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SCHEDULE 14C
INFORMATION REQUIRED IN INFORMATION STATEMENT
SCHEDULE 14C INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(c)
OF THE SECURITIES EXCHANGE ACT OF 1934
Check the appropriate box:
/ / Preliminary Information Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14c-5(d)(2))
/X/ Definitive Information Statement
KERR GROUP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required
/ / Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $0.50 per share, and $1.70 Class B Cumulative
Convertible Preferred Stock, Series D, par value $0.50 per share of Kerr
Group, Inc. (the "Shares")
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
275,962 being the maximum number of shares of Common Stock and 180,006
shares of Series D Preferred Shares to be acquired by Kerr Acquisition
Corporation in the transaction
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
$5.40 per share of Common Stock and $12.50 per share of Series D
Preferred Shares
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$3,740,269.80
------------------------------------------------------------------------
(5) Total fee paid:
$748.10
------------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$5,951.42
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
Schedule 14D-1
------------------------------------------------------------------------
(3) Filing Party:
Kerr Acquisition Corporation and
Fremont Acquisition Company, LLC
------------------------------------------------------------------------
(4) Date Filed:
July 8, 1997
------------------------------------------------------------------------
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KERR GROUP, INC.
500 NEW HOLLAND AVENUE
LANCASTER, PENNSYLVANIA 17602
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INFORMATION STATEMENT
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DECEMBER 11, 1997
---------------------
This Information Statement is furnished by the Board of Directors
(hereinafter the "Board" or the "Board of Directors") of Kerr Group, Inc., a
Delaware corporation (the "Company"), to holders of the outstanding shares of
(i) common stock, par value $.50 per share, including the associated rights to
purchase shares of preferred stock (the "Rights" and, together with the common
stock, the "Common Stock") and (ii) $1.70 Class B Cumulative Convertible
Preferred Stock, Series D, par value $0.50 per share (the "Series D Preferred
Shares" and, together with the Common Stock, the "Shares"), of the Company, in
connection with an Agreement and Plan of Merger, dated as of July 1, 1997, by
and among the Company, Fremont Acquisition Company, LLC, a Delaware limited
liability company ("Parent"), and Kerr Acquisition Corporation, a Delaware
corporation (the "Purchaser") providing for the merger (the "Merger") of
Purchaser with and into the Company (the "Merger Agreement"). As a result of the
Merger, the Company will become a wholly-owned subsidiary of Parent and (i) each
issued and outstanding share of Common Stock (other than shares of Common Stock
that are owned by the Company, Parent, the Purchaser, any other subsidiary of
Parent, or by stockholders who have validly perfected their appraisal rights
under Delaware law) will be converted into the right to receive $5.40 in cash
(the "Common Stock Merger Consideration") and (ii) each issued and outstanding
share of Series D Preferred Shares (other than shares of Series D Preferred
Shares that are owned by the Company, Parent, the Purchaser, any other
Subsidiary of Parent, or by stockholders who have validly perfected their
appraisal rights under Delaware law) will be converted into the right to receive
$12.50 in cash (the "Series D Merger Consideration"). A copy of the Merger
Agreement is attached hereto as Annex I.
The Merger is the second step of a two-step transaction pursuant to which
Parent, as the owner of all of the capital stock of the Purchaser, will acquire
the entire equity interest in the Company. The first step was a tender offer for
the outstanding Shares at $5.40 per share of Common Stock and $12.50 per share
of Series D Preferred Shares, respectively, net to the seller in cash (the
"Offer"). The Purchaser acquired 3,657,133 shares of Common Stock and 307,894
shares of Series D Preferred Shares upon the consummation of the Offer on August
26, 1997, representing approximately 81% of the issued and outstanding Shares on
an as-converted, fully diluted basis.
As a result of the consummation of the Offer, the Purchaser owns and has the
right to vote a sufficient number of outstanding Shares to approve and adopt the
Merger Agreement without the affirmative vote of any other holder of Common
Stock or Series D Preferred Shares, thereby assuring such approval and adoption.
