiality provisions, the letter contained a 70-day period in which the
Company would not solicit other acquisition proposals (but could entertain other
proposals should any be made). Subsequent to retaining his financial advisors
and counsel, who assisted in the preparation of the proposal to acquire the
Company, Alan J. Kaufman on May 2, 1995 made an oral presentation to the
Company's Board of Directors outlining a suggested proposal to acquire all the
Company's outstanding Common Stock and any exercisable stock options by means of
a "cash merger" in which the Company would be merged with Acquisition, a
subsidiary of a corporation controlled entirely by Alan J. Kaufman (hereinafter
such corporation being referred to as "AJK") and all Common Stock of the Company
would be exchanged for $8.00 per share in cash. Alan J. Kaufman indicated that
since his due diligence investigation began on February 14, 1995, he had
received a commitment for the necessary financing to accomplish his proposal
from a large Detroit financial institution.
In light of the involvement of Alan J. Kaufman, a non-employee officer and
Director and the substantial interest of his father Herbert W. Kaufman, who at
that time, beneficially controlled 2,636,115 or approximately 77% of the
Company's Common Stock, the Company's Board of Directors on May 2, 1995
appointed a special committee ("Special Committee") of directors to study and to
evaluate the offer and to negotiate on the Company's behalf. (Herbert W. Kaufman
has since that time transferred to his former wife 878,705 shares and made a
charitable gift of 73,243 shares, leaving him at the date hereof as beneficial
owner of 1,684,167 shares, approximately 49% of the Company's of the Company's
Common Stock. See "COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT"). Two members of the Board of Directors, Alan H. Barry, a CPA and
President and Chief Executive Officer of Brass-Craft Manufacturing Co., a
wholly-owned subsidiary of MASCO Corporation (NYSE), who has served as a
Director of the Company since 1989, and Jeffrey W. Barry, a CPA and attorney,
who had served as long-time President of Walsh College of Accounting and
Business Administration from 1969 until his retirement in 1991, and who has
served as a Director of the Company since 1988, were appointed to the Special
Committee and agreed to take on these duties. Messrs. Barry are not related. The
Board chose them due to their independence (neither is an officer or an employee
of the Company nor a major shareholder) and each was judged to have the
expertise, judgment, knowledge, financial background and experience to help the
Board evaluate the proposal. Due to the fact that each has been a Director for
in excess of five years, each was also deemed to be familiar with the Company's
business. Each indicated his willingness to devote the time necessary to study,
evaluate and negotiate such a transaction in a timely manner. Their compensation
was determined to be $500 per half day, or any portion thereof, for each member
and reimbursement for travel and other expenses, such payment to be made without
regard to the eventual recommendation made by the Special Committee or whether
the Merger or any transaction was consummated.
On May 5, 1995, the Company issued a press release stating it had received
a proposal with respect to a transaction in which shareholders were being
offered $8.00 per share.
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Although the confidentiality letter of February 14, 1995 and its 70-day
non-solicitation provisions were not extended, the parties over the next several
weeks proceeded to discuss the definitive terms of a merger agreement, and the
Special Committee through its counsel began negotiations of an agreement with
terms acceptable to it.
On May 2, 1995, immediately following the Board meeting, the Special
Committee held its first meeting. Alan H. Barry was selected as Chairman of the
Special Committee. The Special Committee then decided to select as its counsel
Kemp, Klein, Umphrey & Endelman, Professional Corporation, the Company's
existing securities counsel, due to their familiarity with the Company and their
securities law expertise. The Special Committee also discussed that it would
engage independent investment bankers and that no other Board member would
participate in such decision. At this meeting and all subsequent meetings, the
Special Committee's legal counsel was present. Its counsel advised the Special
Committee on the duties, obligations and procedures for which the Special
Committee would be responsible, including its obligation to fulfill its
fiduciary duties with respect to evaluating the proposed offer. Its counsel also
addressed the role and independence of the Special Committee and its obligation
to review the proposal carefully in order to obtain a fair price for the
Company's shareholders.
The Special Committee also began immediately on May 2, 1995 to interview
financial advisors to assist it in the evaluation of the proposal. On May 2, it
interviewed one investment banker and on May 5 it interviewed one additional
investment banker and another firm that is a merger and acquisition consultant.
On May 5, 1995, it selected Roney & Co. to begin both an evaluation of the
Company's Common Stock and of the proposal. Roney & Co. was directed to advise
the Special Committee whether the offer of $8.00 per share was fair from a
financial point of view to shareholders and, should it so conclude, to render an
opinion as to the fairness from a financial point of view to shareholders of the
consideration to be paid Company shareholders. The Special Committee concluded
it was appropriate to retain Roney & Co. because several members of its
Corporate Finance Department had formerly been employed by another investment
banking firm which had handled the Company's public offering in 1989 and were
familiar with the Company's business and personnel. Furthermore the Special
Committee was satisfied with Roney & Co's. strong regional reputation in the
financial community, the experience of its Corporate Finance Department
including its members' experience with the brokerage insurance industry and its
experience serving as financial advisor in similar transactions. There has been
no material relationship between Roney & Co. (or members of its Corporate
Finance Department) and the Company or its affiliates during the last two years
prior to their engagement.
In view of the creation of the Special Committee and its engagement of
Roney & Co. as financial advisor, the Board of Directors was satisfied that both
it and the shareholders could be justifiably confident that an unbiased report
concerning the value of the Company and the fairness of the proposal would be
rendered. Alan J. Kaufman did not participate in any manner in any discussions
or deliberations of the Special Committee or the Board with respect to the
proposed transaction.
From the time of its selection on May 5, 1995, Roney & Co. conducted its
own review of the business operations and prospects of the Company. Aside from
public reports filed with the SEC that were readily available, Roney & Co. was
provided immediate and free access to financial, operational and executive
officers and personnel of the Company and to internal Company data and
projections.
The Special Committee met on May 19, 1995 to review with Roney & Co. the
steps that had been taken to date by Roney & Co. to complete its onsite due
diligence and interviews with management of the Company and its principal
operating subsidiary, Burns & Wilcox, Ltd. In order to promote an informed
prospective the Special Committee had invited all Board members of the Company
(other than Alan J. Kaufman) to attend and listen, to enable all them to hear
and receive any tentative reports and findings. The representatives of Roney &
Co. also distributed a booklet containing the tentative results of a number of
their analyses, comparisons, tests and tentative findings. At this meeting,
Roney & Co. explained the results of its various models for valuing the
Company's Common Stock, including its discounted cash flow analysis which
included a 15% discount rate, its consideration of prior Company acquisitions in
comparison to the proposed buyout and its comparison of the Company with a
number of publicly traded companies called a "comparable group" although none
was exactly in the same business as the Company. Roney & Co. noted that several
such
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companies had insurance brokerage operations that were more of a retail nature
(i.e., direct to the ultimate client) rather than the Company's wholesale
business (helping independent insurance agents place insurance risks for their
clients) and several operated both insurance carriers and brokerage operations.
See "Opinion of the Company's Financial Advisor" that follows.
Roney & Co. emphasized that although it had not yet finalized its report,
including a leveraged buy-out model, which was to be completed by May 26, 1995,
the date scheduled for a meeting of the Company's Board of Directors, it was
substantially satisfied that the value being offered by AJK was within a fair
range. Roney & Co. also reported that besides its review of public reports,
including the Company's December 31, 1994 annual report on Form 10-K and the
Company's Form 10-Q quarterly report for the period ending March 31, 1995, it
had conducted onsite management interviews regarding the Company's business and
financial outlook. It also made comparisons of past Company financial
performance and various financial ratios to other public companies, and compared
the Company's own methods of pricing its own acquisitions. Roney & Co. also
stated it had also received and studied certain internal financial forecasts
from the Company. See "-- Opinion of the Company's Financial Advisor."
The representatives of Roney & Co. informed the Special Committee and the
Board members in attendance at the May 19, 1995 meeting, that based on their
preliminary review of such financial and other information received to date,
Roney & Co.'s initial conclusion was that the proposal of $8.00 per share was
fair to shareholders from a financial point of view. The representatives also
reported that Roney & Co.'s valuation of the Company's Common Stock itself, as
part of its tests performed in its evaluation of the cash merger proposal,
reflected a range of value of between $8 to $9 per share and that the cash
merger consideration being offered by AJK per share was in an acceptable range.
Representatives of Roney & Co. and the Special Committee then discussed
that although no other inquiries or proposals had arisen from any other
companies or persons concerning an offer to acquire the Company or any portion
of its business since the public announcement of the proposal on May 5, 1995,
that contact should be made with any company that had expressed any interest,
within approximately the last 18 months, in acquiring the Company or its
business. Only two entities were identified and the previous discussions with
them were reviewed. It was mentioned by the Board member who had previously
spoken to both entities that the contacts were unsolicited by the Company and
arose from inquiries by an investment banker and were not initiated either by
the Company or even by the two entities themselves. The director reported that
preliminary discussions with one somewhat over a year ago had produced no
interest at all and discussions with the other about 18 months ago and then
about 6 months later had produced no preliminary understandings or agreements
but a tentative proposal was suggested by that company of a price and terms
deemed unfavorable to the Company's shareholders (partially cash, partially in a
"soft" note dependent upon future performance of the Company) and discussions
were abandoned. Representatives of Roney & Co. were given permission to contact
the two entities through their respective investment bankers who had contacted
the Company originally, to assure themselves whether or not any interest
existed.
After hearing the Roney & Co. May 19, 1995 preliminary report and receiving
its booklet containing various data and resulting ratios and comparisons and the
review of its contents and the distribution of the booklet to each Board member,
the Special Committee excused the Roney & Co. representatives and the other
members of the Board of Directors to discuss by itself the next steps. The
Special Committee then discussed with its legal counsel the results of the
ongoing review of the proposed form of merger agreement forwarded by legal
counsel for AJK and other legal terms encompassed by the proposal and the
ongoing discussions of proposed modifications. The Special Committee directed
that its legal counsel communicate to AJK's legal counsel revisions to the
proposed agreement. After reviewing Roney & Co.'s presentation and discussing
their own views with respect to the Company, the Special Committee directed that
its Chairman, Alan H. Barry, arrange for an immediate meeting with Alan J.
Kaufman to discuss the preliminary findings of Roney & Co. On May 22, 1995, Mr.
Barry met with Alan J. Kaufman to discuss the Roney & Co. preliminary report and
its preliminary findings including its valuation of the Company at between $8 to
$9. Mr. Kaufman reported that based upon his financial advisor's analyses, he
had on the other hand established a somewhat lower range of value. See "--
Analyses Performed by Alan J. Kaufman's Financial Advisor." Later that same
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day, Mr. Kaufman informed Mr. Barry that AJK would raise the offer to $8.20 per
share, resulting in an aggregate total cash price of in excess of $28 million.
The Special Committee next met on May 23, 1995. Board members other than
Alan J. Kaufman were again invited to attend and did so in person or were
present telephonically. Counsel for the Special Committee reported on the
progress of negotiations of the Merger Agreement and issues that were yet open.
Mr. Alan H. Barry next reported on the discussions of Roney & Co. with the two
companies mentioned at the May 19 meeting with which discussions concerning sale
had been held within the last 18 months. After contact and discussions with the
principals or representatives of the two companies, Roney & Co. reported one
(which was also an insurance brokerage operation) had no interest at the levels
being discussed with Alan J. Kaufman and the other (an insurance carrier
emphasizing malpractice and other coverages) had indicated it was not interested
in validating the existing offer but gave indications it might have further
interest and was told the Board was meeting to consider the AJK proposal on
Friday, May 26, 1995. Mr. Alan Barry also reported that he had met with Alan J.
Kaufman and that after discussion of Roney & Co.'s valuation report, AJK raised
the offered price to $8.20 per share. A discussion then ensued that based upon
Roney & Co.'s May 19 analyses which preliminarily concluded that the transaction
was fair and with the increase of $.20 per share that the Special Committee had
obtained, upon confirmation of Roney & Co.'s analyses to be contained in Roney &
Co.'s final report to be delivered on May 26, it would be in a position to make
a recommendation that the AJK offer be accepted.
On May 26, 1995, the Board of Directors met again to consider the proposal,
to hear Roney & Co.'s report regarding its final conclusions and to discuss any
further information concerning the two entities that had been contacted. Mr.
Barry again reported that his meeting with Alan J. Kaufman had produced an
increase in price to $8.20 per share by AJK and that Roney & Co. had been
informed of such increase.
Roney & Co. made an oral presentation of its conclusions, as it had done on
May 19, and distributed its final booklet report containing its various
mathematical calculations and analytical comparisons. Roney & Co. commented that
the $8.20 per share price now produced a ratio of .99 of net revenues less
contingent commissions. That is, the cash to be paid shareholders equated to
approximately one times ("X") the Company's last 12 months revenues (not
including contingent commissions) before income taxes at March 31, 1995, the end
of the 12 month period preceding the proposed offer. (If contingent commissions
were included in net revenues, the value of the offer to such revenues would be
.93 at March 31, 1995.) Roney & Co. reported additionally, that the value to LTM
(last 12 months') "Operating Income" was now in excess of 10. That is, the total
cash merger price was approximately 10 times the Company's last 12 months
"Operating Income" not including "Other Income."
Roney & Co. also reported that it had contacted the investment bankers for
both of the entities with which Company officials had prior discussions to ask
if their clients had any interest.
Roney & Co. indicated it had spoken to the insurance carrier's investment
banker who indicated his client might have an interest in submitting an offer
for the Company and that if it did he would be in contact with Roney & Co. The
investment banker was assured by Roney & Co. any serious offer would be given
consideration by the Special Committee. Roney & Co. also indicated that the
other company which was a brokerage operation seemed to indicate they had no
interest in submitting a bid to compete with AJK's offer. Roney & Co. stated
that both entities had indicated their awareness of the AJK proposal prior to
its calls.
Roney & Co. then reported on the "LBO model" it had prepared, something
that was not in its prior draft booklet of its tests and ratios delivered on May
19. The purpose of the LBO model was to attempt to determine what a financial
buyer might be able to do and if they could leverage to produce the financing
necessary to effectuate this type of buyout and if so, what buyout price per
share such leveraging and financing could produce. The representatives of Roney
& Co. indicated that the Company does not readily lend itself to an LBO. They
indicated that the Company does not likely have sufficient leverageable assets
for a "financial buyer" to allow it to obtain the kind of financing or special
returns most financial buyers would insist upon in order to make an offer in
excess of AJK's offer.
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Roney & Co. was then asked to again run through the evaluation
methodologies it had used in its May 19 draft report which were now also
contained in the finalized report. The Roney & Co. representatives reported that
they examined, among many other factors: (i) publicly traded insurance brokerage
stocks' price earning ratios, price to book and other ratios associated with
such companies; (ii) other mergers and acquisitions within the same SIC code as
the Company and compared their various data including book value ratios and
price to revenue ratios; (iii) the per share price being offered by AJK compared
to prices paid by the Company itself with regard to its own acquisitions within
the last several years; and (iv) discounted cash flow analyses under three
different scenarios (i.e., "Slow Growth", "Company Projections" and "Most
Optimistic"). This latter methodology (i.e., discounted cash flow analysis) was
intended to arrive at an estimate of "going concern value." The Roney & Co.
representatives reported the average of the three cash flow methods produced an
implied value of $8.17 per share.
After discussing the above and the various items, ratios and comparisons
contained in the final booklet, which was similar to the May 19 booklet except
for the LBO model and the adjustments and modifications of multiples and ratios
resulting from the $.20 per share increase, Roney & Co. stated that $8.20 was a
fair price from a financial point of view. Roney & Co. further indicated that if
the Company were bought by means of the average of the prices the Company itself
typically paid to buy companies or books of business, the implied price would be
approximately $6.37 (30% less than the price AJK was offering).
After its oral report, including commenting on the apparent lack of
interest by other possible bidders (in that none had arisen subsequent to the
public announcement on May 5, 1995), the apparent lack of interest of the
companies with which it had contact, and a re-review of various of its analyses
and comparisons also previously rendered on May 19, Roney & Co. rendered its two
final written opinions. One addressed its valuation of the Company and the
other, the "fairness" of what was now the $8.20 per share offer. The letter
addressing "valuation" opined the fair market value of the Common Stock on May
26, 1995 was within a range of $8 to $9 per share based on 3,435,347 shares
issued and outstanding. The second letter addressing "fairness" enumerated what
Roney & Co. had reviewed to arrive at its conclusion and concluded that "the
consideration to be received by the shareholders of the Company is fair from a
financial point of view to the shareholders of the Company." (See Appendices B-1
and B-2 -- Opinions of Roney & Co.)
Upon the receipt of Roney & Co.'s final report and its written opinions,
the Roney & Co. representatives were excused and the Board continued its
discussions of the transaction and the various facts presented in Roney & Co.'s
report. Shortly into such discussions, Roney & Co. called the Company to
indicate the insurance carrier had, that morning while Roney & Co. was making
its report to the Board, contacted it through its investment banker and wished
to make an offer. The Board meeting was temporarily adjourned.
The members of the Board who comprised the Special Committee immediately
withdrew into another office at which time they convened as a meeting of the
Special Committee and called Roney & Co. for an update as to what it had just
been told. It mentioned the insurance carrier had expressed an indication of
interest to acquire the Company for an amount totaling approximately $28
million, of which two-thirds was to be paid in cash and the remaining one-third
was to be evidenced by a promissory note payable over an as-of-yet undetermined
period. The note was to be fully subordinated to the financing that the
insurance carrier would attempt to obtain and would require to accomplish its
proposal.
With that update, the Special Committee then placed a call directly to the
investment banker representing the insurance carrier to hear the recitation
first hand of his client's offer. He confirmed what Roney & Co. had informed the
Special Committee including that no commitment for financing had yet been
obtained. He indicated that the insurance carrier had not had enough time to
arrange financing. When asked what portion of the purchase price would likely be
financed, he indicated at least one-third. That seemed to confirm that the
portion of the offer which was to be represented by a promissory note would be
subject to the risk that its repayment would depend upon whether the insurance
carrier could successfully operate the Company and be able to produce sufficient
profit to both repay the bank and the balance of the purchase price represented
by the note.
The Special Committee after further considering the insurance carrier's
offer found it inadequate when compared to AJK's offer. The Special Committee
discussed that the $28 million mentioned on behalf of the
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insurance carrier was not only somewhat less than the full value now being
offered by AJK, but that in fact AJK's offer of immediate cash made its offer
much more preferable; that having one-third of the purchase price represented by
a note which was to be subordinated to a bank financing and which would depend
upon the repayment of that financing and future performance of the Company then
under the control of the new owners was too much risk. The Special Committee
directed counsel to immediately call back the insurance carrier's representative
and relate to him that the Special Committee believed that its proposal was
inferior to the existing offer and ask if his client was prepared to enhance its
offer. Counsel called back the representative and indicated that the Company had
an offer of more than $28 million "in cash" already. Counsel indicated to the
representative that unless his client was prepared to improve their proposal,
the Company would move ahead as scheduled. The representative stated that his
client had not authorized any additional offer. Counsel informed the
representative that if his client submitted any additional offer before the
shareholder vote, the Board always intended to honor its fiduciary obligations
to the shareholders to consider other offers.
After further discussion, the Special Committee determined the insurance
carrier's offer to be clearly less favorable than AJK's offer and determined
that it would continue its recommendation that the Board of Directors approve
AJK's offer of $8.20 per share.
The Special Committee then terminated its meeting and the full Board of
Directors meeting was reconvened. Mr. Alan H. Barry made a full report to the
Board of the discussions with the insurance carrier's representative and that in
the opinion of the Special Committee the insurance carrier's "proposal" was
"clearly not in the ballpark" and was clearly inadequate when compared with
AJK's offer of $8.20 per share.
After being provided with Mr. Alan H. Barry's and counsel's report of the
meeting of the Special Committee which had just occurred and the discussions
with the other potential bidder's representative that had just transpired, Mr.
Barry reported that the Special Committee was satisfied with its own analyses
and study, and with the Roney & Co. reports that the transaction was fair to
shareholders and was recommending acceptance of the AJK proposal.
The Board then itself discussed that aside from the Roney & Co. report
which they deemed favorable to the proposal, that the insurance carrier's
"proposal" only confirmed the validity of AJK's bid. Supported by their own
analyses and study, the oral and written reports of Roney & Co., the "proposal"
just made by another potential bidder the terms of which were deemed to be
clearly less favorable than AJK's offer, the lack of interest of the one other
party that Roney & Co. had contacted, the fact that no other potential bidder
had stepped forward since the press release had been issued on May 5, 1995 and
the announcements that had appeared in the Dow Jones Wire Services, the Detroit
newspapers and various insurance media, and the favorable recommendation of the
Special Committee, the Board unanimously concluded and approved (without the
presence or participation of Alan J. Kaufman) that the Merger Consideration was
fair to shareholders and in the best interests of the shareholders; that the
negotiations with respect to the Merger Agreement had concluded satisfactorily
subject to several minor adjustments; that the merger proposal, the Agreement
and Plan of Merger and specifically the consideration being offered therein of
$8.20 per share was approved subject to shareholder approval and the other
conditions to closing contained in the Merger Agreement; and that the Board of
Directors would recommend to the shareholders that they approve the AJK proposal
and the Agreement and Plan of Merger.
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD; FAIRNESS OF THE MERGER
The Special Committee of the Board of Directors concluded that the Merger,
including the Merger Consideration ($8.20 per share) and the negotiation and
structure of the Merger, is fair to the shareholders and recommended to the
Board of Directors that it approve the Merger Agreement.