The Purchaser has executed and delivered to the Company a written consent in
lieu of a meeting of stockholders approving and adopting the Merger Agreement
and authorizing the consummation of the Merger.
SUCH WRITTEN CONSENT PROVIDES THAT THE MERGER WILL BECOME EFFECTIVE NO
EARLIER THAN 20 CALENDAR DAYS AFTER THIS INFORMATION STATEMENT IS FIRST MAILED
TO STOCKHOLDERS OF THE COMPANY. THE COMPANY CURRENTLY ANTICIPATES THAT THE
EFFECTIVE DATE OF THE MERGER WILL BE ON OR ABOUT DECEMBER 31, 1997.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY. PLEASE DO NOT SEND IN ANY OF YOUR STOCK CERTIFICATES AT THIS TIME.
This Information Statement is first being mailed to stockholders on or about
December 11, 1997.
THIS INFORMATION STATEMENT IS DATED DECEMBER 11, 1997.
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TABLE OF CONTENTS
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SUMMARY................................................................................................... 4
THE COMPANIES......................................................................................... 4
GENERAL............................................................................................... 5
REQUIRED VOTE; WRITTEN CONSENT IN LIEU OF MEETING..................................................... 5
PROCEDURE FOR RECEIPT OF MERGER CONSIDERATION......................................................... 5
APPRAISAL RIGHTS...................................................................................... 6
THE MERGER............................................................................................ 6
FINANCING ARRANGEMENTS................................................................................ 7
GENERAL................................................................................................... 8
VOTE REQUIRED; WRITTEN CONSENT IN LIEU OF MEETING......................................................... 8
PROCEDURE FOR RECEIPT OF MERGER CONSIDERATION............................................................. 8
APPRAISAL RIGHTS.......................................................................................... 9
THE MERGER................................................................................................ 12
BACKGROUND OF THE OFFER AND THE MERGER................................................................ 12
OPINION OF CIBC WOOD GUNDY AND LEHMAN BROTHERS FEE.................................................... 15
PURPOSE OF THE OFFER AND THE MERGER................................................................... 20
INTERESTS OF CERTAIN PERSONS IN THE MERGER............................................................ 20
Management Contracts................................................................................ 20
Certain Consideration Received...................................................................... 21
Stock Option Plans.................................................................................. 21
Director Compensation............................................................................... 21
Director Liability and Indemnification.............................................................. 22
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER................................................. 23
REGULATORY APPROVAL................................................................................... 23
THE MERGER AGREEMENT...................................................................................... 24
Merger Agreement...................................................................................... 24
Option Agreement...................................................................................... 30
Guarantee............................................................................................. 31
Other Matters......................................................................................... 31
FINANCIAL ARRANGEMENTS.................................................................................... 32
THE COMPANY............................................................................................... 34
BUSINESS.............................................................................................. 34
Discontinued Operations............................................................................. 34
Principal Products and Markets; Sales and Customers................................................. 36
Competition......................................................................................... 36
Backlog............................................................................................. 37
Raw Materials and Supplies; Fuel and Energy Matters................................................. 37
Product Development, Engineering, Patents and Licensing............................................. 37
Environmental Matters; Legislation.................................................................. 38
Seasonality......................................................................................... 38
Working Capital..................................................................................... 38
PROPERTIES................................................................................................ 40
LEGAL PROCEEDINGS......................................................................................... 41
MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............................................. 44
SELECTED FINANCIAL DATA................................................................................... 45
CERTAIN PROJECTIONS....................................................................................... 46
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................... 48
Results of Operations--Nine Month Period Ended September 30, 1997 Compared to Nine Month Period
Ended September 30, 1996........................................................................... 48
Continuing Operations............................................................................. 48
Discontinued Operations........................................................................... 49
Recently Issued Accounting Pronouncements......................................................... 49
Liquidity and Capital Resources................................................................... 49
Results of Operations--1996 Compared to 1995........................................................ 51
Continuing Operations............................................................................. 51
Discontinued Operations........................................................................... 52
Liquidity and Capital Resources................................................................... 53
Results of Operations--1995 Compared to 1994........................................................ 54
Continuing Operations............................................................................. 54
Discontinued Operations........................................................................... 55
Liquidity and Capital Resources................................................................... 55
AVAILABLE INFORMATION..................................................................................... 56
PRINCIPAL STOCKHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT.................................................. 57
INDEX TO FINANCIAL PAGES.................................................................................. F-1
ANNEX I--Agreement and Plan of Merger..................................................................... I-1
ANNEX II--Section 262 of the General Corporation Law of the State of Delaware............................. II-1
ANNEX III--Opinion of CIBC Wood Gundy Securities Corp..................................................... III-1
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SUMMARY
The following is a summary of the more detailed information contained in
this Information Statement with respect to the Merger which is discussed herein.
This Summary is not intended to be complete and is qualified in its entirety by
the more detailed information contained elsewhere in this Information Statement,
in the annexes hereto and other documents referred to herein. Terms used but not
defined in this Summary have the meanings ascribed to them elsewhere in this
Information Statement. Cross references in this Summary are to the captions of
sections in the Information Statement.
Stockholders are urged to read this Information Statement and the Annexes
hereto in their entirety.
THE COMPANIES
THE COMPANY. The Company is a Delaware corporation with its principal
executive offices located at 500 New Holland Avenue, Lancaster, Pennsylvania
17602. The Company is a major producer of plastic packaging products.
PURCHASER. Purchaser is a Delaware corporation organized to acquire all the
outstanding Shares pursuant to the Merger Agreement and has not conducted any
unrelated activities since its organization. Parent owns 98.2% of the
outstanding capital stock of the Purchaser. The principal executive offices of
the Purchaser are located at 50 Fremont Street, Suite 3700, San Francisco,
California 94105.
PARENT. Parent is a Delaware limited liability company formed at the
direction of Fremont Partners, L.P. ("Fremont Partners") for the purpose of
effecting the Offer and the Merger. Fremont Partners, and affiliated
partnerships, is a private investment fund headquartered in San Francisco with
committed capital of approximately $605 million. The sole general partner of
Fremont Partners is FP Advisors, L.L.C., a Delaware limited liability company
("FP Advisors"). The sole managing member of FP Advisors is Fremont Group,
L.L.C., a Delaware limited liability company (including predecessor entities,
"The Fremont Group"). The sole manager of the Fremont Group is Fremont
Investors, Inc., a Nevada corporation ("Fremont Investors"). Fremont Partners,
FP Advisors, The Fremont Group and Fremont Investors are collectively referred
to herein as the "Fremont Entities." The offices of each of the Fremont Entities
are located at 50 Fremont Street, Suite 3700, San Francisco, California 94105.
The principal executive offices of Parent are located at 50 Fremont Street,
Suite 3700, San Francisco, California 94105.
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GENERAL
This Information Statement is being delivered in connection with the merger
of the Purchaser with and into the Company pursuant to the Merger Agreement. As
a result of the Merger, the Company will become a wholly-owned subsidiary of
Parent, each issued and outstanding Share (other than Shares that are owned by
the Company, Parent, the Purchaser, any other subsidiary of Parent, or by
stockholders who have validly perfected their appraisal rights under Delaware
law) will be converted into the right to receive the Common Stock Merger
Consideration or the Series D Merger Consideration, as the case may be (i.e.,
$5.40 or $12.50 in cash, without interest thereon), and the equity interest of
all pre-Merger stockholders in the Company will be terminated. Holders of the
Series D Preferred Shares will not be entitled to receive any accrued but
undeclared and unpaid dividends.
The Merger is the second step of a two-step transaction pursuant to which
Parent will acquire substantially all of equity interest in the Company. The
first step was the Offer. The Purchaser acquired 3,657,133 shares of Common
Stock and 307,894 shares of Series D Preferred Shares at a price of $5.40 per
share of Common Stock and $12.50 per share of Series D Preferred Shares upon the
consummation of the Offer on August 26, 1997, representing approximately 81% of
the outstanding Shares on an as-converted, fully diluted basis.