The reason the Special Committee and the Board accepted AJK's offer of
$8.20 per share was to enable all the shareholders of the Company to receive the
Merger Consideration for their shares, with a minimum of conditions and
contingencies. The Special Committee concluded that the Merger Consideration was
fair to the shareholders, and it was concerned that the shareholders might lose
the opportunity to receive a price that compared as favorably to recent market
prices for the shares, given the relatively small number of shares that have
customarily traded on the American Stock Exchange over the last several years.
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In determining to recommend approval of the Merger Agreement and the
transactions contemplated thereby, the Special Committee and the Board
considered a number of factors, and in the case of the Board, the recommendation
of the Special Committee, including the following:
(i) The Merger Consideration of $8.20 per share, which is more than
81% above the market price of the shares on April 5, 1995, 30 days before
the public announcement of the proposal.
(ii) The fact that the shares are not actively traded and constitute a
relatively illiquid investment even though listed on the American Stock
Exchange.
(iii) The fairness opinion received by the Special Committee and the
Board from Roney & Co. that $8.20 per share to be received by the
shareholders in the Merger is fair to the shareholders from a financial
point of view.
(iv) Roney & Co.'s presentation and report regarding its analysis of
various factors.
(v) The fact that the Merger Consideration of $8.20 substantially
exceeds the net book value of $1.89 per share as of March 31, 1995.
(vi) The fact that all shareholders are being offered the opportunity
to convert all of their shares in the Merger, and will receive
consideration consisting solely of cash.
(vii) The fact that the terms of the Merger Agreement and the price to
be paid to the shareholders were determined through negotiations between
AJK and its representatives on the one hand, and the Special Committee and
its representatives on the other hand.
(viii) The assets, obligations, operations and earnings of the Company
and its subsidiaries taken as a whole.
(ix) The Special Committee's judgment regarding the prospects of the
Company based on historical performance and management's projections.
(x) All of the terms and conditions of the Merger Agreement taken as a
whole.
(xi) The timing of the Merger and the oral representations from Alan
J. Kaufman that he has no current intentions to sell the Company or any of
its material assets after the Merger.
The Special Committee and the Board concluded that the foregoing facts
indicated that the alternative of not proceeding with the Merger would not be as
financially attractive to the shareholders and would involve substantially
greater uncertainty to them without a commensurate possibility of gains. In view
of the wide variety of factors considered in connection with the evaluation of
the Merger, the Special Committee and the Board did not find it practicable to,
and did not, quantify or otherwise attempt to assign relative weights to the
specific factors considered in reaching its determinations. The Special
Committee and the Board determined that each of the factors discussed in (i)
through (xi) above were supportive of their determination that the Merger is
fair to the shareholders. However, the Special Committee and the Board believed
that, aside from Roney & Co.'s report, the most important factors that affected
their determination, in descending order of importance were (i) the price per
share offered to the shareholders in the Merger; (ii) the lack of a strong and
active trading market for the shares or a comparable price on such market, as
the one being offered, in the period 30 days, or earlier, of the announcement
and the possibility that any large number of market sales would depress the
present price with the consequent inability of shareholders to otherwise sell
their shares for a fair price; (iii) that the Merger Consideration is payable in
cash; and (iv) the proposed transaction preserves the continuity of the
enterprise, the employment of its more than 450 employees, and its relationships
with suppliers and insurance carriers, while providing a fair price to all
shareholders. In addition, the Special Committee noted in connection with its
review of the Company's historical and projected earnings the fact that the
price per share to be received by shareholders in the Merger takes into account
estimated future performance of the Company.
The Special Committee did not separately compute its own valuation for the
shares because it discussed in detail the procedures followed by Roney & Co. and
was satisfied with the accuracy and thoroughness of
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such procedures. Furthermore, the Special Committee did not have any members who
have as much experience as Roney & Co. in performing valuations. Accordingly, a
separate valuation, if performed by the Special Committee, would have been given
lesser authority.
The Special Committee and the Board considered the fact that there have
been no other offers by third parties to acquire the Company, purchase a
substantial part of the assets of the Company or purchase a controlling block of
the securities of the Company at a price and with terms deemed more favorable
than that offered by AJK. The Special Committee noted that no offer to acquire
the Company or its assets other than that described under "Background of and
Reasons for the Merger" previously herein has even arisen. Accordingly, the
Special Committee and the Board do not believe that it would be worthwhile to
further seek a third party acquiror for the Company. The Company, however, has
retained the option to consider, negotiate and recommend any unsolicited offer
from a third party to acquire the Company made prior to the date of the
shareholder vote approving the Merger.
The Special Committee did give great weight to the current and historical
market prices of the shares in making its determination with respect to the
fairness of the consideration to be received in the Merger.
The Special Committee and the Board also reviewed carefully the interests
of certain of the Company's officers and directors in the transaction and does
not believe that its fairness determination was adversely affected as the result
of any such interests. See "-- Interests of Certain Persons in the Merger."
The liquidation of the Company was not considered a reasonable alternative
by the Special Committee or the Board given AJK's interest in maintaining the
Company as a going concern for post-merger operations and the uncertainty of
realizing fair market value of assets in a liquidation sale. Based on the
foregoing factors and the opinion of management that insurance brokerage
operations lack the type of assets to allow for any meaningful liquidation
return in that a good deal of the Company's value is in its "goodwill" (i.e.,
its ability to generate revenue as a going concern), the Special Committee and
the Board do not believe that liquidation could have resulted in greater value
being received by the shareholders.
The Special Committee and the Board recognized that the Merger is not
structured to require the approval of the majority of the unaffiliated
shareholders of the Company and that Herbert W. Kaufman, the father of Alan J.
Kaufman, has sufficient voting power to virtually effect the Merger without the
affirmative vote of any other shareholder. Herbert W. Kaufman has expressed his
desire for support of the Merger but only if all shareholders, including
himself, are provided a fair price. The Special Committee and the Board also
recognized the conflicts of interest of various members of management who are
expected to participate in and become part of the ongoing corporation's
management, including Herbert W. Kaufman who is expected to continue on as
President and a Director of the Company. See "-- Interests of Certain Persons in
the Transaction." Finally, the Special Committee and the Board acknowledged that
the transaction would eliminate the opportunity for the shareholders to
participate in future growth of the Company but would also eliminate the risk of
any future decreases in the value of the Company. Nonetheless, because of the
terms of the Merger Agreement and the other reasons set forth above, it was the
opinion of the members of the Special Committee and the Board that the revised
proposal of $8.20 per share was fair to the shareholders and in the best
interests of the shareholders.
The Board of Directors of the Company has concluded that the Merger
Consideration and the negotiation and structure of the Merger is fair to and in
the best interests of the shareholders and recommends that shareholders vote to
approve and adopt the Merger Agreement based upon the recommendation of the
Special Committee and the opinion of the Special Committee's financial advisor
to the effect that the $8.20 to be received in the Merger is fair from a
financial point of view to the shareholders which opinion, as well as the
conclusion and analysis of Roney & Co. and the Special Committee, the Board has
adopted as its own.
OPINION OF THE COMPANY'S FINANCIAL ADVISOR
Roney & Co. was retained by the Special Committee to render advice to the
Special Committee in connection with the proposed Merger. The Special Committee
of the Company had requested the opinion of
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<PAGE> 20
Roney & Co. as to the fairness, from a financial point of view, of the proposed
consideration to be received by the shareholders of the Company pursuant to the
proposed Merger offer.
Roney & Co. is a regional investment banking firm. As part of its
investment banking services, it is regularly engaged in the valuation of
corporate securities in connection with public offerings, valuations and merger
and acquisition transactions. Roney & Co. was chosen by the Special Committee of
the Board of Directors to conduct a fairness opinion on the basis of its
familiarity with the financial services industry generally and in the relevant
area, and its qualifications, ability, previous experience, and reputation. No
limitations were imposed by the Special Committee upon Roney & Co. with respect
to the investigations made or the procedures followed by Roney & Co. in
rendering its opinion.
On May 19, 1995 Roney & Co. rendered its oral opinion to the Special
Committee of the Board of Directors to the effect that the range of acceptable
values for the Company was $8 to $9 per share, and as of the date of such
opinion, the consideration of the Merger Agreement was fair, from a financial
point of view, to the shareholders of the Company. Roney & Co. subsequently
rendered written opinions to the Board of Directors dated May 26, 1995, to the
effect that the range of valuation for the Company's Common Stock was $8 to $9
per share, and as of that date, the consideration to be received under the
Merger Agreement by the shareholders of the Company was fair, from a financial
point of view. Such opinion described the assumptions made, matters considered
and the scope of the review undertaken and the procedures followed by Roney &
Co. Roney & Co.'s opinion as to "fairness" is included in this Proxy Statement
as Appendix B-1 and as to "valuation" of the Common Stock in Appendix B-2, and
each is incorporated herein by reference. SHAREHOLDERS ARE ENCOURAGED TO READ
RONEY & CO.'S OPINIONS IN THEIR ENTIRETY.
Roney & Co.'s opinion is directed to the Board of Directors of the Company
and addresses the "fairness" of the consideration to be received by
shareholders, but does not constitute a recommendation to any shareholder of the
Company. The consideration to be received by the shareholders of the Company was
first proposed by Alan J. Kaufman, the person in control of the actual acquiring
entity, and finally determined through negotiation between the proposed
purchaser and the Special Committee of the Board of Directors. Roney & Co. did
not recommend the amount of consideration to be paid.
In arriving at the opinion as set forth below, Roney & Co. has, among other
things:
Reviewed a draft copy of the Merger Agreement dated May 2, 1995;
Reviewed the Company's Annual Report on Form 10-K and related
financial information for the five fiscal years ended December 31, 1994 and
the quarterly Reports on Form 10-Qs as filed with the United States
Securities and Exchange Commission ("SEC") for the periods ended March 31,
1995, September 30, 1994, June 30, 1994 and March 31, 1994, and certain
internal financial information related thereto;
Reviewed the Company's Annual Report to Shareholders as filed with the
SEC and related financial information for the three years ended December
31, 1994;
Reviewed other selected financial information for the quarterly
periods ended March 31, 1995, December 31, 1994 and September 30, 1994;
Reviewed the relevant market information regarding the shares of
Common Stock of the Company including historical trading activity, prices
and volume;
Compared certain financial characteristics of the Company to other
publicly held companies in the insurance industry deemed to be relevant;
Reviewed selected information concerning current industry conditions
and trends relating to the valuation of recent mergers and acquisitions
within the insurance brokerage industry;
Compared the proposed terms of the offer contemplated in the draft
Merger Agreement with the financial terms of certain other mergers and
acquisitions which were deemed to be relevant;
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<PAGE> 21
Conducted discussions with members of senior management of the Company
concerning the business, operations, recent financial condition and future
prospects of the Company;
Reviewed the Company's internal forecast for the fiscal years 1995
through 1999;
Prepared a discounted cash flow analysis of the Company and an
estimate of the value of the Company under three different scenarios;
Reviewed such other financial and industry data and performed such
other analysis and took into account such other matters as were deemed
appropriate.
In preparing its opinion, Roney & Co. relied upon the accuracy and
completeness of all financial and other information supplied or otherwise made
available to it by the Company and did not independently verify such information
or undertake an independent evaluation or appraisal of the assets of the
Company.
In preparing the fairness opinion, Roney employed 12 different valuation
ratios that are more fully described below. These 12 ratios included calculating
four average ratios for a group of "comparable" companies (as described more
fully herein) and then applying those average ratios to the proposed offer to
find an implied price per share; calculating four average ratios for recent
mergers and acquisitions in the industry and applying those ratios to the
proposed offer to find an implied price per share; calculating one ratio for
recent acquisitions by the Company itself and applying that ratio to the
proposed offer to find an implied price per share; and calculating three values
for the Company's stock based on a discounted cash flow analysis. The average of
these 12 valuation ratios implied a value of $8.17 per share.
Stock Price Analysis
Roney & Co. prepared a trading history of the shares of the Company from
January 1994 to May 1995. The data was tabulated showing the highs and lows of
the stock price and the total shares traded for each month over the 17 month
period. This information revealed that the shares of the Company traded in a
tight range from $3.75 to $4.54 between January 1994 and March 1995. During the
month of April 1995, the Company's stock traded on 14 different days. The low
for April was the 7th when the stock closed at $4.48 per share and the high for
April was on the 28th when the stock closed at $5.625. For the month of May, the
Company's stock traded on the 3rd at $6.125, on the 4th at $7.125, on the 5th at
$7.125, on the 8th at $7.125, on the 11th at $7.125, on the 15th at $6.875, on
the 16th at $7.00, on the 17th at $7.00, on the 18th at $6.8125, on the 19th at
$6.75, on the 23rd at $6.75, on the 24th at $6.625 and on the 25th at $6.875.
Roney & Co. gave their written report on the 26th of May to the Company's Board
of Directors. In April and May of 1995 prior to the announcement of the offer on
May 5, the Company had issued a few news releases that may or may not have
caused the shares of the Company to rise or fall. On April 4, the Company filed
its 10-K for the year ended December 31, 1994, on April 17 the Company declared
a 10% stock dividend to be paid on May 17 and on May 2 the Company released
first quarter net earnings of 5 cents a share vs. 3 cents a share for the first
quarter of 1994. Roney & Co. concluded that the $8.20 per share proposed offer
was in excess of the value the market was placing on the Company's stock when
looking at the time frame from January 1994 up to April 28, one week prior to
the announcement of the offer and even thereafter.
Comparison with Selected Companies
Roney & Co. compared selected financial ratios for the Company to the
corresponding ratios for a "comparable group" of publicly traded companies.
Although no company was solely involved in the wholesaling of specialty
insurance and related premium financing as does the Company, each of these
somewhat comparable companies according to their business description had
business interests in the insurance brokerage industry or other insurance
related industries Roney & Co. deemed to be relevant. The comparative companies
were also chosen based on conversations with Company management as to which
companies they encountered competing in their same general business. The
comparable list consisted of: (Company/Ticker Symbol) Acordia, Inc. (ACO),
Alexander & Alexander (AAL), Aon Corporation (AOC), Arthur J. Gallagher (AJG),
Baldwin & Lyons (BWINB), W.R. Berkley Corp. (BKLY), E.W. Blanch Holdings, Inc.
(EWB), Continental Corporation (CIC), Gainsco, Inc. (GNA), Hilb Rogal and
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<PAGE> 22
Hamilton (HRH), Home Holdings, Inc. (HHI), Marsh & McLennan (MMC), Mutual Risk
Management (MM), Poe & Brown, Inc. (POBR), St. Paul Co. Companies (SPC),
Victoria Financial, Inc. (VICF), Transatlantic Holdings, Inc. (TRH),
Underwriters Financial Group (UFG), Willis Corroon Group (WCG). Roney & Co.
chose to use the following four ratios because of the availability of such
information and the fact that these ratios are commonly used in valuations. The
four ratios are the (i) 1994 price earnings ratio (Stock Price/Earnings per
share); (ii) the estimated 1995 price earnings ratio; (iii) the price to book
ratio (Stock Price/BookValue per share) ( "Book Value" being defined as total
shareholders' equity divided by total shares outstanding); and (iv) the Market
Capitalization to Net Revenue Ratio (Market Capitalization/Last 12 months Net
Revenue), with Market Capitalization being defined as stock price times total
shares outstanding. On the average the 1994 price-earnings ratio for the group
was 16.5 and the estimated 1995 price earnings ratio was 13.5. On March 31,
1995, prior to the offer, the Company's Common Stock closed on the American
Stock Exchange at $4.53 which, based on 1994 earnings of $.57 per share and 1995
expected earnings of $.65 per share implied a 1994 price earnings ratio of 7.89
and a 1995 price earnings ratio of 6.92. Roney & Co. then noted the proposed
offer of $8.20 results in an implied 1994 price earnings ratio of 14.3 and a
1995 price earnings ratio of 12.6. Roney & Co. then applied the comparables
group of companies' average multiples of 16.5 and 13.5 for 1994 and 1995 to the
Company's earnings and a value of $8.58 per share was derived based on the 1994
comparables group average multiple and a value of $8.78 was derived based on the
estimated 1995 average group multiple.
The average stock price-to-book ratio for the group was 2.7 and the average
market capitalization (stock price times shares outstanding) to net revenue was
1.47. The March 31, 1995 closing price of the Company's Common Stock was $4.53
which based on a book value of $1.89 implied a price-to-book ratio of 2.38.
Based on the proposed offer of $8.20, Roney & Co. calculated an implied
price-to-book ratio of 4.34. Roney & Co. then applied the comparable group's
average price-to-book ratio of 2.7 to the Company's book value of $1.89 and a
value of $5.12 per share was calculated.
In calculating the market-capitalization-to-net revenue ratio, based on the
$4.53 stock price on March 31, 1995 prior to the offer, with approximately
3,440,000 shares outstanding and net revenue over the last 12 months of
$28,596,000, Roney & Co. found that the Company was trading at a ratio of .55.
Based on the proposed offer of $8.20 for each share of the Company, Roney & Co.
implied a ratio of .90. Roney & Co. then applied the group's average
market-capitalization-to-net revenue ratio to the Company's net revenue of
$28,596,000 and calculated an implied value of $12.24 per share. Roney & Co.
also noted however that the other companies which were included within the group
that was being compared consisted primarily of retail insurance brokerage
operations as opposed to wholesale operations which comprise the operations of
the Company. Roney & Co. noted such retail brokerage operations enjoy higher
renewal of insurance business than do wholesale operations and one would expect
the value of their revenue stream to produce a higher implied value than a
wholesale operation.
On the basis of the foregoing, Roney & Co. concluded that prior to the
proposed offer the Company's stock was trading at a discount to the group based
on all four ratios. This discount was partially explained due to the following
factors: the Company's small net revenue base, small market capitalization, lack
of trading and lack of research coverage relative to the group. Roney & Co. did
not give more or less weight to any of the four ratios used in the comparison
with selected companies. Roney & Co. concluded that the $8.20 offer was within
the acceptable range of values when using the comparisons with selected
companies calculations.
Analysis of Recent Mergers and Acquisitions
Roney & Co. analyzed certain other mergers and acquisitions in the Standard
Industrial Classification (SIC) code in which the Company operates, 6411. Roney
& Co. used a sample of 12 U.S. target companies within the 6411 SIC code that
completed transactions between July 31, 1989 and March 1, 1995. The
(Target/ Buyers) were: Kendall Insurance Inc./ Corroon & Black Corp.; Adjustco
Inc./ Preferred Health Care Ltd.; Brown & Brown Inc./ Poe & Associates Inc.;
Celina Financial Corp./ National Mutual Insurance Co.; Madison Capital
Inc./ Citation Insurance Group; Woodsmall Cos./ Arthur J. Gallagher & Co.;
Equivest Finance Inc./ Atlantic Investment Partners; Allegiance Insurance
Co./ Horace Mann Educators Corp.; Gen Insurance Co. (Gen Holding)/ Intergroup
Healthcare Corp.; Equivest Finance (Atlantic)/ Investor group;
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<PAGE> 23
Health Enterprises Inc./ Coastal Healthcare Group Inc.; Bankers Financial
Corp./ Miners National Bancorp. The average price-to-book ratio for the group
was 4.96 and the average total value of the offer to net revenues for the group
was 1.31. Based on the $8.20 proposed offer, Roney & Co. calculated an implied
price to book value of 4.34. Roney & Co. then applied the group average of 4.96
to the Company's book value of $1.89 and calculated a value of $9.37 per share.
With regard to the total net value of the offer to net revenue ratio, based on
the $8.20 proposed offer, Roney & Co. implied a ratio of .99. Roney & Co. then
applied the 1.31 group average to the Company's last 12 months of net revenue of
$28,596,000 and estimated an implied value of $10.79 per share. Again, Roney &
Co. mentioned the difference between retail and wholesale revenue streams and
the higher implied values normally given the former.
Roney & Co. also consulted other industry sources which regularly issue
reports and analyses concerning the insurance industry. These sources revealed
that in 1994, transactions in the insurance brokerage industry were completed
with an average total value of the offer to net revenue multiple of 1.20. Based
on the $8.20 proposed offer and Company net revenues not including contingent
commissions received over the last 12 months' of $28,596,000 this would imply a
ratio of .99. That is, the cash to be paid in the proposed merger is
approximately 1 times the then last 12 months revenue (not including contingent
commissions which can vary dramatically from year to year) at March 31, 1995. If
contingent commissions were included the ratio of value to the offer to total
LTM net revenue would be .93. The sources also highlighted Hilb, Rogal and
Hamilton as an active company in the insurance brokerage acquisition area. Roney
& Co. found that, on the average, Hilb, Rogal and Hamilton reports paying 6
times operating income for its acquisitions. Roney & Co. then applied a "6 times
operating income" formula to the Company's operating income and estimated that
if one were to pay 6 times operating income for the Company, they would pay
$4.93 per share ($2,822,600 operating income multiplied by 6 and divided by
3,435,347 shares outstanding). Based on the $8.20 offer and operating income of
the Company (before income taxes) over the last 12 months of $2,822,600, Roney &
Co. determined AJK was paying 10.02 times operating income.
Roney & Co. also analyzed seven acquisitions that the Company itself had
completed from December 1991 through March 1995. These acquisitions included
Floyd West & Co.; RKS Corp.; Howard James Co.; A&H Cleveland; A&H Atlanta (CA);
McLaughlin Agency; Illinois R. B. Jones. Based on these transactions, the
consideration paid by the Company itself in its prior acquisitions reflect an
average total value to net revenue of .77. Based on the $8.20 proposed offer and
net revenue for the Company over the last twelve months of $28,596,000 this
implied a ratio of .99 that AJK would be paying for the Company. Roney & Co.
then applied the .77 times net revenue to the Company's net revenue and
estimated an implied value of $6.37 per share. That is, if AJK were employing
the Company's own average acquisition methodology, the acquisition price for the
Company would be approximately $6.37 per share.