The consummation of the Offer was subject to several conditions, including,
among other things, there being validly tendered and not withdrawn prior to the
expiration of the Offer, that number of Shares, on an as-converted basis, which
represents at least fifty-one percent (51%) of the shares of Common Stock
outstanding on a fully diluted basis (the "Minimum Condition"). The Minimum
Condition was satisfied.
Effective upon the consummation of the Offer, seven of the eight members of
the Board of Directors of the Company retired or resigned as directors, and two
persons designated by Parent were appointed as members of such Board of
Directors.
REQUIRED VOTE; WRITTEN CONSENT IN LIEU OF MEETING
Under Delaware law, the affirmative vote of holders of a majority of the
outstanding common stock entitled to vote thereon is required to approve and
adopt the Merger Agreement and the transactions contemplated thereby. (Pursuant
to Article FOURTH(E)(f) of the Company's Restated Certificate of Incorporation
(the "Charter") except as provided by law or in the Charter with respect to the
election of directors by Series D Preferred Shares holders, holders of shares of
Series D Preferred Shares are not entitled to vote upon any matter relating to
the business or affairs of the Company.) As a result of the consummation of the
Offer, the Purchaser owns and has a right to vote a sufficient number of shares
of Common Stock to cause the Merger to be approved without the concurrence of
any other holder of shares of Common Stock. The Purchaser has executed and
delivered to the Company a written consent in lieu of a meeting of stockholders
approving and adopting the Merger Agreement and authorizing the consummation of
the Merger.
Such written consent provides that the Merger will become effective no
earlier than twenty (20) calendar days after this Information Statement is first
mailed to stockholders of the Company.
PROCEDURE FOR RECEIPT OF MERGER CONSIDERATION
A Letter of Transmittal for each share of Common Stock and Series D
Preferred Shares will be sent to all stockholders of the Company under separate
cover. The Letter of Transmittal must be completed and returned as directed
therein along with certificates representing the shares of Common Stock or the
shares of Series D Preferred Shares, as the case may be, covered thereby or such
shares of Common Stock or shares of Series D Preferred Shares covered thereby
must be delivered by book entry transfer. Checks will be sent to stockholders as
soon as practicable after the receipt of Letters of Transmittal and certificates
or Shares, as applicable. Detailed instructions concerning the procedure for
receipt of Merger Consideration
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are set forth in the Letter of Transmittal and elsewhere herein. See "PROCEDURE
FOR RECEIPT OF MERGER CONSIDERATION."
APPRAISAL RIGHTS
Under Delaware law, each of (i) holders of shares of Common Stock who do not
vote to approve the Merger and (ii) holders of shares of Series D Preferred
Shares, each of whom otherwise strictly comply with the applicable requirements
of the General Corporation Law of the State of Delaware may dissent from the
Merger and demand payment in cash from the Company of the fair value of their
Shares. See "APPRAISAL RIGHTS" and Annex II hereto.
THE MERGER
BACKGROUND OF THE OFFER AND THE MERGER. For a description of the events
leading to the approval of the Merger Agreement by the Board of Directors of the
Company and of the other events since such approval, see "THE MERGER--Background
of the Offer and the Merger."
APPROVAL OF THE BOARD OF DIRECTORS. On June 30, 1997, the Board of
Directors of the Company unanimously approved the Merger Agreement, the Offer
and the Merger and determined that the terms of the Offer and the Merger are
fair to, and in the best interests of, the holders of both the Common Stock and
the Series D Preferred Shares, and unanimously recommended that the Company's
stockholders accept the Offer and tender their Shares. See "THE
MERGER--Background of the Offer and the Merger."
POTENTIAL CONFLICTS; INTERESTS OF CERTAIN PERSONS IN THE MERGER. Each of
the following individuals formerly held these positions and had employment
agreements with the Company: D. Gordon Strickland, President and Chief Executive
Officer, Robert S. Reeves, Senior Vice President, Richard H. Dittmar, Vice
President, Larry R. Knipple, Vice President and Geoffrey A. Whynot, Vice
President and Chief Financial Officer. The Company estimates that the aggregate
value of all benefits received by these individuals in connection with the
tender in the Offer of shares individually owned, shares held in their accounts
in the Company's employee stock ownership plans, and the acceleration and
cashout of certain option shares in connection with the Merger was $322,870.50.
The Company estimates that the aggregate value of the foregoing for each of
Messrs. Strickland, Reeves, Dittmar, Knipple and Whynot was valued at
$155,608.50, $63,132, $28,935, $43,668 and $31,527, respectively. In addition,
such individuals became entitled to receive cash severance payments from the
Company in connection with such individuals' termination of employment following
the consummation of the Offer. The aggregate value of the payments and other
benefits to be received by Messrs. Strickland, Reeves, Dittmar, Knipple and
Whynot following termination of employment with the Company is approximately
$869,664.16, $385,224, $126,687, $145,295 and $150,860, respectively. See "THE
MERGER--Interests of Certain Persons in the Merger--Management Contracts" and
"THE MERGER AGREEMENT--Other Matters--Management Contracts and Change in Control
Agreements."
Each of the directors and executive officers of the Company prior to the
consummation of the Offer held options to purchase shares of Common Stock, which
options were granted pursuant to the Company's stock option plans. Each of the
directors and officers of the Company who held options to purchase shares of
Common Stock executed option cancellation agreements. See "THE MERGER--Interests
of Certain Persons in the Merger--Stock Option Plans."
The Company's Common Stock Purchase Plan for Directors adopted in 1992
allowed non-employee directors to defer receipt of their fees and have the
amounts contributed to a trust which then purchased Common Stock on behalf of
the participating directors. See "THE MERGER--Interests of Certain Persons in
the Merger--Director Compensation."
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The Delaware General Corporation Law permits a company to indemnify its
officers and directors under certain specified circumstances and also requires
such indemnification under specified circumstances. The Merger Agreement
contains covenants that will require the Company, as the surviving corporation
in the Merger (the "Surviving Corporation"), to maintain the Company's existing
directors' and officers' liability coverage (or replacement or similar coverage)
regardless of whether the Merger becomes effective and to indemnify the officers
and directors of the Company regardless of whether the Merger becomes effective.
See "THE MERGER--Interests of Certain Persons in the Merger--Director Liability
and Indemnification", "THE MERGER AGREEMENT--Indemnification" and "THE MERGER
AGREEMENT--Indemnification and Insurance."
OPINION OF FINANCIAL ADVISOR. CIBC Wood Gundy Securities Corp. ("CIBC Wood
Gundy"), the Company's financial advisor, delivered its written opinion (the
"Fairness Opinion") to the effect that the consideration to be received by the
holders of Common Stock, on the one hand, and the Series D Preferred Shares, on
the other, pursuant to the Offer and under the terms of the Merger Agreement, is
fair to such holders (other than Parent or any other subsidiary of Parent) from
a financial point of view. The full text of the CIBC Wood Gundy fairness opinion
is set forth in Annex III hereto and should be read in its entirety. See "THE
MERGER--Opinion of CIBC Wood Gundy."
PURPOSE OF THE MERGER. The purpose of the Merger is to enable Parent,
through the Purchaser, to acquire substantially all the remaining equity
interest in the Company not currently owned by Purchaser.
CONDITIONS TO THE MERGER. Pursuant to the Merger Agreement, and as a result
of the consummation of the Offer, the respective obligation of each party to
effect the Merger is subject to the satisfaction prior to the Closing Date of
the following condition: no statute, rule, regulation, judgment, writ, decree,
order or injunction shall have been promulgated enacted, entered or enforced,
and no other action shall have been taken by any government or governmental,
administrative or regulatory authority or by any court of competent jurisdiction
that in any of the foregoing cases has the effect of making illegal or directly
or indirectly restraining, prohibiting or restricting the consummation of the
Merger.