On the basis of the foregoing, Roney & Co. concluded that whether looked at
either as .93 or .99 of net revenues, the proposed offer is still at a premium
to the average .77 times net revenue figure the Company itself paid on average
for its recent acquisitions. Roney & Co. also found the proposed offer to be at
a premium when compared to, on average, what Hilb, Rogal and Hamilton would
reportedly pay. When the other ratios were considered, including those found in
analyzing recent mergers and acquisitions within the 6411 SIC code, those found
using the industry sources and the Hilb, Rogal and Hamilton reported
information, Roney & Co. concluded the $8.20 per share offer by AJK was fair
from a financial point of view.
Discounted Cash Flow Analysis
A discounted cash flow analysis is a traditional valuation methodology used
to derive a valuation of a corporate entity by capitalizing the estimated future
earnings and calculating the estimated free cash flows of such corporate entity
and discounting such aggregated results back to the present. Roney & Co.
performed three different discounted cash flow calculations. Using the
projections of future performance as described below Roney & Co. calculated the
estimated "free cash flow" based on projected unleveraged net income before
interest and taxes as adjusted for depreciation and amortization and projected
capital expenditures. The first calculation, based upon the Slow Growth
scenario, used a sales growth rate of 9% in 1995 and 10% every year thereafter.
Commissions paid (commissions paid other agents) were held at Company historical
levels of 43.5%, operating expenses were held at 51.5% (the historical average),
taxes were held at the historical 45%
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level and the discount rate used was 15% (this discount rate represents Roney &
Co.'s estimate of the weighted average cost of capital to the Company). This
scenario produced a value of $5.14 per share. The "Company Projections" scenario
employed the Company's own projections dated February 27, 1995 which included
revenue growth rates of 9% in 1995 and 15% thereafter. Those projections
presumed commissions paid other agents were held at historical levels and
operating expenses dropped steadily from 50.4% in 1994 to 47.6% in 1999, bonuses
were added to the expense line, taxes were held at 45% and the discount rate
used was 15%. The "Company Projections" scenario produced a value of $7.35 per
share. The third, "Most Optimistic", scenario employed the Company projections
as well as included a number of cost reductions in the operation that Roney &
Co. estimated an industry buyer might use in its analysis including reduced
executive overhead and branch closings or consolidations. This last scenario
used the same 15% discount rate and produced a value of $9.35 per share. The
average of the three scenarios produced an implied value of $7.28.
On the basis of the foregoing, Roney & Co. concluded that using the
discounted cash flow approach the $8.20 per share proposed offer was a slight
premium to the $7.35 per share value that was calculated using the Company's own
five year forecast. When analyzing the outcome of the slow growth scenario the
$8.20 proposed offer is a substantial premium, and when analyzing the most
optimistic scenario the $8.20 proposed offer is at a discount. Taking into
account the three scenarios, Roney & Co. concluded the proposed offer of $8.20
per share was within the acceptable range of values when using the discounted
cash flow analysis.
None of the above analyses performed by Roney & Co. was assigned a greater
significance than any other.
Leveraged Buyout Analysis
A Leveraged Buyout (LBO) analysis was also performed by Roney & Co. to
determine if a "financial buyer" (e.g., a non-industry buyer) would find the
assets of the Company sufficiently leverageable in such a transaction to exceed
AJK's offer. An LBO model is a secondary model used in corporate valuations and
therefore given less weight than primary valuation indicators. Roney & Co.
prepared an LBO model and found that there were not sufficient assets of the
Company to leverage for a financial buyer to be enticed into a transaction that
could result in an above market rate of return which financial buyers usually
demand, especially if one were attempting to finance an offer that would exceed
the $8.20 per share price.
Conclusion
Based upon all of the foregoing various analyses and comparisons, Roney &
Co. concluded that the value represented by the offer by AJK of $8.20 per share
was fair, from a financial point of view, to the shareholders of the Company.
Other Factors for Shareholders to Consider
Although the material analyses performed by Roney & Co. in rendering its
opinion have been summarized above, that summary does not purport to be a
complete description of the analyses performed by Roney & Co. Its analyses and
the summary set forth above must be considered as a whole. Selecting portions of
Roney & Co.'s analyses or even a particular method of analyses of the ones that
were employed, without considering all factors and the differing analyses, may
create an incomplete view of the process by which Roney & Co. reached its
opinion. In addition Roney & Co. gave no one particular analysis more or less
weight than other analyses, nor did Roney & Co. deem various assumptions more or
less probable than other assumptions, so that the ranges of valuations resulting
from any particular analysis described above should not be taken to be Roney &
Co.'s view of the actual value of the Company. Roney & Co. had indicated to the
Company that the preparation of a fairness opinion is to a large degree
judgmental and is not necessarily susceptible to partial analysis or summary.
In performing its analysis, Roney & Co. made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of the Company. Roney & Co.
used in its analyses various projections of future performance based on
assumptions deemed reasonable by Company management. The projections are based
on numerous variables
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and assumptions which are inherently unpredictable and must be considered not
certain of occurrence as projected. Accordingly, actual results could vary
significantly from those assumed in the projections and any related analysis. No
one analysis, nor any set of analyses, performed by Roney & Co. is necessarily
indicative of actual values or actual future results, which may be significantly
more or less favorable than suggested by such analyses. All such analyses were
prepared solely as part of Roney & Co.'s analysis of the fairness, from a
financial point of view, of the consideration to be received by Company
shareholders. The analysis does not purport to be an appraisal or to reflect the
prices at which a company might actually be sold or the prices at which any
securities may trade at the present time or at any time in the future.
Roney & Co.'s fairness opinion does not address relative merits of the
Merger Agreement as compared to any alternative business strategy that might
exist for the Company or the effect of any other business combinations in which
the Company might engage. In addition as described above, Roney & Co.'s opinion
to the Company's Board of Directors was only one of many factors taken into
consideration by the Board in its decision to approve the Merger Agreement and
the Merger.
For Roney & Co.'s services in connection with the rendering of its
opinions, the Company has paid Roney & Co. $40,000. The Company also agreed to
reimburse Roney & Co. for reasonable out-out-pocket expenses, including
reasonable fees and expenses of legal counsel, and has agreed to indemnify Roney
& Co. against certain expenses and liabilities incurred in connection with its
engagement, including liabilities under federal securities laws.
Roney & Co. may, in the ordinary course of its business, trade securities
of the Company for its own account or for the accounts of customers and thus may
hold long or short positions in such securities at any time (it presently holds
935 shares for customers). Although there exist no present plans to do so, Roney
& Co. may in the future be considered by the Company to provide investment
banking and securities brokerage services. These relationships are considered by
the Company to be in the ordinary course of business and to be immaterial to
Roney & Co.'s engagement as described herein.
ANALYSES PERFORMED BY ALAN J. KAUFMAN'S FINANCIAL ADVISOR
In February, 1995, Alan J. Kaufman engaged Coopers & Lybrand, L.L.P.
("C&L"), through its Midwest Corporate Finance Group, as his financial advisor
to perform certain due diligence with respect to the Company, and to provide
financial data and analyses to assist him in determining whether to submit a
proposal to acquire the Company. C&L was also retained to assist Alan J. Kaufman
in structuring, and securing appropriate financing for, any such contemplated
acquisition. C&L was engaged by Alan J. Kaufman after he had interviewed C&L and
several other possible financial advisors. C&L had no relationship with Alan J.
Kaufman prior to its retention as financial advisor. C&L was chosen on the basis
of its qualifications, ability, experience, reputation and its familiarity with
the insurance industry and no limitations were imposed on C&L with respect to
its work pursuant to its engagement. C&L executed a confidentiality letter with
the Company and was given access to whatever data and records it requested.
C&L prepared a market multiple analysis for Alan J. Kaufman by comparing
certain current selected financial ratios of the Company with those of 13 other
publicly-traded companies. Although none of the publicly-traded companies was
involved entirely in the same business as the Company, each had business
interests in the insurance brokerage industry or other insurance-related
industries that C&L concluded would allow them to be appropriate comparison
purposes. The comparable list consisted of (company/ ticker symbol); Acordia Inc
(ACO); Alexander & Alexander (AAL); AON Corp (AOC); Berkley (WR) Corp (BKLY);
Baldwin & Lyons-CLB (BWLNB); Continental Corp (CIC); Hallmark Finl Svcs Inc
(HAF.EC); HILB Rogal & Hamilton Co (HRH); Homeowners Group Inc (HOMG); Markel
Corp (MAKL); Poe & Brown Inc (POBR); St. Paul Cos (SPC) Universal Hldg Corp
(UHCO). C&L chose to use the following five ratios because of the availability
of such information and the fact that these ratios are commonly used in
financial analyses: total capitalization/ revenues; total
capitalization/ earnings before interest and taxes; total
capitalization/ earnings before interest, taxes, depreciation and amortization;
market capitalization/ earnings; and market capitalization/ book value. For
these purposes, market capitalization was deemed to be stock price times total
shares outstanding; total capitalization was deemed to be market capitalization
plus longterm
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indebtedness; and revenues consisted of gross revenues (i.e., commissions and
fees including any contingent income) before deductions for cost of commission
and fees.
The ranges for each of the ratios for the 13 public companies were very
expansive and C&L accordingly excluded in each category the two highest and two
lowest values in order to arrive at more meaningful ranges. C&L then took the
range for each financial ratio at its low end, midpoint and high end and applied
such ranges to comparable numbers of the Company for 1994 to arrive at implied
equity values for the Company. Using the midpoint range, this market multiple
analysis illustrated the following implied equity values for the Company based
on the following ratios: market capitalization/ book value -- $10,490,000;
market capitalization/ earnings -- $19,970,000; total capitalization/ earnings
before interest and taxes -- $22,240,000; total capitalization/ earnings before
interest, taxes, depreciation and amortization -- $28,950,000; and total
capitalization/ revenues -- $47,590,000. The average of the five ratios showed
an implied equity value for the Company of $25,848,000 (approximately $7.51 per
share) based on the midpoint range. If the highest ratio (total
capitalization/ revenues) were eliminated, the average of the four other
financial ratios would demonstrate an implied equity value for the Company of
$20,412,000 ($5.93 per share) at the midpoint range. If the lowest ratio (market
capitalization/ book value) were eliminated, the average of the four other
financial ratios would demonstrate at midpoint range an implied equity value of
$29,690,000 ($8.63 per share).
C&L's work consisted of the market multiple analysis described above. It
did not submit any report, opinion or appraisal and made no recommendation as to
the fairness of the proposed transaction. Alan J. Kaufman reviewed the market
multiple analysis prepared by C&L. The proposal of $8.00 per share in cash for
each share of outstanding stock of the Company made on May 2, 1995 (subsequently
increased to $8.20 per share) took into consideration the information contained
in the market multiple analysis, as well as the current and historical market
prices for the Company's Common Stock, his own experience and knowledge of the
insurance industry and his overall evaluation of the value of the Company.
DISSENTERS' RIGHTS
Under Michigan law, rights to demand an appraisal process supervised by a
county circuit court are unavailable if the shares concerned are listed on the
New York or American Stock Exchange. The Common Stock is listed on the American
Stock Exchange. Such dissenters' rights are also unavailable under Michigan law
in "cash merger" transactions such as the Merger proposal to be voted upon.
However, certain principles of state corporation law relating to substantive or
procedural fairness may apply when shareholders no longer have an equity
interest in a corporation as a result of a merger or acquisition. It is possible
that a holder of Common Stock could pursue other judicial remedies if the holder
believes directors of the Company have breached their fiduciary duty to
shareholders. See "THE MERGER -- Certain Litigation."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
The aggregate amount of cash to be paid to the Company's shareholders
pursuant to the terms of the Merger is approximately $28,337,653, which includes
payment for 3,440,558 shares outstanding as of the Record Date (4,234 of which
were issued as of June 30, 1995 by the Company for $7.69 each pursuant to an
Employees Stock Purchase Plan which has now been terminated), the difference
between the exercise price of $4.96 for 24,200 unexercised stock options, 6,050
held by each of four Board members (two of whom comprise the Special Committee)
and the $8.20 cash merger price; and 8,470 unexercised stock options held by
branch managers or assistant branch managers exercisable at $2.69 per share who
will also receive the difference between their exercise price and the $8.20 cash
merger price. For a listing of the shareholdings and options of the Company's
directors and executive officers, see "COMMON STOCK OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT."
It is anticipated that the officers and Directors of the Company will
continue to serve in such functions for the Company following the Merger. Alan
J. Kaufman will serve as President and the sole director of AJK. Herbert W.
Kaufman, President and Director, and Gerald W. Horton, Senior Vice President,
will continue as officers of the Company after the Merger under their existing
employment agreements amended only to provide that the amortization of any
indebtedness in connection with the proposed Merger will not reduce
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bonuses or profit sharing contributions provided for in such agreements. Herbert
W. Kaufman's employment agreement provides that upon his retirement he is also
to serve as a consultant to the Company for seven years. Other senior officers
including Gerald A. Wesolowski, Chief Financial Officer, and Brooke Bothe,
Corporate Secretary, George F. Allen, Senior Vice President of Burns & Wilcox,
Ltd., and David Price, Vice President of Burns & Wilcox, Ltd., will also
continue their employment and compensation arrangements with the Company, and
bonus arrangements, where existing, will also be amended to provide that the
amortization of indebtedness incurred to effectuate the Merger will not affect
their compensation and bonuses.
In addition, Alan J. Kaufman and Herbert W. Kaufman own approximately 50%
and 6%, respectively, of the equity interest of a partnership that leases the
headquarters' property to the Company. The lease, which has a term expiring
December 31, 2000 provides for payments by the Company of approximately
$259,000, $279,000, $296,000, $308,000 and $318,000 per year (1995-1999), in
addition to certain prorated costs attributable to property taxes and operating
costs of the building above a 1994 base. The lease will continue in effect
following the Merger.
At December 31, 1994, the Company had a $697,663 receivable from an
irrevocable trust established by Herbert W. Kaufman, in which his children are
the primary beneficiaries. This amount represents the payment of premiums on a
split-dollar life insurance arrangement. The Company has a security interest in
the policy to the extent of the premiums advanced. The balance of such
receivable at December 31, 1993 was $614,029. The Company intends to continue
this arrangement after the Merger.
Neal F. Zalenko, a director, is a certified public accountant. Although his
firm, Zalenko and Associates, P.C., does not perform the audit of the Company's
consolidated financial statements, he is paid to perform advisory and consulting
services. The Company plans to continue this arrangement. For the year ended
December 31, 1994, the Company incurred fees of $20,041 for Zalenko and
Associates, P.C.
Alan J. Kaufman is a principal in the law firm of Kaufman and Payton, P.C.
His firm performs various legal services for the Company. The Company expects to
continue to retain such firm on a regular basis. For the year ended December 31,
1994, the Company incurred fees of $111,060 for Kaufman and Payton, P.C.
Lillian Kaufman, the mother of Alan J. Kaufman, and at the Record Date the
beneficial owner of 25.5% of the Common Stock, intends to loan AJK $4,000,000
and she will receive in return a 9%, 10 year unsecured subordinated note. See
"THE MERGER AGREEMENT -- Financing the Transaction: Sources and Amounts of
Funds."
It is also anticipated that the business of the Company after the Merger
will be conducted in essentially the same manner as it is presently conducted.
Neither the management of the Company nor continuing members of the Board of
Directors of the Company have any present plans to purchase or sell any material
assets prior to or subsequent to the Merger, other than in the ordinary course
of business.
CERTAIN EFFECTS OF THE MERGER
Upon consummation of the Merger, each share of Common Stock will be
converted into the right to receive the Merger Consideration. Acquisition will
merge with and into the Company, with the Company becoming a wholly owned
subsidiary of AJK. As a result, the present holders of the Common Stock will
cease to have any ownership interest in the Company or rights as stockholders
and will cease to participate in the Company's future earnings and growth in
value of the Company, if any. Similarly, such shareholders will not face the
risk of any decline in the value of the Company after the Merger. Any and all
appreciation or depreciation in the value of the Company will be borne solely by
AJK, controlled by Alan J. Kaufman. The Merger will be a taxable transaction to
the holders of the Common Stock for federal income tax purposes and may be
taxable for state, local, foreign and other tax purposes. The Company
shareholders may incur a taxable gain for federal income tax purposes as a
result of the receipt of cash in exchange for Common Stock if their basis in the
Common Stock is less than $8.20 per share. See "-- Certain Federal Income Tax
Consequences of the Merger."
It is expected that the Merger between Acquisition, the subsidiary
controlled by AJK, whose sole shareholder is Alan J. Kaufman, and the Company
itself will qualify as a tax-free reorganization pursuant to
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Section 368(a)(1)(A) of the Internal Revenue Code and that neither the Company
nor Alan J. Kaufman will incur any federal income tax as a result of the Merger.
However, as indicated previously, shareholders of the Company receiving $8.20
per share will have taxable gains.
The beneficial ownership of the equity interest of Alan J. Kaufman will
increase from less than 1% to 100% as a result of the Merger. Mr. Kaufman's
percentage ownership in the Company's net book value and net earnings will
change correspondingly upon consummation of the Merger (the Company, after the
Merger, becoming a subsidiary of AJK). At the same time, however, the cash
payments to be paid from the Company's funds in the Merger may decrease the
Company's net book value and the interest due on the debt incurred to effectuate
the Merger will likely decrease future net earnings. See "THE MERGER AGREEMENT
-- Financing the Transaction: Sources and Amounts of Funds."
After the Merger is consummated, the Company will file a certification with
the Securities and Exchange Commission that it is owned by less than 300 persons
and request termination of registration of its Common Stock. The Company's
obligation to file reports with the SEC, such as annual and quarterly reports
and proxy statements, will terminate immediately upon filing of the
certification. Its registration will be terminated within 90 days after such
filing. Such termination will mean that the Company will no longer be obligated
to hold annual or special shareholder meetings for which proxies must be
solicited pursuant to a proxy statement, to print and to distribute to
shareholders annual or quarterly reports or proxy statements, to maintain a
transfer agent for its Common Stock, or to retain counsel or accountants to
assist in the preparation of any of the above reports or statements.
TAX WITHHOLDING
The Company will have the obligation to deduct and withhold from the Merger
Consideration payable to a holder of Common Stock such amounts as it is required
to deduct and withhold with respect to the payment under applicable tax law. The
Letter of Transmittal each shareholder will receive after the Special Meeting
will, among other instructions, address the issue of what information is
required to prevent tax withholding for any particular shareholder (the
shareholder will be required to supply certain information to avoid tax
withholding, e.g., his/her social security number).
CERTAIN LITIGATION
On June 16, 1995, a lawsuit was commenced in the Circuit Court for the
County of Oakland, Michigan, Case No. 95-499008-CZ, relating to the proposed
merger and naming as defendants the Company, each of its Directors and AJK and
Acquisition. The plaintiff is Richard N. Frank, and he purports to represent a
class which includes shareholders of the Company other than the defendants. The
complaint sets forth general allegations that, among others, the Directors
breached their fiduciary duties to the shareholders by "grossly" undervaluing
the Company and its shares, by failing to obtain a fair price and that Herbert
W. Kaufman and Alan J. Kaufman agreed to set a low per share buyout price and
that each defendant aided and abetted the other in such attempt. The principal
relief sought is a declaration as a class action and recovery of damages in an
unspecified amount against all defendants, including attorney fees and all
costs. The Company does not anticipate that this lawsuit will affect the
consummation of the Merger and filed its answer to the lawsuit on July 7, 1995
denying the plaintiff's allegations. The Company intends to contest the suit
vigorously.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The receipt of the Merger Consideration by a shareholder in exchange for
shares of Common Stock pursuant to the Merger will be a taxable transaction for
federal income tax purposes under the Internal Revenue Code (the "Code"), and
may also be a taxable transaction under applicable state, local, foreign and
other tax laws.
In general, a shareholder will recognize gain or loss equal to the
difference between the tax basis for the shares of Common Stock held by such
shareholder and the amount of cash received in exchange therefor. Such gain or
loss will be capital gain or loss if the shares of Common Stock are capital
assets in the hands of the shareholder and will be long-term capital gain or
loss if the holding period for the Common Stock is more
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than one year. Long-term capital gains recognized in 1995 by shareholders who
are individuals are taxable at a maximum rate of 28% (as compared with a maximum
rate of 39.6% on ordinary income). Corporations generally are subject to tax at
a maximum rate of 35% on both capital gains and ordinary income. The distinction
between capital gain and ordinary income may be relevant for certain other
purposes, including the taxpayer's ability to utilize capital loss carryovers to
offset any gain recognized.
The foregoing discussion may not be applicable to shareholders who acquired
their shares of Common Stock pursuant to the exercise of stock options or other
compensation arrangements or who are not citizens or residents of the United
States or who are otherwise subject to special tax treatment under the Code.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER IS INCLUDED FOR GENERAL INFORMATION ONLY AND IS BASED ON EXISTING TAX LAW
AS OF THE DATE OF THIS PROXY STATEMENT, WHICH MAY DIFFER ON THE DATE OF THE
CONSUMMATION OF THE MERGER OR AT THE EFFECTIVE TIME. EACH SHAREHOLDER IS URGED
TO CONSULT SUCH SHAREHOLDER'S OWN TAX ADVISOR TO DETERMINE THE PARTICULAR TAX
CONSEQUENCES TO SUCH SHAREHOLDER OF THE MERGER, INCLUDING THE APPLICABILITY AND
EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
PLANS FOR COMPANY IF MERGER NOT CONSUMMATED
As consummation of the Merger is subject to fulfillment and satisfaction of
certain covenants and conditions, including AJK having sufficient funds to pay
the Merger Consideration and the Company obtaining shareholder approval of the
Merger, there can be no assurance that the Merger will be consummated. If the
Merger is not consummated, the Company currently plans to continue its existing
operations and to evaluate its strategic alternatives.
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THE MERGER AGREEMENT
GENERAL
Pursuant to the Merger Agreement, at the "Effective Time" (as defined in
"Effective Time" below) of the Merger Agreement (i) Acquisition will be merged
with and into the Company, which will be the surviving corporation in the
Merger; (ii) each share, other than shares held by AJK, Acquisition, or by
Company or any of its subsidiaries, will be converted into the right to receive
$8.20 so that AJK, as parent of Acquisition, will become the sole shareholder of
the Company; (iii) each share of capital stock of Acquisition will be converted
into and become one fully paid and nonassessable share of Common Stock, par
value $.0025 per share, of Company as the surviving corporation. In connection
with the Merger, each outstanding stock option will entitle the holder to
receive, for each share of Company Common Stock subject thereto, $8.20 in cash
less the per share exercise price of each stock option.
EFFECTIVE TIME
If the Merger Agreement is approved by the requisite vote of Company
shareholders, and the other conditions to the Merger are satisfied or waived,
the Merger will become effective upon the filing of a Certificate of Merger with
the Department of Commerce, State of Michigan (the "Effective Time"). It is
currently anticipated that the filing will be made as promptly as practicable
after the Special Meeting and approval of the Merger by the shareholders of the
Company. As indicated previously herein, Herbert W. Kaufman, who beneficially
owns approximately 49% of the Company's stock, and Lillian Kaufman who
beneficially owns approximately 25.5%, have advised the Company they presently
intend to vote for the Merger. See "Covenants and Conditions."
EXCHANGE OF SHARES -- PAYMENT
In order to receive the cash to which Company shareholders will be entitled
at the Effective Time, each holder of a certificate or certificates theretofore
representing shares of Company Common Stock will be required to properly
surrender such certificates together with a duly executed and properly completed
letter of transmittal and any other required documents, to Mellon Securities
Trust Company, acting as the Paying Agent.
The Paying Agent will send instructions to holders of shares with regard to
the procedure for surrendering certificates in exchange for cash, together with
a letter of transmittal to be used for this purpose, as soon as practicable
after the Effective Time. Holders of shares should surrender certificates
representing shares only with a letter of transmittal.
Upon receipt of such certificate or certificates together with a duly
executed and properly completed letter of transmittal, the Paying Agent will
arrange for the issuance and delivery of a check in the amount of $8.20 to the
person or persons entitled thereto for each share represented by such stock
certificate or certificates.
HOLDERS OF SHARES SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THE ENCLOSED
PROXY CARD. PLEASE WAIT UNTIL YOU RECEIVE A FORM OF LETTER OF TRANSMITTAL AFTER
THE SPECIAL MEETING.
REPRESENTATIONS AND WARRANTIES
The Company. The Agreement contains certain representations and warranties
by the Company relating to, among other things: (i) corporate organization, good
standing, power, authority and similar matters; (ii) capitalization; (iii) the
authorization, execution, delivery, performance and enforceability of the
Agreement and the transactions contemplated thereby; (iv) the absence of any
violation of its articles of incorporation, bylaws, applicable judgments,
decrees, orders, statutes, or regulations, and certain contracts, agreements and
obligations; (v) the delivery and content of certain reports and financial
statements; (vi) the absence of certain liabilities and certain changes in its
business; (vii) compliance with applicable laws and the possession of required
licenses and permits; (viii) the absence of certain material litigation that
could threaten or impede the Merger; (ix) employees and employee benefits
including ERISA compliance; (x) transactions
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with affiliates; (xi) the filing of tax returns and payment of taxes; (xii)
broker's, finder's and similar fees; (xiii) compliance with environmental laws;
(xiv) no agreements or commitments not made in the ordinary course of business;
(xv) no default under any material agreement or contract; (xvi) conduct of the
business has been in the ordinary course of business; (xvii) no change or any
event in its business or assets or results of operations which has had, or is
likely to have, a material adverse effect; (xviii) the Board of Directors has
taken such action as is necessary to render inapplicable to the merger State of
Michigan takeover statutes; (xix) the vote required to effect the Merger; (xx)
the Company has received the opinion of Roney & Co. that the Merger
Consideration is fair to shareholders from a financial point of view.
Acquisition and AJK. The Merger Agreement contains certain representations
and warranties by Acquisition and AJK relating to, among other things: (i)
corporate organization, good standing, power and authority and similar matters;
(ii) the authorization, execution, delivery and performance of the Agreement and
the transactions contemplated thereby; (iii) broker's, finder's and similar
fees; (iv) receipt of commitment from lending sources that funds will be
available to pay the Merger Consideration; and (v) information supplied by
Acquisition or AJK for inclusion in the Proxy Statement is correct and complete.
COVENANTS AND CONDITIONS TO CONSUMMATION OF THE MERGER
The obligations of the Company and AJK and Acquisition to consummate the
Merger are subject to the following conditions, among others: (i) approval of
the Merger Agreement by a majority of the shareholders of the Company entitled
to vote; (ii) compliance with all statutory requirements for the valid
consummation of the Merger, including the receipt of all required
authorizations, consents and approvals of federal and state governmental
agencies; (iii) no temporary restraining order, preliminary or permanent
injunction or other order or decree shall be in effect preventing the
consummation of the Merger; (iv) AJK and Acquisition shall have received the
financing necessary to effectuate the Merger and to exchange and convert all
outstanding shares into cash; (v) employment agreements with senior executives
of the Company shall have been amended to provide that formulas for calculating
bonus or profit sharing awards for such executives shall be determined exclusive
of principal or interest paid or accrued on any indebtedness incurred by AJK or
Company in connection with the Merger; and (vi) the representations and
warranties of the other party to the Merger Agreement shall be true and correct
in all material respects as of the Closing Date.
Except for the shareholder approval required by applicable corporate law
and compliance with all statutory requirements for the valid consummation of the
Merger, any of the foregoing conditions may be waived at any time prior to the
Merger by the parties to the Merger Agreement.
The Company has agreed to conduct its business in the ordinary and usual
course prior to the consummation of the Merger and to use its best efforts to
cause the transactions contemplated by the Merger Agreement to be consummated.
Other Covenants of the Company
The Company has covenanted that it will not initiate or solicit discussions
with, engage in negotiations with, or provide any non-public information to any
person, entity or group involving the possible sale, transfer or joint venture
of any part of the business, stock or assets of the Company to any person other
than AJK, provided, however, that if, prior to receipt of Company shareholder
approval of the Merger, the Board of Directors of the Company determines, based
upon written advice of outside counsel, that its fiduciary duties under Michigan
law so require, the Company may, in response to unsolicited requests, provide
information concerning the Company and negotiate with any other entity or group
concerning a superior proposal for a different transaction;
Further, the Company has covenanted that until the Effective Time of the
Merger, the Company and its subsidiaries:
(i) will conduct its operations in the usual, regular and ordinary
course consistent with past practice, will use its best efforts to preserve
its business organization and goodwill and keep available the services of
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its officers and employees, and will maintain satisfactory relationships
with persons having business relationships with it;
(ii) will not enter into any new material line of business;
(iii) will not change accounting policies except as required by law or
generally accepted accounting principles;
(iv) will not declare or pay any dividend or distribution on any
shares of its capital stock other than the annual cash dividend declared in
the first quarter of each fiscal year and will not adjust or split its
capital stock or repurchase or redeem such stock;
(v) with certain exceptions relating to existing employee stock plans,
will not issue any additional shares of capital stock;
(vi) will not amend its articles of incorporation or bylaws;
(vii) will not incur or commit to any capital expenditure or other
obligations in connection therewith, in excess of $1,000,000 individually
or $2,000,000 in the aggregate;
(viii) will not acquire or agree to acquire an equity interest in or a
substantial portion of the assets of any other business or entity which
exceeds $1,000,000 individually or $2,000,000 in the aggregate;
(ix) will not make any investment except for transactions in the
ordinary course of business consistent with the Company's practice of
investing its cash in marketable equity and debt securities;
(x) will not sell, lease or otherwise dispose of any material assets;
(xi) will not incur any indebtedness for borrowed money or guarantee
any such indebtedness except for permitted acquisitions;
(xii) will not take any action that could be expected to, or result in
any representation or warranty becoming untrue;
(xiii) will not increase any compensation or amend any employment
agreement with any of its officers, directors or employees, adopt any new
employee benefit plan, or amend any existing employee benefit plan;
(xiv) will file all required tax returns and pay all taxes due;
(xv) will not settle, pay or discharge any claims or liabilities other
than those in the ordinary course of business or as reflected or reserved
in its most recent unaudited financial statements;
(xvi) will not amend, modify or terminate any material contract, lease
or agreement;
(xvii) will confer on a regular basis with AJK, report on operational
matters and advise of any changes or events having or which could have a
material adverse effect on the Company or which could cause a material
breach of any representation, warranty or covenant of the Company.
Any of the foregoing covenants may also be waived at any time prior to the
Merger.
FINANCING THE TRANSACTION: SOURCES AND AMOUNTS OF FUNDS
The aggregate Merger Consideration of approximately $28,337,653 will be
paid to the Company's shareholders from the following sources: NBD Bank ("NBD")
has provided a loan commitment ("Loan Commitment") to AJK, Acquisition's parent
company, to enter into a loan agreement to allow AJK to borrow up to $20,000,000
in connection with the Merger; Alan J. Kaufman, the sole shareholder of AJK,
will be contributing $1,000,000 in equity to AJK; Lillian Kaufman, Alan J.
Kaufman's mother (former wife of Herbert W. Kaufman), will loan $4,000,000 to
AJK and will receive in exchange therefor Subordinated Notes from AJK; and the
Company's funds would be utilized for payment of the balance of the Merger
Consideration and expenses in connection with the Merger.
The Loan Commitment requires that prior to NBD executing the loan
documentation and providing such proceeds, there will be: the contribution of
equity and subordinated debt to AJK as described above; no material adverse
change, as determined by NBD in the condition (financial or otherwise),
operations,
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assets or prospects of AJK, the Company, its Royal Budget Premium, Inc.
subsidiary, or Alan J. Kaufman; and no material adverse change in any
information provided NBD. AJK indicates it has met or will be able to meet all
such conditions of the Loan Commitment. The actual loan arrangement pursuant to
the Loan Commitment is contained in loan documentation which AJK and NBD have
negotiated and substantially agreed to the form thereof and which AJK
anticipates will be executed immediately following approval by the shareholders
of the Merger.
The following is a summary of the loan arrangement between NBD and AJK: the
loan of $20,000,000 consists of a $5,000,000 Term Loan and a $15,000,000
Revolving Credit Facility; the Term Loan is to be repaid in 20 quarterly
principal payments of $250,000, plus interest; the Revolving Credit Facility is
due five years from the date of closing of the loan transaction, provided that
the $15,000,000 Credit Facility is to be reduced to $14,000,000 by June 30,
1966, to $13,000,000 by June 30, 1997 and to $12,000,000 by June 30, 1998;
interest under both the Term Loan and Revolving Credit Facility is to be
determined based upon various levels of total debt to earnings before interest,
taxes, depreciation and amortization ("EBITDA") and is established on levels
above the prime rate of interest or applicable LIBOR margins (with initial
pricing for the first 12 months following the Merger expected to be 250 basis
points over LIBOR for the applicable LIBOR period); in addition, an annual
facility fee is payable to NBD, generally at the level of 25 basis points;
certain commitment fees, closing fees and expenses are payable to NBD
aggregating $125,000; a success fee not to exceed $250,000 could be payable on
the fifth anniversary of the loan agreement if AJK achieves certain financial
objectives; Alan J. Kaufman is personally guaranteeing the loan in an amount of
$750,000, subject to reduction when certain financial ratios are achieved; and
all of Alan J. Kaufman's stock in the borrower, AJK, is pledged as collateral to
secure all payments and other obligations under the loan arrangements with NBD.
In addition, the loan documentation with NBD contains various
representations and warranties and affirmative and negative covenants from AJK
customary for loan agreements. The representations and warranties by AJK to NBD
would relate to, among other items: corporate authority; validity of the loan
documents; use of loan proceeds; correctness of financial statements; payment of
taxes; no event of default under material contracts; solvency of corporate
entities; pending litigation; and title to assets. The affirmative covenants
would include, among other items: preservation of corporate existence;
compliance with laws; maintenance of properties; furnishing of financial
statements to NBD; and maintaining access to, and underwriting authority for,
primary insurance markets. The negative covenants would include, among other
items: AJK would not permit its EBITDA, its fixed charge coverage ratio, its
interest coverage ratio, and its total funded debt to EBITDA ratio, to fall
below specified amounts during each year of the term of the loan arrangement;
liens could not be placed upon any property with certain exceptions; additional
indebtedness could not be incurred with certain exceptions; restrictions would
be imposed upon mergers, acquisitions, dispositions of assets, investments and
dividends; no payments could be made upon the Subordinated Notes except as
permitted in the subordination documents; and no significant changes in
accounting principals and practices could be instituted. In the event of a
default in any representation and warranty or any covenant, subject to grace
periods for curing of the default in certain instances, NBD would then have the
right to declare due and owing all the outstanding loan obligations and could
enforce all rights and remedies available to it, including any rights pursuant
to the guaranty from Alan J. Kaufman and the pledge of his stock in AJK. AJK
anticipates it will be able to satisfy all the conditions and covenants.
The following is a summary of the Subordinated Notes ($4,000,000); the
Subordinated Notes will be fully subordinated to all obligations under the NBD
loan described above; the Subordinated Notes will be unsecured
(non-collateralized), are non-convertible and have no equity or other
participation rights; interest is payable at the rate of 9% per annum and will
be paid quarterly; interest only will be paid during the first five years, and
principal (together with interest) will be payable in equal quarterly payments
over the next five years; and the Subordinated Notes may be prepaid by AJK at
any time without premium or penalty subject to prepayment restrictions under the
NBD loan.
AJK is in the process of completing the documentation for the NBD loan
arrangement and for the Subordinated Notes. AJK has received no indication that
the documentation will not be completed to accomplish the Merger. However,
should financing not be obtained from NBD or pursuant to the
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Subordinated Notes, the Merger and the contemplated exchange and conversion will
be abandoned, even if Company shareholder approval of the Merger has already
been obtained.
NBD has also committed to provide a $3,000,000 Line of Credit to provide
financing for the premium finance business of Royal Premium Budget, Inc. a
subsidiary of the Company engaged in financing insurance premiums. Repayment of
all advances by NBD under that Line of Credit will be on a demand basis and
subject to annual review by NBD. The advances would be secured by a security
interest in the accounts receivable of Royal Premium Budget, Inc. Interest on
the Line of Credit will be computed in the same manner as described above under
the Term Loan and the Revolving Credit Facility.
AMENDMENT AND TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time, whether before or after approval by the
shareholders of the Company, (i) by mutual written consent of AJK and the
Company, upon the approval of the Board of the Company; (ii) by either AJK or
the Company if the other party has materially breached any representations,
warranties, covenants or obligations which remain uncured; (iii) by either AJK
or the Company upon written notice to the other party: (1) if any governmental
entity of competent jurisdiction shall have issued a final permanent order
enjoining or otherwise prohibiting the consummation of the Merger; or (2) if a
closing shall not have occurred within 30 days after Company shareholder
approval; (iv) by either AJK or Acquisition upon written notice to the Company:
(1) if, prior to the Company Special Shareholders Meeting, a takeover proposal
is commenced, publicly proposed, publicly disclosed or communicated to the
Company (or the willingness of any person to make a takeover proposal is
publicly disclosed or communicated to the Company) and (A) the Company
shareholder approval is not obtained at the Company Special Shareholders
Meeting, (B) the Company Special Shareholders Meeting does not occur prior to
150 days after the date of the Merger Agreement, or (C) the Board of Directors
of the Company or any committee thereof shall have withdrawn or modified its
approval or recommendation of the Merger or the Merger Agreement, or approved or
recommended any other person's takeover proposal; or (2) if AJK shall not have
available all the funds, including the financing, necessary to perform its
obligations under the Merger Agreement, including consummating the Merger on the
terms contemplated thereby; (v) by the Company if prior to the receipt of the
Company shareholder approval, the Board of Directors of the Company, to the
extent required by its fiduciary obligations, as determined in good faith by the
Board of Directors based on the advice of outside counsel, decides to withdraw
or modify its approval or recommendation of the Merger Agreement or the Merger,
approve or recommend any superior proposal, enter into an agreement with respect
to such superior proposal or terminate the Merger Agreement, in each case at any
time after the second business day following written notice to AJK that the
Board of Directors of the Company has received a superior proposal and the
Company has paid to AJK its fees and expenses in connection with the Merger
proposal.
The Merger Agreement may be amended at any time prior to the Effective
Time, upon the authorization of the respective Boards of Directors of
Acquisition and the Company, except that after the shareholders of the Company
have approved the Merger Agreement, no amendment to the Merger Agreement will be
made which by law requires the approval by shareholders, unless such actual
further shareholder approval is then obtained.
EXPENSES
All expenses of the Company incurred in connection with the proposed Merger
will be borne by the Company whether or not the Merger is consummated as
contemplated by the Merger Agreement, except as noted below. The Company
estimates that its expenses for fees paid the members of the Special Committee,
27
<PAGE> 35
printing, fairness opinion, filing, exchange (paying) agent, accounting and
legal services will be approximately as follows:
<TABLE>
<S> <C>
Special Committee.................................................. $ 20,000
Printing........................................................... 35,000
Fairness Opinion................................................... 40,000
Filing Fees........................................................ 6,000
Exchange Agent..................................................... 20,000
Accounting......................................................... 10,000
Legal.............................................................. 150,000
--------
Total......................................................... $281,000
========
</TABLE>
In the event AJK or Alan J. Kaufman do not obtain the financing necessary
to consummate the Merger after shareholder approval of the Merger has been
obtained, Alan J. Kaufman has agreed to reimburse the Company for up to $100,000
of its expenses.
Alan J. Kaufman has indicated he has, or will, incur on behalf of AJK the
following estimated expenses which he intends to have paid from Company funds
should the transaction be completed:
<TABLE>
<S> <C>
Bank commitment and closing fees................................... $125,000
Coopers and Lybrand -- accounting analysis and investment advice... 125,000
Legal.............................................................. 100,000
--------
Total......................................................... $350,000
========
</TABLE>
In the event the Company shareholders do not approve of the Merger proposal
or the Company exercises its "fiduciary out" and any other party other than AJK
or Acquisition effect a takeover proposal, or the Company authorizes or
recommends another takeover proposal with some other party prior to 12 months
after the Merger Agreement is terminated, the Company has agreed to reimburse
AJK for all its reasonable out-of-pocket expenses incurred by AJK or its
affiliates (including Alan J. Kaufman) in connection with the Merger which would
include all fees and expenses (including commitment, closing and related fees)
of counsel, commercial banks, other lenders, investment banking firms,
accountants, experts and consultants to AJK or any of its affiliates. AJK and
Alan J. Kaufman have advised that to date they have incurred approximately
$250,000 of what they believe to be such reasonable out of pocket expenses.
CONDUCT OF BUSINESS AFTER THE MERGER
Following the Merger of Acquisition and Company in which Company will be
the ongoing (surviving) entity, the Company will continue its business in
substantially the same manner that it conducted its business before the Merger,
but as a corporation wholly owned by and controlled by its parent company, AJK,
which in turn will be controlled by its sole shareholder, Alan J. Kaufman. Upon
the consummation of the Merger, it is expected that the current directors and
officers of the Company will continue in such positions.
The Articles of Incorporation and Bylaws of the Company as in effect at the
Effective Time shall be the Articles of Incorporation and Bylaws of the Company
immediately after the Merger. Alan J. Kaufman, as sole shareholder of AJK, the
parent company after the Merger, will have the power and authority to cause the
adoption of restated Articles of Incorporation and Bylaws after the Merger.
INFORMATION CONCERNING THE COMPANY'S BUSINESS
GENERAL
H.W. Kaufman Financial Group, Inc. (with its consolidated subsidiaries, the
"Company") is a nationwide general agent and broker of specialty insurance
products, principally property and casualty coverages. The Company was
incorporated in 1969 in Michigan and in the same year was the survivor of a
merger with DEK Electronics, Inc., a Maryland corporation traded on the
over-the-counter market. In 1971,
28
<PAGE> 36
the Company acquired its principal operating subsidiary, Burns & Wilcox, Ltd.
("Burns & Wilcox"). In 1990, the Company's shares were listed on the American
Stock Exchange.
The Company's business strategy is to target niche areas in the insurance
marketplace that standard insurance carriers traditionally avoid, and to
increase its share of this specialty market by developing its existing offices
and/or acquiring sales offices in strategic locations and by developing new
products. The Company, through a series of acquisitions and new office openings,
has expanded from three offices at the end of 1983 to 35 at December 31, 1994,
and then 36 at June 30, 1995.
Burns & Wilcox, Ltd., the Company's principal subsidiary, represents a
number of insurance carriers either as a general agent or as a broker. The
Company also places insurance through certain Underwriters at Lloyd's. The
Company does not assume the insurance risk, but rather serves as a non-exclusive
intermediary between the insurance carriers and a large pool of independent
agents, who at various times may look to the Company, among other sources, to
find specialty insurance coverages for their clients. For its services the
Company receives commissions from the insurance carriers. A large portion of the
commissions received by the Company are from a subsidiary of the Nationwide
Group, referred to hereafter as the "Primary Carrier."
The specialty coverages placed by the Company are atypical in that they
cannot be placed with standard carriers. For example, the Company emphasizes
specialty insurance coverages for, among others, construction-related insurance
risks, security guards, day care and pre-schools, burglar and fire alarm
monitoring companies, homeowners' associations, dry cleaners, exercise and
health studios, motels, apartment complexes and grocery stores. The premiums for
specialty coverages are not generally based upon predetermined underwriting
criteria.