REGULATORY MATTERS. No regulatory approval is required for the Merger. See
"THE MERGER-- Regulatory Approval."
CERTAIN INCOME TAX CONSEQUENCES. The receipt of cash pursuant to the Merger
Agreement or the exercise of appraisal rights will be a taxable transaction for
Federal income tax purposes and may also be a taxable transaction for state,
local, foreign and other tax purposes. See "THE MERGER--Certain Federal Income
Tax Consequences." Stockholders are urged to consult their tax advisors as to
the particular tax consequences of the Merger to them, including the
applicability and the effect of Federal, state, local, foreign and other tax
laws.
FINANCING ARRANGEMENTS
Parent funded the purchase price of the Shares purchased in the Offer, and
the repayment of certain debt of the Company, and intends to fund the aggregate
Merger Consideration, through cash on hand of the Purchaser the sale of equity
interests to Fremont Partners and affiliated partnerships (and to key management
of the Company and related entities) and Parent will in turn contribute such
amount to the Purchaser, and through a permanent bank financing. See "FINANCIAL
ARRANGEMENTS." Parent and the Purchaser estimate that the total amount of funds
required by the Purchaser to fund the aggregate Merger Consideration payable in
respect of the remaining 275,962 shares of Common Stock and 180,006 shares of
Series D Preferred Shares outstanding is $3,790,849.80. See "FINANCIAL
ARRANGEMENTS."
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GENERAL
This Information Statement is being delivered in connection with the merger
of Purchaser into the Company pursuant to the Merger Agreement. As a result of
the Merger, Parent will own 98.2% of the issued and outstanding Shares of
capital stock of the Company, each issued and outstanding Share (other than
Shares that are owned by the Company, Parent, Purchaser, any other subsidiary of
Parent, or by stockholders who have validly perfected their appraisal rights
under Delaware law) will be converted into the right to receive the Merger
Consideration and the equity interest of all pre-Merger stockholders in the
Company will be terminated.
The Merger is the second step of a two-step transaction pursuant to which
Parent will acquire substantially all of the equity interest in the Company. The
first step was the Offer. Purchaser acquired 3,657,133 shares of Common Stock
and 307,894 shares of Series D Preferred Shares at a price of $5.40 per share of
Common Stock and $12.50 per share of Series D Preferred Shares, respectively,
upon the consummation of the Offer on August 26, 1997, representing
approximately 81% of the outstanding shares of Common Stock on an as-converted,
fully diluted basis.
The consummation of the Offer was subject to several conditions, including
satisfaction of the Minimum Condition. See "THE MERGER--THE MERGER."
VOTE REQUIRED; WRITTEN CONSENT IN LIEU OF MEETING
Pursuant to the General Corporation Law of the State of Delaware, the Merger
Agreement must be approved and adopted by the affirmative vote of the holders of
a majority of the outstanding shares of Common Stock at a duly convened meeting
of the stockholders of the Company called for such purpose.
As a result of the Purchase, the Purchaser owns a sufficient number of
Shares to cause the Merger to be approved and adopted without the concurrence of
any other holder of shares of Common Stock. Pursuant to Section 228(a) of the
Delaware General Corporation Law, any action required by the Delaware General
Corporation Law to be taken at any meeting of stockholders of the Company may be
taken without a meeting, without prior notice and without a vote of the
stockholders of the Company if a written consent, setting forth the action for
taken, shall be signed by the holders of a majority of the outstanding Shares.
The Purchaser has executed and delivered to the Company a written consent (the
"Consent") in lieu of a meeting of stockholders approving and adopting the
Merger Agreement and, in accordance with Rule 14c-2(b) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), authorizing the
consummation of the Merger no earlier than 20 calendar days after this
Information Statement is first mailed to stockholders of the Company. In
accordance with Section 228(d) of the Delaware General Corporation Law, this
Information Statement constitutes notice of the approval of the Merger Agreement
and the consummation of the Merger without a meeting of stockholders by less
than unanimous consent to all stockholders of the Company.