In 1988, the Company entered the premium finance business through its
subsidiary Royal Premium Budget, Inc. This provided the Company the ability to
provide financing for the payment of premiums on insurance coverages placed by
the Company or by independent agents. Royal assumes minimal risk in that it
requires a substantial down payment to finance the premium, and retains power of
attorney to cancel the underlying financed policy.
INSURANCE BROKERAGE AND GENERAL AGENCY BUSINESS
Burns & Wilcox. Burns & Wilcox does business with various insurance
carriers on a nationwide basis and on their behalf solicits insurance business
directly from independent insurance agents, rather than from the public. Such
insurance agents in turn seek out Burns & Wilcox when they are having difficulty
finding an insurance carrier to fulfill their clients' requirements for
insurance coverage. At December 31, 1994, Burns & Wilcox had in excess of 400
contracts with insurance carriers, several of which allow the Company to act as
a general agent with certain in-house binding authority. However, most of the
contracts with insurance carriers allow the Company to place business with them
on a brokerage basis with no binding authority. Not all contracts deal with
every branch office of the Company, as some are on a branch basis, some are
regional and others are national in scope.
Insurance Agents. Burns & Wilcox maintains mailing lists of over 25,000
independent insurance agents for which it has placed policies in recent years,
and who comprise a pool from which business may come. Burns & Wilcox actually
did business with 15,610 and 9,998 agents from this pool during the years ended
December 31, 1994 and 1993 respectively. Of the numerous insurance agents who
used Burns & Wilcox to place insurance coverages, no one agent accounted for
over five percent of the Company's commissions and fees in 1994, 1993 and 1992.
The ten largest agents with which business was conducted accounted for, in the
aggregate, approximately 4% in 1994, 4% in 1993 and 6% in 1992 of the Company's
commissions and fees.
The Primary Carrier. Only one insurance carrier, the Primary Carrier,
accounted for over ten percent of the Company's commissions and fees, including
profit-sharing commissions in 1994, 1993 and 1992. In 1994, 1993 and 1992, the
five insurers with which the Company placed the largest amount of insurance
risks accounted for 50%, 47% and 50% of the Company's commissions and fees,
respectively. The Primary Carrier accounted for approximately 26%, 29% and 33%
of the Company's commissions and fees in the years ended December 31, 1994, 1993
and 1992. The Primary Carrier is the Company's principal source for primary and
29
<PAGE> 37
excess property and casualty insurance coverages and is rated "A+" (the highest
rating) by A.M. Best Company, an internationally recognized insurance industry
rating source. Although the Company placed business during 1994 with 382 other
insurance carriers and other general agencies, and believes that it could
replace the coverages now placed with the Primary Carrier, no assurance can be
given that the business placed through one or more other carriers would be as
profitable to the Company.
Compensation. The Company is compensated for its services by the payment of
commissions by insurance carriers which are usually based upon a percentage of
the premium paid by the insured. Commission rates are dependent on a number of
factors including the type of insurance and the particular insurance carrier.
The Company may also receive profit-sharing commissions which are based on the
profit the insurance carrier makes on the overall volume of business placed by
the Company in a given period of time.
Expansion Program. The Company has actively sought to expand its branch
network through the acquisition of existing agencies and the opening of
additional offices.
Summarized below is the expansion of Burns & Wilcox offices over the eight
years ended December 31, 1994:
AGGREGATE NUMBER OF COMPANY OFFICES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
35 32 30 26 23 21 19 17
</TABLE>
The 35 offices at December 31, 1994 are located in 22 states, representing
a geographic diversity which the Company believes is an important factor in
obtaining appointments as a general agency or contracts with insurance carriers.
From these offices the Company also does business in states in which no branch
office is located and in recent years has placed policies in all 50 states and
Mexico. At June 30, 1995, the Company had 36 offices.
In the past the Company had acquired existing insurance agencies with a
relatively small investment and payment of the balance based on volume produced
over a period of years. Such acquisitions had been funded by the Company's
operations and had not required at any one time a material commitment of
capital. More recently the Company has been able to purchase larger agencies
than in the past and these acquisitions have been funded by the Company's
operations alone or in combination with seller and bank financing. The Company
does not forego the possibility of borrowing funds to accomplish an acquisition
should that seem necessary or appropriate to management.
PREMIUM FINANCE BUSINESS
Royal. Royal Premium Budget, Inc. ("Royal") was incorporated in March 1988,
as a subsidiary of the Company, primarily to provide a source for financing
insurance premiums for clients of insurance agents doing business with Burns &
Wilcox. In 1989, Royal expanded its financing of insurance premiums to other
creditworthy purchasers of property and casualty insurance. The Company has a
line of credit with a local bank in the amount of $2,500,000 for insurance
premium financing. There were no amounts outstanding under the available line of
credit either as of December 31, 1994 or June 30, 1995.
In 1994, Royal's gross revenues increased 3.8% to $455,000 from $438,000 in
1993. Gross revenue primarily consists of interest income earned on contracts
written. The average outstanding balance at any one time during 1994 was
approximately $2,400,000.
During 1994 Royal obtained licenses for premium financing in two additional
states bringing the total number of states in which Royal is licensed to
twenty-four.
30
<PAGE> 38
COMPETITION
The business of acting as an intermediary and negotiating between insurance
carriers and insurance agents in order to place insurance risks is highly
competitive, and there are a great many insurance agency and brokerage concerns
in the geographic areas in which the Company operates that actively compete with
the Company in every area of its business. The principal factors of competition
are price, service and the selection and availability of insurance carriers with
whom particular types of insurance are placed. There are many competing firms
which are larger and have greater financial resources than the Company.
The Company is also in competition with certain insurance companies that
write insurance directly with their customers without the intervention of agents
and without paying commissions. In addition, some insureds and groups of
insureds have initiated programs of self-insurance such as formation of industry
insurance pools and captive insurance companies. To date, the Company believes
that such direct writing insurance and self-insurance has had relatively little
effect on the Company's business and operations.
The Company's competition in the premium finance business arises primarily
from other finance companies and institutions in general that lend money. Royal
is currently an insignificant participant in the business of financing insurance
premiums.
REGULATION AND LICENSING
At June 30, 1995, the Company or its employees were licensed to carry on
the Company's business in 49 states. License laws and regulations vary from
state to state and are often quite complex. Under the laws of most states, the
regulatory authorities have relatively broad discretion with respect to
granting, renewing and revoking agents' licenses to transact business in the
state. The manner of operating in particular states may vary according to the
licensing requirements of the particular state which may require, among other
things, that a firm operate in the state through a local designated agent or
through a local corporation. The Company's operations depend on the validity of
and its good standing under the licenses and approvals pursuant to which it
operates. There can be no assurance that a state authority might disagree and
cause the Company to restrict its method of doing business in the state or
possibly exclude or temporarily suspend the Company from
carrying on some or all of its activities in the state. However, the Company
believes it is operating within existing state regulations and interpretations
generally followed by the industry.
EMPLOYEES
As of June 30, 1995, the Company had 474 full-time employees, 61 of whom
were located at the Farmington Hills, Michigan Corporate Headquarters office
where the majority of the Company's general and administrative functions are
conducted. None of the Company's employees are represented by labor unions. The
Company considers its employee relations to be good.
The Company has a number of "middle management" employees experienced in
its business operations. At June 30, 1995 the Company had 40 managers with an
average of approximately 21 years experience in the placement of standard and
specialty insurance risks or in the general agency business. The Company seeks
out experienced managers for its various branch operations and it has generally
been able to employ persons with suitable management and selling experience to
effectively manage its operations.
PROPERTIES
The Company's corporate headquarters relocated to Farmington Hills,
Michigan April 1, 1994 where the Company leases approximately 14,738 square feet
of space under a lease that expires December 31, 2000. In addition to its
corporate headquarters, the Company leases office facilities under
noncancellable operating leases in the cities in which its branch offices are
located, with a total leased space of approximately 132,864 square feet. In
addition to minimum fixed rentals, a number of leases contain escalation clauses
related to cost-of-living or other factors. The Company owns no real estate. See
"THE MERGER -- Interest of Certain Persons in the Merger."
31
<PAGE> 39
The Company also leases assorted office equipment used in day-to-day
operations. The Company believes all its facilities, computing systems and other
equipment are well-suited and adequate for its business.
LEGAL PROCEEDINGS
The Company and its subsidiaries are subject to various claims and lawsuits
in the ordinary course of business. Most legal proceedings against the Company
allege negligence and are generally described as "errors and omissions" ("E&O")
suits. Such suits typically allege, for instance, failure to advise clients to
include coverage for certain risks under issued policies, failure to notify of a
rejection of an application for insurance, or failure to notify of cancellations
of policies. The Company maintains an "E&O" liability insurance policy. The
Company does not submit any claim to its "E&O" carrier that it feels, after
consultation with legal counsel, is a nuisance suit, without merit or far below
the deductible limit of the "E&O" insurance policy. The current deductibility
limit requires the Company to pay the first $250,000 on each claim, except for
policies written through the Primary Carrier, on which the deductibility limit
is $100,000 on each claim. The policy has a limit on liability of $10,000,000
for each claim as well as an aggregate liability limit of $10,000,000. If not
submitted to the carrier, counsel for the Company is retained to defend the
action. To the extent that the lawsuits may be found in favor of the plaintiffs,
and to the extent that these matters may not be covered by the Company's errors
and omissions insurance policy, the Company may be liable in those matters.
Based on discussions with its general counsel, the law firm of Kaufman and
Payton, P.C. of which Alan J. Kaufman is a principal, and its other counsel
handling matters in other states, the Company's management is of the opinion
that any such liabilities would not have a significant effect on the financial
position of the Company.
32
<PAGE> 40
SELECTED FINANCIAL DATA
The following historical selected financial data of the Company for each of
the five fiscal years ended December 31, 1994 have been derived from the
financial statements of the Company, which have been audited by BDO Seidman,
independent certified public accountants. The Company's financial statements for
the three years ended December 31, 1994, together with such auditors' report
thereon, are included elsewhere in this Proxy Statement. The financial
information set forth as of June 30, 1995 and 1994 and for the six-month periods
then ended is unaudited but, in the opinion of the Company management, includes
all adjustments necessary for a fair presentation. Unaudited financial
statements as of June 30, 1995 and for the six months then ended are also
included elsewhere in this Proxy Statement. Operating results for the six-month
periods ended June 30, 1995 and 1994 are not necessarily indicative of results
that may be expected for the entire year. This information should be read in
conjunction with the Management's Discussion and Analysis of Financial Condition
and Results of Operations, and the financial statements and notes thereto
included elsewhere in this Proxy Statement. (The following amounts are in
thousands except per share data.)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEAR ENDED DECEMBER 31,
------------------ ---------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Commissions and fees........ $28,705 $25,703 $52,364 $44,924 $39,131 $27,413 $23,752
Cost of commissions and
fees..................... 12,679 11,258 22,746 19,878 17,088 11,836 10,429
------- ------- ------- ------- ------- ------- -------
Gross Profit............. 16,026 14,445 29,618 25,046 22,043 15,577 13,323
------- ------- ------- ------- ------- ------- -------
Divisional operating
expenses................. 11,439 10,296 20,766 18,123 15,792 11,904 10,431
General and administrative
expenses................. 3,621 3,250 6,169 5,130 4,418 3,148 2,636
------- ------- ------- ------- ------- ------- -------
Total Operating Expenses.... 15,060 13,546 26,935 23,253 20,210 15,052 13,067
------- ------- ------- ------- ------- ------- -------
Operating Income............ 966 899 2,683 1,793 1,833 525 256
Other income -- net........... 395 218 537 549 395 684 564
------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................... 1,361 1,117 3,220 2,342 2,228 1,209 820
Taxes on income............... 751 591 1,453 1,036 1,014 558 389
------- ------- ------- ------- ------- ------- -------
Net Income.................... $ 610 $ 526 $ 1,767 $ 1,306 $ 1,214 $ 651 $ 431
======= ======= ======= ======= ======= ======= =======
Earnings Per Share:
Net Income Per Common
Share.................... $.18 $.15 $.52 $.38 $.35 $.19 $.13
==== ==== ==== ==== ==== ==== ====
Weighted number of common
shares outstanding....... 3,444 3,426 3,426 3,423 3,422 3,422 3,422
Balance Sheet Data (at end of
period)
Working capital (deficit)... $ 2,046 $ 1,540 $ 1,898 $ 1,478 $ (731) $ (898) $ (194)
Total assets................ 54,453 48,034 47,904 41,266 35,305 26,696 23,793
Long term debt.............. 150 425 425 -- -- 450 31
Stockholders' equity........ 7,068 5,606 6,768 5,568 4,705 3,887 3,575
Book value per share........ 2.05 1.80 1.97 1.63 1.38 1.14 1.05
Cash Dividends Yearly -- per
share....................... .149 .132 .115 .099 .094
</TABLE>
All share and per share data have been adjusted to reflect a 3-for-2 stock
split distributed September 10, 1990, and 10% stock dividends distributed May
1994 and May 1995.
33
<PAGE> 41
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The property and casualty insurance business is subject to significant
fluctuations due to economic and competitive conditions, interest rates, premium
rates and the frequency and severity of claims. The Company believes that since
the early 1980's the industry has passed through several such periods, known as
"soft" and "hard" markets. The Company believes that the "soft" market which
began in mid-1987 continues, except for some hardening the Southeast and
Southwest regions of the country.
This "soft" market is characterized by lower premiums as insurance
companies compete for new business. Commission revenue, the Company's primary
source of income, is a fixed percentage of premiums. Therefore, when premium
rates are low, the Company concentrates on specialty products and selected
markets whose rates tend to vary less due to the fact that these coverages are
not as readily available.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1995
On June 30, 1995, the Company's financial condition reflected working
capital of $2,045,526, a tangible net worth of $2,915,808 and stockholders'
equity of $7,067,843. This compared to a working capital of $1,539,990, a
tangible net worth of $1,916,059, and stockholders' equity of $5,605,713, at
June 30, 1994. The improvement in working capital and tangible net worth
reflects the continued profitability of the Company over the last year, and the
$1,151,369 addition to Deferred Revenue during the 1st quarter of 1995. This
improvement occurred notwithstanding expenditures for Books of Business of
$850,000 in the first six months ended June 30, 1995. The Company had also spent
additional funds in expanding its corporate-wide computer network.
During the quarter ended March 31, 1995, the Company acquired two
additional operating locations. On February 15, 1995, the Company acquired an
insurance agency in St. Louis, Missouri for $400,000. The purchase consisted of
$200,000 paid in cash and a note for the remaining $200,000. The note is payable
in eight semiannual installments of $25,000 commencing January 15, 1996 and
bears interest at 8.25%.
In addition, on March 31, 1995, the Company acquired an insurance agency in
Illinois for a purchase price of $950,000. A payment of $100,000 was made on
April 1, 1995 and $550,000 was paid on May 30, 1995. The balance of $300,000 is
due on March 31, 1996. These obligations do not bear interest.
The purchase price of these acquisitions have been allocated primarily to
goodwill, covenants not to compete and other intangible assets. Revenues of the
acquired companies have been included in the Company's revenue since the date of
acquisition.
Three Hundred Fifty Thousand ($350,000) of the balance due related to these
acquisitions is reflected in, and is the reason for the increase in, "Current
portion of Long-Term Obligations" in the consolidated Balance Sheets as of June
30, 1995. The Company believes neither of these acquisitions has had or will
have a material impact on the future liquidity of the Company.
At December 31, 1994
At December 31, 1994, the Company's financial condition reflected working
capital of $1,898,000, tangible net worth of approximately $3,420,000 and
stockholders' equity of approximately $6,768,000. This compared to a working
capital of $1,478,000, a tangible net worth of approximately $2,573,000 and
stockholders' equity of approximately $5,568,000 at December 31, 1993.
The Company's working capital increased in calendar year 1994 as a result
of 1994 year-end profits and even though the Company made payments of $624,000
on acquisitions purchased during 1994.
34
<PAGE> 42
Cash and cash equivalents were $10,370,260, $9,296,749 and $7,014,297 at
December 31, 1994, 1993 and 1992, respectively. The increase of $1,073,511 in
1994 was due to increased profitability and the net cash provided by operations
resulting from current year profits. The increase of $2,282,452 in 1993 was due
to increased working capital coupled with increased profitability.
The Company maintains two lines of credit from a Detroit area banking
institution, one for $500,000 for H.W. Kaufman Financial Group and the second
for $2,500,000 for Royal, both of which are on an ongoing basis and dependent on
the banks' continued satisfaction with the management, operations and financial
condition of the H.W. Kaufman Financial Group, Inc. and subsidiaries. The
$500,000 line is available for operating and non-operating needs. The interest
rate of the $2,500,000 line is the bank's variable base lending rate plus one
quarter of one percent. The interest rate on the $500,000 line is the bank's
base lending rate. At June 30, 1995, the bank's base rate was 9.00%. As of
December 31, 1994 and June 30, 1995, no balances were outstanding under either
line of credit. (Since AJK has received its commitment for financing of the
Merger from another bank, it is anticipated these lines of credit will terminate
upon the Effective Date.) The Company believes that internally generated funds
and available credit are sufficient to meet the Company's working capital needs
for the immediately foreseeable future.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the components
of the Company's consolidated statements of income as a percentage of
commissions and fees.
<TABLE>
<CAPTION>
SIX MONTHS
END JUNE 30, YEARS ENDED DECEMBER 31,
--------------- -------------------------
1995 1994 1994 1993 1992
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Commissions and fees................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of commissions and fees........................ 44.2 43.8 43.4 44.2 43.7
----- ----- ----- ----- -----
Gross Profit................................. 55.8 56.2 56.6 55.8 56.3
----- ----- ----- ----- -----
Divisional operating expenses....................... 39.9 40.1 39.7 40.4 40.3
General and administrative expenses................. 12.6 12.6 18.8 11.4 11.3
----- ----- ----- ----- -----
Total operating expenses..................... 52.5 52.7 51.5 51.8 51.6
----- ----- ----- ----- -----
Operating income.................................... 3.5 3.5 5.1 4.0 4.7
Other income -- net................................. 1.4 .9 1.0 1.2 1.0
----- ----- ----- ----- -----
Income before taxes................................. 4.7 4.4 6.1 5.2 5.7
Taxes on income..................................... 2.6 2.3 2.8 2.3 2.6
----- ----- ----- ----- -----
Net income.......................................... 2.1% 2.1% 3.3% 2.9% 3.1%
===== ===== ===== ===== =====
</TABLE>
The category "Commissions and fees" consist of the following components:
commissions, fees, profit-sharing commissions and volume bonuses. Commissions
are amounts earned by the Company and paid by the insurance carriers, and are a
percentage of the premiums invoiced. Fees are amounts received by the Company
for services rendered to the referring agent, and may include inspection,
policy-writing and underwriting fees. Profit-sharing commissions are paid by
several insurance carriers, but principally the "Primary Carrier" for whom the
Company acts as a general agent. Profit-sharing commissions are based upon the
ratio of the amounts of premium placed with the carrier and the loss-experience
related to these policies. Volume bonuses are additional commissions paid by
several carriers for increased sales.
Six Months Ended June 30, 1995 and 1994
Commission and fee income increased $3,002,060 or 11.68% to $28,705,280 for
the six months ended June 30, 1995 from $25,703,220 for the six months ended
June 30, 1994. The increase reflects increased sales over last year at existing
offices and the additional sales from Illinois R.B. Jones/Burns & Wilcox Ltd.
and the Gerry McLaughlin Agency which were acquired March 31, 1995 and February
15, 1995 respectively.
35
<PAGE> 43
Profit-sharing commissions in the six months ended June 30, 1995 were
$781,630 and accounted for approximately 2.7% of commission and fee revenue as
compared to $800,417 or 3.1% of commissions and fees for the comparable period
in 1994.
Gross profit increased $1,580,446 to $16,025,581 for the six months ended
June 30, 1995 as compared to $14,445,135 for the six months ended June 30, 1994.
Gross profit as a percentage of commission and fee income, excluding profit
sharing and volume bonus commissions, decreased to 54.49% for the six months
ended June 30, 1995 as compared to 54.79% for the comparable period in 1994.
This decrease was attributable to an increase in commissions paid to producers.
Total operating expenses, including both divisional and general and
administrative expenses, were $15,059,707 for the six months ended June 30, 1995
compared to $13,546,419 for the six months ended June 30, 1994. The aggregate
dollar amount of total operating expenses increased due to higher payroll and
rent expense. Total operating expenses as a percentage of commission and fee
income, excluding profit sharing and bonus commissions, decreased to 53.93% for
the six months ended June 30, 1995 from 54.40% for the six months ended June 30,
1994. Amortization expense for the six months ended June 30, 1995 was $545,557
compared to $617,364 for the six months ended June 30, 1994.
Other income was $394,935 for the six months ended June 30, 1995 as
compared to $218,444 in the comparable period in fiscal 1994. The six months
ended June 30, 1995 included a gain on the sale of marketable securities and an
increase in interest and dividend income. The increased interest and dividend
income was due to a higher rate of interest on investments.
The Company's provision for income taxes for the six months ended June 30,
1995 increased to $751,174 from $591,195 for the comparable period last year due
to increased profitability in the first half of this year and an increase in
State income tax for prior years.
As a result of the foregoing factors, net income increased to $609,635 for
the six months ended June 30, 1995 from $525,965 for the six months ended June
30, 1994.
Three Months Ended June 30, 1995 and March 31, 1995
Commission and fee income increased to $15,349,483 for the second quarter
ended June 30, 1995 from $13,355,797 for the first quarter ended March 31, 1995.
In the second quarter the Company received $236,244 in profit sharing and volume
bonus commissions versus $545,386 in the first quarter.
Profit-sharing and volume bonus commissions in the three months ended June
30, 1995 accounted for approximately 1.5% of commission and fee revenue compared
to 4.1% for the three months ended March 31, 1995.
Gross profit increased $815,340 to $8,420,460 for the three months ended
June 30, 1995 as compared to $7,605,120 for the three months ended March 31,
1995. Gross profit as a percentage of commission and fee income, excluding
profit sharing and volume bonus commissions, decreased to 54.15% for the three
months ended June 30, 1995 as compared to 55.11% for the three months ended
March 31, 1995. This decrease was attributable to an increase in commissions
paid to producers.
Total operating expenses, including both divisional and general and
administrative expenses, were $7,782,873 for the three months ended June 30,
1995 and $7,276,834 for the three months ended March 31, 1995. The increase in
expenses was primarily due to the addition of Illinois R.B. Jones/Burns & Wilcox
Ltd. and the Gerry McLaughlin Agency on March 31, 1995 and February 15, 1995
respectively.
Other income for the three months ended June 30, 1995 was $209,999 compared
to $184,936 for the first quarter of fiscal 1995. The increase was primarily due
to a gain on the sale of marketable securities during the quarter ended June 30,
1995.
The Company's provision for income taxes was $393,383 for the second
quarter ended June 30, 1995 compared to $347,791 in the immediate previous
quarter. As a result of the foregoing factors, net income of $454,203 was
recorded for the three months ended June 30, 1995 as compared to income of
$155,431 for the three months ended March 31, 1995.
36
<PAGE> 44
Three Months Ended June 30, 1995 and 1994
Commission and fee income increased $1,907,774 or 14.19% to $15,349,483 for
the three months ended June 30, 1995 compared to $13,441,709 for the three
months ended June 30, 1994. Profit-sharing and volume bonus commissions for the
three months ended June 30, 1995 were $236,244 compared to $481,599 for the
three months ended June 30, 1994. The increase in commission and fee income was
attributable to the acquisition of Illinois R.B. Jones/Burns & Wilcox Ltd. and
the Gerry McLaughlin Agency.
Profit-sharing and volume bonus commissions were 1.5% and 3.6%
respectively, of commission and fee income in the three months ended June 30,
1995 and 1994.
Gross profit increased to $8,420,460 for the three months ended June 30,
1995 from $7,651,194 for the three months ended June 30, 1994. Gross profit as a
percentage of commission and fee income, excluding profit-sharing and volume
bonus commissions, was 54.2% in the three months ended June 30, 1995 compared to
55.3% for the three months ended June 30, 1994. This decrease was attributable
to an increase in commissions paid to producers.
Total operating expenses, including both divisional and general and
administrative expenses, were $7,782,873 for the three months ended June 30,
1995 compared to $6,940,819 for the comparable period last year. Total operating
expenses as a percentage of commission and fee income, excluding the effect of
profit-sharing and volume bonus commissions, decreased to 51.5% for the three
months ended June 30, 1995 from 53.6% for the three months ended June 30, 1994.
The 2.1% decrease represents managements' continued effort to control expenses.
The aggregate dollar amount of total operating expenses increased due to payroll
and rent expense. Amortization expense for the three months ended June 30, 1995
was $298,287 versus $369,019 for the comparable period last year.
Other income increased $101,090 to $209,999 for the three months ended June
30, 1995 compared to $108,909 for the comparable period last year.
The Company's provision for income taxes for the three months ended June
30, 1995 increased to $393,382 as compared to $386,195 for the three months
ended June 30, 1994. The increase was due primarily to increased profitability
in the second quarter of fiscal 1995 compared to the comparable period in fiscal
1994.
As a result of the foregoing factors, net income of $454,203 was recorded
for the three months ended June 30, 1995 compared to a net income of $433,089 in
the comparable period of fiscal 1994.
Fiscal Years Ended December 31, 1994, 1993 and 1992
Total commission and fees were $52,363,586, $44,924,237 and $39,131,000 for
the years ended December 31, 1994, 1993 and 1992, respectively. The $7,439,349
or 16.6% increase from 1993 to 1994 was attributable to increased volume of
sales at existing locations, and the acquisition of Howard James Company in
Encino, California; and the acquisition from Alexander Howden of its Cleveland,
Ohio and the Atlanta, Georgia offices. The $5,793,237 or 14.8% increase from
1992 to 1993 was attributable to increased sales at existing locations.
The Company recognized profit-sharing commissions and volume bonuses of
$1,832,992, $1,287,112 and $2,513,299 which represented 3.5%, 2.9% and 6.4% of
total commissions and fees in the years ended December 31, 1994, 1993 and 1992,
respectively.
Of the amounts stated immediately above, $944,035, $531,670 and $1,842,793
were received from the Primary Carrier.
Of the amount received in 1994 from the Primary Carrier, $45,222
represented a volume bonus, as compared to $427,349 for 1993. The Bonus
Commission Agreement with the Primary Carrier was not renewed for 1994,
therefore, volume bonuses were lower than in 1993. Profit-sharing commissions
increased to $898,813 in 1994 from $104,321 in 1993. The level of profit-sharing
commissions from the Primary Carrier increased in 1994 versus 1993 due to the
combination of an increased number of policies at a lower average
37
<PAGE> 45
premium, coupled with a change in the profit-sharing agreement to which an
addendum was added to provide a guaranteed amount, while the agreement is in
effect.
As rates and loss ratios may vary from year-to-year, and the Primary
Carrier reserves the unilateral right to modify the agreement, the Company is
uncertain as to the amount of the profit-sharing commissions and volume bonuses
it will earn in future years. The recognition of profit-sharing commissions and
volume bonuses adds no additional costs to the Company's operations as all costs
of commissions and fees attributable to their generation have already been
recorded when the policies were placed with the carrier. Accordingly, profit-
sharing commissions and volume bonuses tend to impact heavily on gross profits.
The Primary Carrier discontinued its volume bonus arrangement with the Company
in 1994.
Cost of commissions and fees as percentage of commissions and fee income
were 43.4%, 44.2% and 43.7% for the years ended December 31, 1994, 1993 and
1992, respectively. The decrease in 1994 represents a decrease in commission
paid out to agents.
Gross profit as a percentage of commission and fee income was 56.6%, 55.8%
and 56.3% for the years ended December 31, 1994, 1993 and 1992, respectively.
Total operating expenses for the years ended December 31, 1994, 1993 and
1992 were $26,935,394, $23,253,205 and $20,210,056, respectively. General and
administrative expenses were $6,169,386, $5,130,113 and $4,418,106. Divisional
operating expenses were $20,766,008, $18,123,092 and $15,791,950, respectively.
The increase of $1,039,273 or 20.3% in general and administrative expenses
in 1994 versus 1993 was primarily the result of increased salaries and benefits
combined with an increase in the cost of business insurance, primarily E&O
coverage. The same factors were also attributable for the prior year's increase.
The increase of $2,642,916 or 14.6% in divisional operating expenses in
1994 versus 1993 was primarily a result of expenses associated with an expanding
office base. Nonetheless, divisional operating expenses decreased as a percent
of commission and fees in 1994 to 39.7%, compared to 40.4% in 1993, as
established offices were able to generate increased revenues without incurring
substantially increases costs. Divisional operating expenses as a percentage of
commissions and fees were 40.3% in 1992. Amortization expense, which primarily
represents the amortization of intangible assets acquired in the purchase of
agencies and books of business, was $1,143,426, $1,036,537 and $1,040,177 in the
years ended December 31, 1994, 1993 and 1992, respectively.
The category "Other Income" represents interest income and other revenues
which totaled $537,668, $548,897 and $395,391 for the years ended December 31,
1994, 1993 and 1992, respectively. The increase in 1993 was the result of higher
dividend and interest income due to increases in interest bearing cash accounts
and investments in 1993 and realized gain on securities. The decrease in 1994
was the result of a realized loss of $18,894 on the sale of marketable
securities while in 1993 there was a realized gain of $96,128 on the sale of
marketable securities.
Net income for the years ended December 31, 1994, 1993 and 1992 was
$1,767,324, $1,305,701 and $1,213,570, respectively. The $461,623 or 35.4%
increase in 1994 versus 1993 was attributable to increased commissions and fees
coupled with increases dollar-wise in total operating expense but remaining
stable as a percentage of commission and fees income. This improvement reflects
the Company's concerted effort in the past two years to control expenses.
The Company's provision for income taxes was $1,453,000, $1,036,000 and
$1,014,500 for the years ended December 31, 1994, 1993 and 1992, respectively.
The 1994 and 1993 increases in income taxes are primarily due to increased
profitability coupled with increases in expenses not deductible for tax
purposes, such as amortization of goodwill attributable to acquisitions. The
effective tax rates for the years ended December 31, 1994, 1993 and 1992 were
45.1%, 44.2% and 45.5%, respectively. See Note 10 of the Notes to the
Consolidated Financial Statements for a reconciliation of statutory to effective
tax rates, Appendix F.
38
<PAGE> 46
ACQUISITIONS AND THEIR RESULTS ON OPERATIONS
In keeping with management's belief that geographic diversity is integral
to its expansion program, the Company has acquired or opened twenty-one offices
in thirteen states since 1987. A majority of offices were acquired by purchasing
a "book of business" as opposed to "opening" branches which were initiated
simply on the potential market deemed to exist in that particular area.
The Company has continued to acquire existing agencies or to open new
offices as the appropriate opportunities arise. As the Company grew, it was able
to purchase larger agencies than in the past and to arrange other financing and
purchase methods as management deemed necessary to meet the circumstances of the
acquisition. The rental obligation of the leased space in which to operate these
branches and the costs of necessary furniture and fixtures has not been and is
not expected to be, material in relation to aggregate revenues of the Company.
Accordingly, the Company does not anticipate material commitments for capital
expenditures and further anticipates that through its internal and external
sources of funds, it will have the funds to fulfill any such commitments, along
with continued expansion of its branch network.
EFFECT OF INFLATION
The Company does not believe that inflation has had a material effect on
the results of its operations to date. Increased sales during the six months
ended June 30, 1995 and the years ended December 31, 1994 and 1993 were
attributable primarily to the continuing expansion of sales efforts and outlets.
The Company has a large percentage of its investment portfolio in
short-term investments. Changes in current market interest rates correspondingly
affect yields on this portfolio.
RECENT ACCOUNTING PRONOUNCEMENTS
Since the Company does not provide postretirement or postemployment
benefits other than a profit sharing plan, SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," and SFAS No. 112, "Employers'
Accounting for Postemployment Benefits," will not have any effect on the
financial statements of the Company.
39
<PAGE> 47
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is listed and traded on the American Stock
Exchange ("ASE") under the symbol "HWK." The following table sets forth, for the
periods indicated, the high and low closing prices for the Company's Common
Stock as reported by the ASE and as adjusted for the 10% stock dividends in
both 1994 and 1995. The quotations do not include retail mark-ups, mark-downs or
commissions.
<TABLE>
<CAPTION>
CLOSING
PRICES(1)
--------------
HIGH LOW
----- -----
<S> <C> <C>
1992
First Quarter................................................ $3.20 $2.27
Second Quarter............................................... 2.58 2.17
Third Quarter................................................ 3.10 2.38
Fourth Quarter............................................... 2.58 2.17
1993
First Quarter................................................ 5.37 3.41
Second Quarter............................................... 4.34 3.41
Third Quarter................................................ 4.75 4.55
Fourth Quarter............................................... 5.16 4.65
1994
First Quarter................................................ 5.06 4.34
Second Quarter............................................... 4.66 3.75
Third Quarter................................................ 4.10 3.69
Fourth Quarter............................................... 4.55 3.86
1995
First Quarter................................................ 4.77 3.75
Second Quarter............................................... 7.75 4.49
</TABLE>
-------------------------
(1) As adjusted for April 1994 and April 1995 stock dividends.
On April 5, 1995, 30 days preceding public announcement that it had been
approached concerning a proposed merger that would result in an $8.00 sale price
for each share outstanding, the closing price per share of the Company's Common
Stock as reported by the ASE was $4.53. On May 4, 1995, the day preceding the
announcement, the closing price was $7.125. On May 25, 1995, the last trading
day before the Company's public announcement of the signing of the definitive
merger agreement which would result in an exchange of each share for $8.20, the
closing price per share was $6.875. On October , 1995, the last full trading
day prior to the printing of this Proxy Statement, the closing price of the
Common Stock was $ per share. Company shareholders are urged to obtain
current market quotations for their shares.
The Articles of Incorporation of the Company authorize the issuance of
7,500,000 shares of Common Stock, $.0025 par value. No other classes of capital
stock have been authorized.
40
<PAGE> 48
DIVIDENDS
The Company paid its first annual dividend on January 15, 1988 and has
increased it in each of the ensuing seven years as follows:
<TABLE>
<CAPTION>
DECLARATION PAYMENT ANNUAL
DATE DATE DIVIDEND*
-------------------------------------------------- ----------------- ---------
<S> <C> <C>
March 10, 1995.................................... April 8, 1995 $ .16
February 14, 1994................................. March 24, 1994 $ .15
March 11, 1993.................................... March 25, 1993 $ .13
February 14, 1992................................. March 11, 1992 $ .12
January 29, 1991.................................. February 25, 1991 $ .10
January 12, 1990.................................. February 6, 1990 $ .09
January 18, 1989.................................. February 13, 1989 $ .08
December 31, 1987................................. January 15, 1988 $ .07
</TABLE>
-------------------------
* Adjusted for all stock splits and stock dividends through May 1995.
If the Merger is approved, existing shareholders will no longer own shares
of Common Stock and will no longer be entitled to further dividends from the
Company when and if declared.
41
<PAGE> 49
DIRECTORS AND EXECUTIVE OFFICERS OF THE
COMPANY AND CERTAIN SIGNIFICANT EMPLOYEES
The directors and executive officers of the Company and certain significant
employees and their respective position, age and the year they began their
positions are as follows:
<TABLE>
<S> <C> <C> <C>
Herbert W. Kaufman..................... 70 1969 President, Chief Executive Officer,
Director
Gerald W. Horton....................... 51 1986 Executive Vice President, General
Manager, Director
Alan J. Kaufman........................ 47 1970 Treasurer, Director
Steven D. Kaufman...................... 45 1979 Director
Neal F. Zalenko........................ 50 1980 Director
Jeffery W. Barry....................... 56 1988 Director
Alan H. Barry.......................... 52 1989 Director
Gerald F. Wesolowski................... 49 1990 Chief Financial Officer
Brooke Bothe........................... 50 1991 Corporate Secretary
George S. Allen........................ 46 1992 Senior Vice President, Burns & Wilcox
Ltd.
</TABLE>
The directors of the Company are elected at each annual meeting of
shareholders and serve until their successors are duly elected and qualified.
Officers of the Company serve at the pleasure of the Board of Directors except
that Herbert W. Kaufman is employed in his present capacity pursuant to the
terms of a three-year employment agreement which began January 1, 1992; on
December 6, 1994 this agreement was extended for three additional years. Mr.
Horton is employed in his present capacity pursuant to the terms of a
year-to-year employment agreement, dated August 2, 1985.
Herbert W. Kaufman has been a Director, President and Chief Executive
Officer of the Company since 1969. Mr. Kaufman serves on the Board of Trustees
of Walsh College. Mr. Kaufman serves on the Management, Long Range Planning, and
Stock Option Compensation Committees.
Gerald W. Horton, Executive Vice President, General Manager and a Director,
joined the Company in 1980 as Casualty Manager and has since 1987 served as
General Manager of Burns & Wilcox. He was appointed as a Director in 1986 by the
Board of Directors. Mr. Horton serves on the Management, and Long Range Planning
Committees.
Alan J. Kaufman has served as Treasurer and Director of the Company since
1970. He is not employed by the Company. Mr. Kaufman is the Senior Principal of
the law firm of Kaufman and Payton, P.C. He has been engaged full-time in the
practice of law since 1973 and is the elder son of Mr. Herbert W. Kaufman,
President of the Company, and the brother of Steven D. Kaufman, also a Director.
Kaufman and Payton, P.C. acts as the Company's general and litigation counsel.
Mr. Kaufman serves on the Management, Long Range Planning, and Stock Option
Compensation Committees.
Steven D. Kaufman has been a Director of the Company since 1979 and since
1981, has owned and operated Universal Seminars, Inc., located in Toronto,
Ontario, Canada. He is the son of Mr. Herbert W. Kaufman and the brother of Alan
J. Kaufman.
Neal F. Zalenko has been a Director of the Company since 1980 and has been
a Certified Public Accountant since 1971. Since 1973, he has been President of
Zalenko and Associates, P.C., Certified Public Accountants. Mr. Zalenko also
serves on the Audit and Finance, Management, Stock Option Compensation,
Compensation, and Long Range Planning Committees.
Jeffery W. Barry has served as a Director since 1988. Mr. Barry served as
President of Walsh College of Accounting and Business Administration from 1969
to 1991, at which time he retired. He now serves on the Walsh College Board of
Trustees (as does Herbert W. Kaufman). A 1963 graduate of the University of
Michigan School of Law, he is both an attorney and a CPA. Mr. Barry serves on
the Company's Audit and Finance, Compensation, and Long Range Planning
Committees.
42
<PAGE> 50
Alan H. Barry has served as a Director since 1989. Mr. Barry since 1972
served in various management positions in finance, operations and administration
with Brass-Craft Manufacturing Co. and in 1988 was elected its President and
Chief Executive Officer. Mr. Barry, a CPA, is a 1966 graduate of the University
of Toledo. Mr. Barry serves on the Audit and Finance, Long Range Planning,
Compensation, and Management Committees.
Gerald F. Wesolowski joined the Company on June 15, 1987 as Corporate
Controller. Mr. Wesolowski was appointed Assistant Treasurer in 1990.
Brooke Bothe was appointed Acting Corporate Secretary in November 1991. She
was elected as Corporate Secretary by the Board of Directors in January 1992.
She joined the Company in September 1987 as Corporate Administrator and Director
of Personnel. Ms. Bothe is a 1985 graduate of the School of Business
Administration at the University of Michigan.
George S. Allen was appointed Senior Vice President of Burns & Wilcox, the
Company's principal operating subsidiary, in 1992. Mr. Allen has been a Vice
President of Burns & Wilcox since 1990, and served as the Branch Manager of its
Charlotte, North Carolina office from 1987 to March 1992.
Jeffery W. Barry and Alan H. Barry are not related.
43
<PAGE> 51
COMMON STOCK OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of October 2, 1995 regarding (i) each
person who is known by the Company to be the beneficial owner of more than five
percent of the Company's Common Stock, (ii) each Director of the Company, (iii)
each executive officer of the Company, and (iv) all Directors and executive
officers of the Company as a group. Unless otherwise indicated, the Company
believes that the individuals listed each have sole voting and investment power
with respect to such shares. Unless otherwise indicated, the address of each
individual listed is c/o H. W. Kaufman Financial Group, Inc., 30833 Northwestern
Highway, Suite 220, Farmington Hills, Michigan 48334.
<TABLE>
<CAPTION>
AMOUNT PERCENT
BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
---------------- ------------------ --------
<S> <C> <C>
OFFICERS AND DIRECTORS
Alan J. Kaufman(1)(5)............................ 15,311 *
Herbert W. Kaufman(1)............................ 1,684,167(3) 49%
Steven Kaufman(1)(6)............................. 10,620(4) *
Neal F. Zalenko(2)(7)............................ 101,937 2.97%
Jeffery W. Barry(2)(8)........................... 8,228(4) *
Alan H. Barry(9)................................. 8,167(4) *
George S. Allen.................................. 1,605 *
Gerald W. Horton(2).............................. 8,342(4) *
Gerald F. Wesolowski............................. 1,814 *
Brooke Bothe..................................... 85 *
All officers and directors as a group (11
persons)....................................... 1,839,977 53.50%
--------- -----
OTHER BENEFICIAL OWNERS
Lillian Kaufman.................................. 878,705(1)(3) 25.50%
Jewish Federation of Metropolitan Detroit........ 73,243 2.10%
</TABLE>
-------------------------
* less than 1%
(1) Alan J. Kaufman, Treasurer and a Director, and Steven Kaufman, a Director,
are brothers and Herbert W. Kaufman, the Company's President, Chief
Executive Officer and a Director, is their father. Lillian Kaufman is the
former wife of Herbert W. Kaufman and the mother of Alan J. and Steven
Kaufman. Each of them disclaims beneficial ownership of the others' shares
of Common Stock.
(2) Held jointly with his wife.
(3) Pursuant to a Judgment of Divorce entered in November 1985, Herbert W.
Kaufman transferred to Lillian Kaufman, his former wife, the ownership
interest in one-third of the shares of Common Stock in the Company
registered in his name. However, pursuant to that Judgment, Mr. Kaufman had
the sole right to vote all such shares on all matters and sole investment
powers including the right to sell such shares during his lifetime. In the
event Mr. Kaufman sold any or all the shares, Mrs. Kaufman had the right,
but not the obligation to consider one-third of said shares as sold by her
and to receive the proceeds therefrom. Mr. Kaufman transferred physical
delivery of the one-third ownership interest (878,705 shares) to her
immediately before the Record Date, and she now has the sole voting and
investment rights to such shares.
(4) Includes presently exercisable options granted November 1, 1993 for 6,050
shares (at an exercise price of $4.96 per share).
(5) Includes an aggregate of 6,600 shares owned under the Uniform Gifts to
Minors Act ("UGMA") for the benefit of his three children gifted by Herbert
W. Kaufman on December 20, 1994. Alan J. Kaufman's address is 30833
Northwestern Highway, Suite 200, Farmington Hills, Michigan 48334.