The Merger will become effective upon the filing of a certificate of merger
with the Secretary of State of the State of Delaware in accordance with the
Delaware General Corporation Law. As used in this Information Statement,
"Effective Time" means the effective time of the Merger under the Delaware
General Corporation Law.
PROCEDURE FOR RECEIPT OF MERGER CONSIDERATION
VALID SURRENDERS OF SHARES. A Letter of Transmittal will be sent to you
under separate cover following the consummation of the Merger. For Shares to be
validly surrendered pursuant to the Merger, a Letter of Transmittal (or a
manually signed facsimile thereof), properly completed and duly executed, with
any required signature guarantees, must be received by Boston EquiServe, L.P.,
as the depositary (the "Depositary") at one of its addresses set forth in the
Letter of Transmittal and either (i) certificates
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representing Shares must be received by the Depositary or (ii) such Shares must
be delivered by book-entry transfer.
BOOK-ENTRY TRANSFER. The Depositary will establish an account with respect
to the Shares at The Depository Trust Company or the Philadelphia Depository
Trust Company (each, a "Book-Entry Transfer Facility" and, collectively, the
"Book-Entry Transfer Facilities") for purposes of the Merger. Any financial
institution that is a participant in any of the Book-Entry Transfer Facilities'
systems may make book-entry delivery of Shares by causing a Book-Entry Transfer
Facility to transfer such Shares into the Depositary's account at such
Book-Entry Transfer Facility in accordance with that Book-Entry Transfer
Facility's procedure for such transfer.
SIGNATURE GUARANTEES. No signature guarantee is required on the Letter of
Transmittal (i) if the Letter of Transmittal is signed by the registered
holder(s) (which term, for purposes of this Section, includes any participant in
the Book Entry Transfer Facility's systems whose name appears on a security
position listing as the owner of the Shares) of Shares tendered therewith and
such registered holder has not completed either the box entitled "Special
Delivery Instructions" or the box entitled "Special Payment Instructions" on the
Letter of Transmittal or (ii) if such Shares are tendered for the account of a
financial institution (including most commercial banks, savings and loan
associations and brokerage houses) that is a participant in the Security
Transfer Agent's Medallion Program, the New York Stock Exchange Medallion
Signature Guarantee Program or the Stock Exchange Medallion Program (each, an
"Eligible Institution" and, collectively, "Eligible Institutions"). In all other
cases, all signatures on Letters of Transmittal must be guaranteed by an
Eligible Institution. See Instructions 1 and 5 to the Letter of Transmittal. If
the certificates for Shares are registered in the name of a person other than
the signer of the Letter of Transmittal, or if payment is to be made, or
certificates for Shares not tendered or not accepted for payment are to be
returned, to a person other than the registered holder of the certificates
surrendered, then the tendered certificates for such Shares must be endorsed or
accompanied by appropriate stock powers, in either case, signed exactly as the
name or names of the registered holders or owners appear on the certificates,
with the signatures on the certificates or stock powers guaranteed as aforesaid.
See Instructions 1 and 5 to the Letter of Transmittal.
THE METHOD OF DELIVERY OF CERTIFICATES FOR SHARES, THE LETTER OF TRANSMITTAL
AND ANY OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND RISK OF THE STOCKHOLDER.
IF DELIVERY IS MADE BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED,
PROPERLY INSURED, IS RECOMMENDED.
THE METHOD OF DELIVERY OF CERTIFICATES FOR SHARES, THE LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE STOCKHOLDER.
SHARES WILL BE DEEMED DELIVERED ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY
(INCLUDING IN THE CASE OF A BOOK-ENTRY TRANSFER BY BOOK-ENTRY CONFIRMATION). IF
DELIVERY IS MADE BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED,
PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ENSURE TIMELY DELIVERY.