(6) Steven Kaufman's address is 719 Yonge Street, 3rd Floor, Toronto, Ontario,
Canada M4Y 2B5.
44
<PAGE> 52
(7) Neal F. Zalenko's address is 26211 Central Park Boulevard, Suite 200,
Southfield, Michigan 48076.
(8) Jeffery W. Barry's address is 116 Rhododendron Court, Chapel Hill, North
Carolina 24514.
(9) Alan H. Barry's address is 39600 Orchard Hill Drive, Novi, Michigan 48376.
TRANSACTIONS BY COMPANY OFFICERS OR DIRECTORS IN COMMON STOCK WITHIN THE LAST 24
MONTHS
Form 4's and Form 5's filed by certain officers and directors with the
Securities and Exchange Commission indicate Herbert W. Kaufman made gifts in
December 1994 and January 1995 aggregating 18,000 shares to children and
grandchildren. Of that amount, Alan J. Kaufman's three children received a gift
on December 20, 1994 under the UGMA of 2,200 shares (as adjusted for the May
1995 stock dividend) each and Alan J. Kaufman is the custodian.
Steven Kaufman received gifts of 6,600 of such shares (as adjusted for the
May 1995 stock dividend) from his father, 3,300 on December 20, 1994 and 3,300
in January 1995. In February 1995, Steven Kaufman sold 3,000 shares at a price
of $4.75 each. Neal F. Zalenko made a gift of 500 shares on October 13, 1994.
Messrs. Alan H. Barry, Jeffery W. Barry, Gerald W. Horton and Steven
Kaufman were each granted stock options under the Company's 1989 Stock Option
Plan for 6,050 shares (as adjusted for stock dividends) on November 1, 1993.
On January 1, 1995, certain officers were issued shares pursuant to payroll
deductions under the Company's Employee Stock Purchase Plan at the price
determined by the last prior trading day's closing price of $4.625 per share:
George S. Allen, 309; Gerald W. Horton, 309; Brooke Bothe, 61 (as adjusted for
the April 1995 10% stock dividend).
On June 30, 1995, pursuant to the Employee Stock Purchase Plan, additional
shares were issued at $7.6875: Mr. Allen 165, Mr. Horton 165 and Ms. Bothe 24.
The Plan is to terminate on June 30, 1995 assuming approval by Company
shareholders of the Merger.
On September , 1995 Herbert W. Kaufman transferred 878,705 shares,
representing 25.5% of the Company's Common Stock, to Lillian Kaufman, his former
wife, in satisfaction of a November, 1985 Judgment of Divorce (see footnote (3)
above). On that same date, Mr. Kaufman made a gift of 73,243 shares, 2.1% of the
Common Stock, to the Jewish Federation of Metropolitan Detroit-United Jewish
Foundation.
DESCRIPTION OF AJK AND ACQUISITION
AJK Enterprises, Inc. ("AJK") is a Michigan corporation, wholly owned by
Mr. Alan J. Kaufman, which was formed on May 24, 1995 for the sole purpose of
effecting the Merger. AJK Acquisition Company ("Acquisition"), a wholly owned
subsidiary of AJK, is also a Michigan corporation formed on May 24, 1995. Both
AJK and Acquisition maintain principal executive offices at 30833 Northwestern
Highway, Suite 200, Farmington Hills, Michigan 48334. Both AJK and Acquisition
currently have nominal assets and no liabilities, and no operating history and
Acquisition will cease to exist when it is merged into the Company in connection
with the Merger. Alan J. Kaufman will contribute $1,000,000 to the equity of AJK
immediately coincident with the Merger. See "THE MERGER AGREEMENT -- Financing
the Transaction: Sources and Amounts of Funds." Accordingly, no selected
financial data, pro forma financial information or equivalent share information
with regard to either AJK or Acquisition is presented in this Proxy Statement
since it is the Company's view such information is not meaningful to a
shareholder's appraisal of the Merger.
Alan J. Kaufman is President, Treasurer and the sole Director of both AJK
and Acquisition, and Jeanette M. Russow is the Secretary of each. There are no
other officers. Ms. Russow has been employed as a legal assistant at Honigman
Miller Schwartz and Cohn, AJK's and Acquisition's legal counsel, for in excess
of five years. Her business address is 2290 First National Building, Detroit,
Michigan 48226.
45
<PAGE> 53
TRANSACTION OF OTHER BUSINESS
Management of the Company is not aware of any matters to be presented for
action at the Special Meeting, except for matters discussed in this Proxy
Statement. If any other matters properly come before the meeting, it is intended
that the shares represented by proxies will be voted in accordance with the
judgment of the person voting the proxies.
INDEPENDENT AUDITORS
BDO Seidman has served as independent auditors for the Company for in
excess of five years. Representatives of BDO Seidman are expected to be present
at the Special Meeting to make a statement, if they desire to do so, and will be
available to respond to appropriate questions. The financial statements as of
December 31, 1994 and 1993 and for each of the three years ended December 31,
1994 have also been included in reliance on the report of BDO Seidman,
independent certified public accountants, which is included herein.
SHAREHOLDER PROPOSALS
In the event the Merger is not completed as proposed, the Company will
schedule an Annual Meeting of Shareholders to be held in the fall or winter of
1995-96. Proposals of shareholders intended to be presented at the Annual
Meeting in 1995-96 must be submitted to the Company in appropriate written form
on or before November 1, 1995.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Exchange Act
and in accordance therewith file reports, proxy statements and other information
with the Commission. Such reports, proxy statements and other information filed
with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1025, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and the following Regional Offices of the Commission:
Suite 1400, Northwestern Atrium Center, 500 West Madison, Chicago, Illinois
60661-2511; and Room 1400, 75 Park Place, New York, New York 10007. Copies of
such material can be obtained at prescribed rates from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. If
the Merger Agreement is approved and the Merger consummated, the Company will no
longer be subject to the informational requirements of the Exchange Act.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Company (File No.
1-7228) pursuant to the Exchange Act are incorporated by reference in this Proxy
Statement.
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994; and its Amendment No. 1.
2. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995 and its Amendments Nos. 1 and 2.
3. The Company's 8-K Reports submitted June 2, 1995 and June 28, 1995.
4. The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995 and its Amendment No. 1.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Proxy Statement and prior to
the date of the Special Meeting shall be deemed to be incorporated by reference
into this Proxy Statement and to be 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
46
<PAGE> 54
herein shall be deemed to be modified or superseded for purposes hereof to the
extent that a statement contained herein (or in any other subsequently filed
document that is or is deemed to be incorporated by reference herein) modifies
or supersedes such previous statement. Any statement so modified or superseded
shall not be deemed to constitute a part hereof except as so modified or
superseded. All information appearing in this Proxy Statement is qualified in
its entirety by the information and financial statements (including the notes
thereto) appearing in the documents incorporated herein by reference.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN CERTAIN
EXHIBITS THERETO) ARE AVAILABLE WITHOUT CHARGE UPON WRITTEN OR ORAL REQUEST BY
ANY PERSON TO WHOM THIS PROXY STATEMENT HAS BEEN DELIVERED, IN THE CASE OF
DOCUMENTS RELATING TO THE COMPANY, FROM BROOKE BOTHE, 30833 NORTHWESTERN
HIGHWAY, SUITE 220, FARMINGTON HILLS, MI 48334, ATTENTION: CORPORATE SECRETARY
(TELEPHONE: (810) 932-9000). IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE BY OCTOBER 23, 1995.
By Order of the Board of Directors
/s/ Brooke Bothe
Brooke Bothe, Secretary
Southfield, Michigan
October 9, 1995
PLEASE COMPLETE AND RETURN YOUR PROXY CARD PROMPTLY IN THE ENCLOSED
ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
47
<PAGE> 55
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Audited Financial Statements:
Report of Independent Certified Public Accountants................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1993......................... F-3
Consolidated Statements of Income for each of the years in the three-year period
ended December 31, 1994............................................................ F-4
Consolidated Statements of Stockholders' Equity for each of the years in the
three-year period ended December 31, 1994.......................................... F-5
Consolidated Statements of Cash Flow for each of the years in the three-year period
ended December 31, 1994............................................................ F-6
Summary of Accounting Policies....................................................... F-7
Notes to Consolidated Financial Statements........................................... F-9
Unaudited Quarterly Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 1995 and December 31, 1994...... F-14
Condensed Consolidated Statements of Operations for each of the six-month periods
ended June 30, 1995 and June 30, 1994.............................................. F-15
Condensed Consolidated Statements of Cash Flows for each of the six-month periods
ended June 30, 1995 and June 30, 1994.............................................. F-16
Part 1 -- Financial Information...................................................... F-17
</TABLE>
F-1
<PAGE> 56
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
H.W. Kaufman Financial Group, Inc.
Southfield, Michigan
We have audited the accompanying consolidated balance sheets of H.W.
Kaufman Financial Group, Inc. and subsidiaries as of December 31, 1994 and 1993,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
H.W. Kaufman Financial Group, Inc. and subsidiaries at December 31, 1994 and
1993, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1994 in conformity with
generally accepted accounting principles. As discussed in the Summary of
Accounting Policies, the Company changed its method of accounting for marketable
securities in 1994.
/s/ BDO Seidman
BDO SEIDMAN
Troy, Michigan
January 31, 1995
F-2
<PAGE> 57
H.W. KAUFMAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1993
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents........................................ $10,370,260 $ 9,296,749
Marketable securities (Note 1)................................... 3,983,853 3,527,058
Receivables
Trade......................................................... 23,575,263 19,560,167
Notes......................................................... 2,456,921 2,528,779
Other......................................................... 107,194 491,240
Prepaid expenses and other current assets (Note 10).............. 1,000,589 873,084
----------- -----------
Total Current Assets............................................... 41,494,080 36,277,077
----------- -----------
Improvements and Equipment
Furniture, fixtures and equipment................................ 3,319,261 2,238,317
Improvements to leased premises.................................. 583,043 71,105
----------- -----------
3,902,304 2,309,422
Less accumulated depreciation and amortization................... 1,689,590 1,208,030
----------- -----------
Net Improvements and Equipment..................................... 2,212,714 1,101,392
----------- -----------
Other
Goodwill, net of accumulated amortization of $1,338,408 and
$1,088,036.................................................... 1,481,636 1,843,008
Covenants not to compete, net of accumulated amortization of
$418,892 and $403,626......................................... 174,108 370,083
Other intangible assets, net of accumulated amortization of
$819,106 and $1,034,098....................................... 1,692,848 781,927
Miscellaneous (Note 11).......................................... 849,047 892,130
----------- -----------
Total Other Assets................................................. 4,197,639 3,887,148
----------- -----------
$47,904,433 $41,265,617
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Payables
Insurance companies........................................... $31,559,820 $27,998,807
Customer advance payments..................................... 2,137,937 1,430,111
Other......................................................... 598,603 574,174
Accruals
Taxes, other than on income................................... 2,566,699 2,408,403
Compensation.................................................. 2,097,202 1,770,699
Other......................................................... 210,666 616,823
Current portion of long-term obligation (Note 4)................. 425,000 --
----------- -----------
Total Current Liabilities.......................................... 39,595,927 34,799,017
Long Term Obligation, less current portion (Note 4)................ 425,000 --
----------- -----------
Total Liabilities.................................................. 40,020,927 34,799,017
----------- -----------
Deferred Revenue................................................... 1,115,132 898,813
----------- -----------
Commitments and Contingencies (Notes 3 and 8)
Stockholders' Equity (Notes 5, 6 and 7)
Common stock, $.0025 par -- 7,500,000 shares authorized;
3,123,043 outstanding in 1994 and 2,830,230 outstanding in
1993.......................................................... 7,808 7,075
Additional paid-in capital....................................... 1,953,069 459,329
Retained earnings................................................ 4,906,265 5,101,383
Net unrealized loss on marketable securities..................... (98,768) --
----------- -----------
Total Stockholders' Equity......................................... 6,768,374 5,567,787
----------- -----------
$47,904,433 $41,265,617
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-3
<PAGE> 58
H.W. KAUFMAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Commissions and Fees.................................. $52,363,586 $44,924,237 $39,131,000
Cost of Commissions and Fees.......................... 22,745,536 19,878,228 17,088,265
Gross Profit.......................................... 29,618,050 25,046,009 22,042,735
Divisional Operating Expenses......................... 20,766,008 18,123,092 15,791,950
General and Administrative Expenses................... 6,169,386 5,130,113 4,418,106
Total Operating Expenses............................ 26,935,394 23,253,205 20,210,056
Operating Income...................................... 2,682,656 1,792,804 1,832,679
Other Income -- Net (Note 9).......................... 537,668 548,897 395,391
Income Before Taxes On Income......................... 3,220,324 2,341,701 2,228,070
Taxes On Income (Note 10)............................. 1,453,000 1,036,000 1,014,500
----------- ----------- -----------
Net Income............................................ $ 1,767,324 $ 1,305,701 $ 1,213,570
========== ========== ==========
Earnings Per Share.................................... $.57 $.42 $.39
==== ==== ====
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
<PAGE> 59
H.W. KAUFMAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL LOSS
------------------- PAID-IN RETAINED ON MARKETABLE
SHARES AMOUNT CAPITAL EARNINGS SECURITIES TOTAL
--------- ------ ---------- ----------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1992....... 2,827,230 $7,067 $ 449,586 $ 3,430,279 $ -- $3,886,932
Less dividends paid ($.14 per
share of common stock)....... -- -- -- (395,810) -- (395,810)
Net income..................... -- -- -- 1,213,570 -- 1,213,570
--------- ------ ---------- ----------- --------------- ----------
Balance, December 31, 1992..... 2,827,230 7,067 449,586 4,248,039 -- 4,704,692
Less dividends paid ($.16 per
share of common stock)....... -- -- -- (452,357) -- (452,357)
Shares issued upon exercise of
stock options................ 3,000 8 9,743 -- -- 9,751
Net income..................... -- -- -- 1,305,701 -- 1,305,701
--------- ------ ---------- ----------- --------------- ----------
Balance, December 31, 1993..... 2,830,230 7,075 459,329 5,101,383 -- 5,567,787
Effect of adopting SFAS No. 115
as of January 1, 1994, net of
tax effect................... -- -- -- -- 125,883 125,883
Less dividends paid ($.18 per
share of common stock)....... -- -- -- (509,459) -- (509,459)
Shares issued in accordance
with employee stock purchase
plan......................... 7,720 20 35,685 -- -- 35,705
Shares issued upon exercise of
stock options................ 2,000 5 6,495 -- -- 6,500
10% stock dividend issued
(Note 5)..................... 283,093 708 1,451,560 (1,452,983) -- (715)
Net change in unrealized gain
(loss) on marketable
securities, net of tax
effect....................... -- -- -- -- (224,651) (224,651)
Net income..................... -- -- -- 1,767,324 -- 1,767,324
--------- ------ ---------- ----------- --------------- ----------
Balance, December 31, 1994..... 3,123,043 $7,808 $1,953,069 $ 4,906,265 $ (98,768) $6,768,374
========= ======= ========== ============ ============== ==========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
<PAGE> 60
H.W. KAUFMAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income.......................................... $ 1,767,324 $ 1,305,701 $ 1,213,570
Adjustments to reconcile net income to net cash
provided by operating activities
Amortization of intangible assets................ 1,094,043 1,036,537 1,040,177
Depreciation and amortization.................... 645,227 378,911 291,204
Deferred income taxes............................ 46,700 (168,700) 5,000
Loss on disposition of equipment................. 22,430 3,617 18,618
Loss (gain) on sale of marketable securities..... 18,894 (96,128) (4,022)
Changes in assets and liabilities, net of effects
from purchase transactions
Increase in receivables........................ (3,559,192) (3,516,612) (4,263,267)
Decrease (increase) in prepaid expenses and
other current assets........................ (109,711) 77,548 (227,228)
Decrease (increase) in miscellaneous assets.... 43,083 (250,549) (145,914)
Increase in payables........................... 4,293,268 4,152,267 7,278,448
Increase in accruals........................... 78,642 601,160 1,732,946
Increase (decrease) in deferred revenue........ 216,319 794,492 (270,679)
----------- ----------- -----------
Net Cash Provided By Operating Activities............. 4,557,027 4,318,244 6,668,853
----------- ----------- -----------
Cash Flows From Investing Activities
Proceeds from the sale of marketable securities..... 183,587 309,953 304,140
Purchase of improvements and equipment.............. (1,778,979) (542,214) (470,142)
Purchase of marketable securities................... (822,538) (836,425) (1,239,497)
Payments for purchase of books of business.......... (597,617) (74,500) (664,632)
----------- ----------- -----------
Net Cash Used In Investing Activities................. (3,015,547) (1,143,186) (2,070,131)
----------- ----------- -----------
Cash Flows From Financing Activities
Dividends paid...................................... (510,174) (452,357) (395,810)
Proceeds from the issuance of common stock.......... 42,205 9,751 --
Reduction of long-term obligations.................. -- (450,000) (950,000)
----------- ----------- -----------
Net Cash Used In Financing Activities................. (467,969) (892,606) (1,345,810)
----------- ----------- -----------
Net Increase In Cash And Cash Equivalents............. 1,073,511 2,282,452 3,252,912
Cash and Cash Equivalents, beginning of year.......... 9,296,749 7,014,297 3,761,385
----------- ----------- -----------
Cash and Cash Equivalents, end of year................ $10,370,260 $ 9,296,749 $ 7,014,297
========== ========== ==========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
<PAGE> 61
H.W. KAUFMAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
BUSINESS
The Company and its subsidiaries sell specialty insurance products and
services as general agents and brokers to independent insurance agents through a
network of branch offices located in a number of states. In addition, through
subsidiaries, the Company provides premium financing on insurance coverages.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly-owned. All significant
intercompany accounts have been eliminated.
MARKETABLE SECURITIES
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 115, "Accounting for Certain Investments in Debt and Equity Securities" as
of January 1, 1994. In accordance with SFAS No. 115, prior years' financial
statements have not been restated to reflect the change in accounting method.
The effect of adopting SFAS No. 115, as of January 1, 1994, was to increase
stockholders' equity (net of income taxes) by $125,883.
At January 1, 1994, marketable equity and debt securities have been
categorized as available-for-sale and as a result are stated at market value. At
December 31, 1994 and 1993 all marketable equity and debt securities are
classified as current assets. Unrealized gains or losses, net of the tax
effects, are included as a component of stockholders' equity until realized.
At December 31, 1993, marketable equity securities were stated at the lower
of aggregate cost or market. At December 31, 1993, marketable securities
included in current assets had a market value of $3,736,863.
RECEIVABLES
The Company considers all receivables to be fully collectible; as a result,
no allowance for doubtful accounts is considered necessary. If amounts become
uncollectible, they are charged to operations when that determination is made.
Notes receivable arise from the Company offering short-term premium
financing to insureds. Interest rates on premium financing contracts ranged from
8% to 18% (approximately 15% average in 1994) and the related interest is
included in commissions and fees.
IMPROVEMENTS, EQUIPMENT AND DEPRECIATION
Improvements and equipment are stated at cost. Depreciation is computed
over the estimated useful lives of assets ranging from three to ten years using
accelerated methods for both financial reporting and income tax purposes.
OTHER ASSETS
Other assets include amounts assigned to goodwill, covenants not to
compete, agency contracts and policyholder lists obtained in the acquisitions of
"books of business." These intangibles are being amortized on a straight-line
basis over two to five years, except for goodwill which is amortized over
various periods not to exceed twelve years.
F-7
<PAGE> 62
H.W. KAUFMAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED)
FIDUCIARY FUNDS
Premiums receivable from agents are reported as assets and premiums
payable, net of commissions earned, to the insurance carriers are reported as
liabilities. Premiums collected from agents and not yet remitted to the carriers
are held in a fiduciary capacity and invested in short-term investments until
remitted.
Certain states require that funds be maintained in segregated accounts for
the payment of specific liabilities. At December 31, 1994, cash and certificates
of deposit of approximately $2,300,000 were restricted for the payment of such
liabilities.
REVENUE RECOGNITION
Commissions are recognized when the insurance agents are invoiced.
Commissions relating to return or additional premiums or adjustments are
recognized when they occur.
Profit-sharing commissions from insurance carriers are recognized when
earned and reasonably estimatable. Some of the carriers may subsequently adjust
the commissions based on actual policy experience. Adjustments resulting in
overpayments are applied to future commissions based on the Company's agreement
with individual carriers and are reflected as deferred revenue in the financial
statements while underpayments from carriers are recorded as a receivable.
TAXES ON INCOME
Beginning in 1993, the financial statements reflect adoption of the
liability method of accounting for income taxes pursuant to Statement of
Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes."
Financial statements presented for 1992 reflect income taxes under the deferral
method previously required. The cumulative effect as of January 1, 1993 of
adopting SFAS No. 109 was insignificant.
Deferred income taxes are recorded to reflect the future tax consequences
of temporary differences between the financial reporting bases and tax bases of
the Company's assets and liabilities.
EARNINGS PER SHARE
Earnings per share are computed on the basis of the weighted average number
of common shares outstanding during each year. The dilutive effect of the
outstanding common stock options is included in the earnings per share
calculation. The weighted average number of common shares outstanding was
3,114,867, 3,111,580 and 3,110,503 for the years ended December 31, 1994, 1993
and 1992, respectively.
Fully diluted earnings per share amounts are not presented because they are
not materially dilutive.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
money market funds and certificates of deposit with an original maturity of
three months or less to be cash equivalents.
F-8
<PAGE> 63
H.W. KAUFMAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. MARKETABLE SECURITIES
The following information pertains to marketable equity securities and debt
securities classified as available for sale at December 31, 1994:
<TABLE>
<CAPTION>
GROSS
AGGREGATE UNREALIZED AGGREGATE
FAIR HOLDING COST
VALUE LOSSES BASIS
---------- ---------- ----------
<S> <C> <C> <C>
Equities and Stock & Bond Mutual Funds..................... $3,271,739 $ 12,369 $3,284,108
Bonds and Bond Mutual Funds................................ 712,114 152,245 864,359
---------- ---------- ----------
Total............................................... $3,983,853 $ 164,614 $4,148,467
========= ======== =========
</TABLE>
Proceeds, gross realized gains, and gross realized losses from the sale of
securities classified as available for sale for the year ended December 31,
1994, were $183,587, $3,601, and $22,495, respectively. For the purpose of
determining gross realized gains and losses, the cost of securities sold is
based upon specific identification method.
The unrealized gain (loss) on available-for-sale securities decreased by
$374,418 (before the effect of income taxes) for the year ended December 31,
1994.
2. LINE OF CREDIT AGREEMENTS
The Company has a $500,000 unsecured line of credit available with a bank.
Borrowings under the line of credit are due on demand and bear interest at the
bank's variable base rate. During the years ended December 31, 1994 and 1993,
there were no borrowings under this agreement.
One of the Company's subsidiaries has a $2,500,000 line of credit available
with the bank to be utilized for insurance premium financing. Borrowings under
the line of credit are due on demand, bear interest at the bank's variable base
rate plus 1/4 percent, and are secured by substantially all of the Company's
assets. During the years ended December 31, 1994 and 1993, there were no
borrowings under this agreement.
3. EMPLOYEE BENEFIT PLAN
The Company has established a retirement plan which allows employees to
contribute a portion of their salaries under section 401(k) of the Internal
Revenue Code. The Company has agreed to match 50% of the contributions of each
employee up to 6% of the employee's salary with an annual cap of $3,000 per
employee. In addition, the Company can make an additional contribution to the
plan in an amount determined by the Board of Directors. These contributions are
discretionary but may not exceed 12 percent of the annual aggregate compensation
(as defined) paid to all participating employees. The expense for this plan for
the years ended December 31, 1994, 1993 and 1992 was $243,784, $220,548, and
$183,813, respectively.
4. LONG-TERM OBLIGATION
In connection with the acquisition of all the assets and book of business
of a broker in 1994, the Company entered into a promissory note payable for
$850,000. This promissory note is non-interest bearing and requires payments of
$425,000 in 1995 and 1996.
5. STOCKHOLDERS' EQUITY
On April 5, 1994, the Company declared a 10% common stock dividend to
stockholders of record on April 19, 1994, distributed on May 5, 1994. Retained
earnings and additional paid in capital were charged for $1,452,983 and
$1,451,560, respectively, as a result of the issuance of 283,093 shares of the
Company's
F-9
<PAGE> 64
H.W. KAUFMAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock and cash of $715 paid in lieu of fractional shares. The weighted
average number of shares outstanding and per share amounts have been restated
for periods prior to the stock dividend.
6. EMPLOYEE STOCK PURCHASE PLAN
On July 1, 1994 the Company initiated an employee stock purchase plan
whereby all full-time employees may withhold up to 10% of their earnings to
purchase Company common stock. On each June 30 and December 31, the Company uses
the withheld funds to purchase shares of stock at the then current market price.
Accordingly, no compensation expense is recorded in connection with the plan.
The shares to be sold to participants under this plan are authorized and
unissued shares of the Company's common stock.
The maximum number of shares available under this plan during all offerings
is 300,000 shares. Since the inception of the plan, employees had purchased a
total of 7,720 shares at $4.625 per share. Total receipts to the Company were
$35,705.
7. STOCK OPTIONS
On July 25, 1989, the stockholders approved the Company's 1989 Stock Option
and Incentive Plan ("1989 Stock Option Plan") for the granting of incentive and
non-qualified stock options and restricted stock awards to the officers, key
employees and directors of the Company. A total of 412,500 shares of the
Company's common stock has been reserved for issuance under the 1989 Stock
Option Plan. Stock options may be granted under the plan at a price not less
than the fair market value of the stock on the date the option is granted and
must be exercisable by the date fixed by the Company, but not later than ten
years after the date of grant. Stock options granted under the 1989 Stock Option
Plan are not generally exercisable until one year after they are granted, and
the restrictions attached to the restricted stock awards do not normally expire
until at least one year after the award is made.
Changes in stock options outstanding are summarized as follows:
<TABLE>
<CAPTION>
SHARES OPTION PRICE
------ --------------
<S> <C> <C>
Balance, January 1, 1992............................................ 16,500 $ 2.95
Granted........................................................... -- --
Exercised......................................................... -- --
Expired or terminated............................................. (1,100) 2.95
------ --------------
Balance, December 31, 1992.......................................... 15,400 2.95
Granted........................................................... 22,000 5.45
Exercised......................................................... (3,300) 2.95
Expired or terminated............................................. (1,100) 2.95
------ --------------
Balance, December 31, 1993.......................................... 33,000 2.95 and 5.45
------ --------------
Balance, December 31, 1993.......................................... 33,000 2.95 and 5.45
Granted........................................................... -- --
Exercised......................................................... (2,200) 2.95
Expired or terminated............................................. -- --
------ --------------
Balance, December 31, 1994.......................................... 30,800 $2.95 and 5.45
====== =============
Exercisable, December 31, 1994...................................... 30,800 $2.95 and 5.45
====== =============
</TABLE>
F-10
<PAGE> 65
H.W. KAUFMAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
Litigation
At December 31, 1994, the Company is a defendant in several lawsuits. To
the extent that the lawsuits may be found in favor of the plaintiffs, and to the
extent that these matters may not be covered by the Company's errors and
omissions insurance policy, the Company may be liable in these matters. In the
opinion of management, such liabilities would not have a significant affect on
the financial position of the Company.
Employment Agreements
The Company has certain agreements with branch managers, key employees and
officers to award bonuses based upon earnings. Expenses incurred under these
bonus arrangements approximated $1,306,000, $1,102,000 and $867,000 during the
years ended December 31, 1994, 1993 and 1992, respectively.
Operating Leases
The Company operates in leased office facilities in various locations under
operating leases with terms ranging from one to seven years with renewal options
for additional periods. Office equipment and vehicles are also leased for terms
of up to four years. Many leases provide that the Company shall pay for real
estate and personal property taxes, maintenance, insurance and other expenses.
Future minimum rentals under non-cancelable operating leases as of December 31,
1994 are as follows: 1995 -- $1,655,000; 1996 -- $1,223,000; 1997 -- $1,103,000;
1998 -- $895,000; and 1999 -- $753,000.
Rent expense for the years ended December 31, 1994, 1993 and 1992 was
$1,797,597, $1,831,356 and $1,452,440, respectively.
9. OTHER INCOME -- NET
Other income -- net is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Interest and dividend income.............................. $556,562 $452,322 $388,603
Net realized gains (losses) on the sale of marketable
securities.............................................. (18,894) 96,128 4,022
Miscellaneous............................................. -- 447 2,766
-------- -------- --------
Total Other Income -- Net............................ $537,668 $548,897 $395,391
======== ======== ========
</TABLE>
10. TAXES ON INCOME
Provisions for federal and state income taxes in the consolidated
statements of income are comprised of the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Current Tax Expense
Federal................................................ $1,179,000 $1,062,000 $ 855,000
State and local........................................ 227,300 142,700 154,500
---------- ---------- ----------
Total Current..................................... 1,406,300 1,204,700 1,009,500
Deferred Tax (Benefit) Expense -- federal................ 46,700 (168,700) 5,000
---------- ---------- ----------
Total Taxes On Income.................................... $1,453,000 $1,036,000 $1,014,500
========== ========== ==========
</TABLE>
F-11
<PAGE> 66
H.W. KAUFMAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets are included with other current assets and are
comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1994 1993 1992
-------- -------- -------
<S> <C> <C> <C>
Accrued compensation..................................... $123,000 $117,000 $31,300
Unrealized loss on marketable securities................. 56,000 -- --
Intangibles.............................................. 54,000 -- --
Accrued lease termination fee............................ -- 60,000 --
Accrued self-insured health expenses..................... -- 37,000 14,000
-------- -------- -------
Gross Deferred Tax Assets................................ 233,000 214,000 45,300
-------- -------- -------
Deferred tax assets valuation allowance.................. -- -- --
-------- -------- -------
$233,000 $214,000 $45,300
======== ======== =======
</TABLE>
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
pretax income as a result of the following differences:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Income Taxes At Statutory Rate........................... $1,095,000 $ 796,000 $ 758,000
Increase In Taxes Resulting From
State and local taxes, net of federal income tax
benefit............................................. 150,000 94,000 102,000
Amortization of goodwill............................... 123,000 123,000 141,000
Other.................................................. 85,000 23,000 13,500
---------- ---------- ----------
Total Taxes On Income.................................... $1,453,000 $1,036,000 $1,014,500
========== ========== ==========
Effective Tax Rate....................................... 45.1% 44.2% 45.5%
==== ==== ====
</TABLE>
11. RELATED PARTY TRANSACTIONS
At December 31, 1994 and 1993 the Company had a non-interest bearing
receivable of $697,663 and $614,029 due from a stockholder/officer's irrevocable
trust. The receivable represents premium payments on split dollar life insurance
policies on the stockholder/officer. The Company has a security interest in the
policies to the extent of premiums advanced.
12. MAJOR CUSTOMERS
The Company acts as an intermediary between insurance carriers and
independent insurance agents who use the Company to find insurance coverage for
the agents' customers. No one insurance agent accounts for over ten percent of
the Company's commissions and fees. However, the Company placed a significant
amount of insurance coverage with one insurance carrier. Approximately 26%, 29%
and 33% of the Company's commissions and fees for the years ended December 31,
1994, 1993 and 1992 were attributable to insurance placed with one insurance
carrier.
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Cash Paid During The Year For
Taxes on income........................................ $1,683,299 $1,086,216 $ 721,052
Interest............................................... 10,224 36,313 63,477
========== ========== ==========
</TABLE>
F-12
<PAGE> 67
H.W. KAUFMAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Non-Cash Investing And Financing Activities
In 1994, the Company purchased all of the assets and book of business of a
broker for $1,200,000. In conjunction with the acquisition, the Company issued a
promissory note payable for $850,000 (see Note 4).
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1994
Commissions and fees........................... $12,262 $ 13,442 $13,561 $ 13,099
Gross profit................................... 6,794 7,651 7,916 7,257
Net income..................................... 93 433 832 409
Earnings per share............................. .03 .14 .26 .13
1993
Commissions and fees........................... $10,288 $ 11,318 $11,616 $ 11,702
Gross profit................................... 5,727 6,188 6,545 6,586
Net income..................................... 62 269 460 515
Earnings per share............................. .02 .09 .15 .17
</TABLE>
F-13
<PAGE> 68
H.W. KAUFMAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,*
1995 1994
----------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current:
Cash and cash equivalents.............................................. $12,354,672 $10,370,260
Marketable securities, market value, Available-for-sale................ 4,396,033 3,983,853
Receivables:
Trade................................................................ 25,260,418 23,575,263
Notes................................................................ 3,865,324 2,456,921
Other................................................................ 362,902 107,194
Prepaid expenses and other current assets.............................. 775,271 1,000,589
----------- -------------
Total current assets............................................ 47,014,620 41,494,080
----------- -------------
Improvements and Equipment:
Furniture, fixtures and equipment...................................... 3,847,143 3,319,261
Improvements to leased premises........................................ 588,520 583,043
----------- -------------
4,435,663 3,902,304
Less accumulated depreciation and amortization......................... (2,094,101) (1,689,590)
----------- -------------
Net improvements and equipment.................................. 2,341,562 2,212,714
----------- -------------
Other Assets:
Goodwill, net of accumulated amortization of $1,497,903 and
$1,338,408........................................................... 1,417,141 1,481,636
Covenants not to compete, net of accumulated amortization of $503,158
and $418,892......................................................... 385,841 174,108
Other intangible assets, net of accumulated amortization of $1,120,901
and $819,106......................................................... 2,349,053 1,692,848
Miscellaneous.......................................................... 945,221 849,047
----------- -------------
Total other assets.............................................. 5,097,256 4,197,639
----------- -------------
$54,453,438 $47,904,433
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable:
Insurance companies.................................................. $36,553,474 $31,559,820
Customer advance payments............................................ 2,846,865 2,137,937
Other................................................................ 707,127 598,603
Accruals:
Taxes, other than on income.......................................... 2,104,043 2,566,699
Compensation......................................................... 1,680,678 2,097,202
Other................................................................ 301,907 210,666
Current portion of long-term obligations............................. 775,000 425,000
----------- -------------
Total current liabilities................................................ 44,969,094 39,595,927
Long-term debt, less current portion..................................... 150,000 425,000
Deferred revenue......................................................... 2,266,501 1,115,132
----------- -------------
Total liabilities............................................... 47,385,595 41,136,059
Stockholders' Equity:
Common stock, $.0025 par -- 7,500,000 shares authorized; 3,440,467
shares outstanding in 1995 and 3,123,043 shares outstanding in
1994................................................................. 8,601 7,808
Additional paid-in capital............................................. 2,291,468** 1,953,069**
Retained earnings...................................................... 4,648,528** 4,906,265**
Securities valuation................................................... 119,246 (98,768)
----------- -------------
Total stockholders' equity...................................... 7,067,843 6,768,374
----------- -------------
$54,453,438 $47,904,433
============ =============
</TABLE>
-------------------------
* Condensed from 1994 Audited Financial Statements
** Additional paid-in capital and Retained earnings have been adjusted to
reflect the 10% stock dividend distributed on May 17, 1995 and the 10% stock
dividend distributed on May 5, 1995.
F-14
<PAGE> 69
H.W. KAUFMAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
-------------------------- ---------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Commissions and fees...................... $28,705,280 $25,703,220 $15,349,483 $13,441,709
Cost of commission and fees............... 12,679,699 11,258,085 6,929,023 5,790,515
----------- ----------- ----------- -----------
Gross profit............................ 16,025,581 14,445,135 8,420,460 7,651,194
----------- ----------- ----------- -----------
Divisional operating expenses............. 11,438,491 10,296,895 5,908,677 5,285,265
General & administrative.................. 3,621,216 3,249,524 1,874,196 1,655,554
----------- ----------- ----------- -----------
Total operating expense................. 15,059,707 13,546,419 7,782,873 6,940,819
----------- ----------- ----------- -----------
Operating income........................ 965,874 898,716 637,587 710,375
Other income.............................. 394,935 218,444 209,999 108,909
----------- ----------- ----------- -----------
Income before income taxes.............. 1,360,809 1,117,160 847,586 819,284
Taxes on income........................... 751,174 591,195 393,383 386,195
Net income................................ $ 609,635 $ 525,965 $ 454,203 $ 433,089
=========== =========== =========== ===========
Earnings per share........................ $.18 $.15* $.13 $.13*
==== ==== ==== ====
Weighted average number of shares
outstanding............................. 3,443,519 3,425,788* 3,446,107 3,425,804*
</TABLE>
Interim results are not necessarily indicative of the results of operations
for a full year.
-------------------------
* Weighted average number of shares outstanding and earnings per share have been
adjusted to reflect the 10% stock dividend distributed on May 17, 1995.
F-15
<PAGE> 70
H.W. KAUFMAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1995 1994
----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income............................................................ $ 609,635 $ 525,965
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Depreciation expense................................................ 404,511 241,417
Amortization of intangible assets................................... 545,557 551,578
Deferred income taxes............................................... (203) 73,000
Decrease (increase) in accounts receivable.......................... (3,349,266) (4,422,752)
Decrease (increase) in prepaid expenses and other current assets.... 79,975 290,966
Decrease (increase) in miscellaneous assets......................... (96,174) 9,877
Increase (decrease) in accounts payable............................. 5,811,106 5,736,619
Increase (decrease) in accrued expenses............................. (787,939) (971,024)
Abandonment of leasehold improvements............................... -- 23,678
Write-off of intangibles............................................ -- 65,786
(Gain) loss on sale of marketable securities........................ (16,000) 19,019
Increase in deferred revenue........................................ 1,151,369 1,115,132
----------- -----------
Net cash provided by operating activities........................... 4,352,571 3,259,261
----------- -----------
Cash Flows from Investing Activities:
Proceeds from the sale of marketable securities....................... 153,500 83,587
Purchase of marketable securities..................................... (186,120) (360,807)
Purchase of books of business......................................... (849,000) (462,000)
Purchase of improvements and equipment................................ (533,359) (1,096,464)
----------- -----------
Net cash used by investing activities................................. (1,414,979) (1,835,684)
----------- -----------
Cash Flows from Financing Activities:
Dividends paid........................................................ $ (564,061) $ (510,177)
Proceeds from stock issuance.......................................... 35,881 6,501
Reduction of long term debt........................................... (425,000) --
----------- -----------
Net cash used by financing activities................................... (953,180) (503,676)
----------- -----------
Net increase (decrease) in cash and cash equivalents.................... 1,984,412 919,901
Cash and cash equivalents, beginning of year............................ 10,370,260 9,296,749
----------- -----------
Cash and cash equivalents, end of period................................ $12,354,672 $10,216,650
============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the six months ended:
Income taxes........................................................ 510,000 $ 700,000
Interest............................................................ 7,352 --
</TABLE>
-------------------------
Footnote:
During the quarter ended March 31, 1995, the Company acquired the Gerry
McLaughlin Insurance Agency and the Illinois R. B. Jones Agency. $199,000
related to the Gerry McLaughlin Insurance Agency was paid and recorded as
Purchase of Books of Business. On April 1, 1995 and May 30, 1995 the Company
issued payments to Alexander Howden North America for $100,000 and $550,000
representing payments for the purchase of the book of business of Illinois R. B.
Jones. The increase in the current portion of long-term obligations for the six
months ended June 30, 1995 is the result of these acquisitions of business and
reflects the current portion of the balance due thereon at June 30, 1995. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resource". Reduction of long-term debt
reflected above under Cash Flow from Financing Activities was attributable to
payments made on other prior acquisitions.
F-16
<PAGE> 71
PART I -- FINANCIAL INFORMATION
ITEM 1. -- FINANCIAL STATEMENTS
The consolidated Financial Statements included herewith have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in the Consolidated Financial Statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading.
In the opinion of the Company's Management, the Financial Statements for
six months ended June 30, 1995 and 1994 reflect all adjustments for normal
recurring accruals which are necessary to present a fair statement of the
results for the period then ended. It is suggested that these Financial
Statements be read in conjunction with the audited, consolidated Financial
Statements and notes thereto submitted in the Company's Form 10-K filing for the
year ended December 31, 1994.
The results for the six months ended June 30, 1995, are not necessarily
indicative of the results of the entire year of 1995.
On April 17, 1995, the Company reported a 10% Stock Dividend payable to
shareholders of record as of May 1, 1995. Approximately 311,977 additional
shares of common stock were issued pursuant thereto. These transactions have
been treated for accounting purposes as stock splits effected in the form of
dividends. The weighted average number of shares outstanding on the Consolidated
Statements of income only, have been adjusted to reflect the May 1, 1995 Stock
Dividend.
F-17
<PAGE> 72
EXHIBIT 17(D)(2)
PROXY H. W. KAUFMAN FINANCIAL GROUP, INC. PROXY
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS TO BE HELD
OCTOBER 30, 1995
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Herbert W. Kaufman and Brook
Bothe, and each of them with full power of substitution, his or her
Proxies to represent and vote, as designated below, all shares of the
Common Stock of H.W. Kaufman Financial Group, Inc. ("Company")
registered in the name of the undersigned and held of record by the
undersigned on October 2, 1995 at the Special Meeting of Shareholders
to be held at 10:00 a.m. on Monday, October 30, 1995 at the offices of
the Company, located at 30833 Northwestern Highway, Suite 220,
Farmington Hills, Michigan 48334, and at any adjournment thereof. The
undersigned hereby revokes all proxies previously granted with respect
to such meeting.
The Board of Directors recommends that you vote "FOR" the
proposal.
1. APPROVAL of the Agreement and Plan of Merger dated as of May
26, 1995, as amended, among the Company, AJK Enterprises, Inc. and AJK
Acquisition Company, and all required transactions pursuant thereto.
/ / FOR / / AGAINST / / ABSTAIN
2. OTHER MATTERS: In their discretion, the Proxies are authorized
to vote upon such other business as may properly come before the
Special Meeting or any adjournment thereof that was not known to the
Board of Directors of the Company prior to the solicitation hereof.
This proxy may be revoked prior to the exercise of the powers
conferred by the proxy.
(Continued and to be Signed on Reverse Side)
(Continued from other side)
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO
DIRECTION IS GIVEN, WILL BE VOTED FOR APPROVAL OF THE AGREEMENT AND
PLAN OF MERGER.
<TABLE>
<CAPTION>
<S> <C>
Dated:________________________________, 1995.
________________________________
Signature
________________________________
Signature if held jointly
</TABLE>
PLEASE DATE AND SIGN ABOVE EXACTLY AS NAME(S) APPEARS AT THE LEFT.
EXECUTORS, ADMINISTRATORS, TRUSTEES, GUARDIANS, ETC. SHOULD INDICATED
CAPACITY WHEN SIGNING. FOR STOCK HELD IN JOINT TENANCY, EACH JOINT
OWNER SHOULD SIGN. IF EXECUTED BY A CORPORATION, THE PROXY SHOULD BE
SIGNED BY A DULY AUTHORIZED OFFICER. IF EXECUTED BY A PARTNERSHIP,
PLEASE SIGN IN THE PARTNERSHIP'S NAME AND BY AN AUTHORIZED PERSON.
PLEASE MAKE ANY ADDRESS CHANGE AT LEFT.