BACKUP FEDERAL INCOME TAX WITHHOLDING. TO PREVENT BACKUP FEDERAL INCOME TAX
WITHHOLDING OF 31% OF THE AGGREGATE MERGER CONSIDERATION PAYABLE TO A
STOCKHOLDER, SUCH STOCKHOLDER MUST PROVIDE THE PAYING AGENT WITH HIS CORRECT
TAXPAYER IDENTIFICATION NUMBER AND CERTIFY THAT HE IS NOT SUBJECT TO BACKUP
FEDERAL INCOME TAX WITHHOLDING BY COMPLETING THE SUBSTITUTE FORM W-9 INCLUDED IN
THE LETTER OF TRANSMITTAL.
APPRAISAL RIGHTS
Stockholders of the Company are entitled to appraisal rights under Section
262 of the Delaware General Corporation Law ("Section 262") as to Shares owned
by them. Set forth below is a summary
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description of Section 262. Section 262 is reprinted in its entirety as Annex II
to this Information Statement. All references in Section 262 and in this summary
to a "stockholder" are to the record holder of the Shares as to which appraisal
rights are asserted. A person having a beneficial interest in Shares that are
held of record in the name of another person, such as a broker or nominee, must
act promptly to cause the record holder to follow the steps summarized below
properly and in a timely manner to perfect whatever appraisal rights the
beneficial owner may have.
THE FOLLOWING SUMMARY IS NOT A COMPLETE STATEMENT OF THE LAW RELATING TO
APPRAISAL RIGHTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO ANNEX II. THIS
SUMMARY AND ANNEX II SHOULD BE REVIEWED CAREFULLY BY ANY HOLDER WHO WISHES TO
EXERCISE STATUTORY APPRAISAL RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO DO SO
BECAUSE FAILURE TO COMPLY STRICTLY WITH THE PROCEDURES SET FORTH HEREIN AND
THEREIN WILL RESULT IN THE LOSS OF APPRAISAL RIGHTS.
In accordance with Section 262, any stockholder entitled to appraisal rights
may, within 20 days after the date of mailing of this Information Statement,
demand in writing from the Company, the appraisal of the fair value of such
stockholder's Shares. Such demand must reasonably inform the Company of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of the fair value of such stockholder's Shares. Any stockholder
(other than a record owner who is acting as a nominee holder for different
beneficial owners) seeking to exercise appraisal rights for a portion, but not
all, of such stockholder's Shares should consult with legal counsel before
taking any such action. The Company believes that Delaware law has not clearly
addressed the ability of such a stockholder to exercise appraisal rights with
respect to a portion, but not all, of such stockholder's Shares. Stockholders
should be aware of the risk that should a stockholder seek to exercise appraisal
rights with respect to a portion, but not all, of such stockholder's Shares, the
Company may assert that by doing so such stockholder has waived such
stockholder's appraisal rights and a Delaware court may find that such
stockholder has so waived such stockholder's appraisal rights. A stockholder who
elects to exercise appraisal rights must mail or deliver such stockholder's
written demand to the President of the Company at 500 New Holland Avenue,
Lancaster, Pennsylvania 17602.
A demand for appraisal must be executed by or for the stockholder of record,
fully and correctly, as such stockholder's name appears on the certificate or
certificates representing his Shares. If the Shares are owned of record in a
fiduciary capacity, such as by a trustee, guardian, or custodian, such demand
must be executed by the fiduciary. If the Shares are owned of record by more
than one person, as in a joint tenancy or tenancy in common, such demand must be
executed by all joint owners. An authorized agent, including an agent for two or
more joint owners, may execute the demand for appraisal for a stockholder of
record; however, the agent must identify the record owner and expressly disclose
the fact that, in exercising the demand, such person is acting as agent for the
record owner.
A record owner, such as a broker, who holds Shares as a nominee for others,
may exercise appraisal rights with respect to the Shares held for all or less
than all beneficial owners of Shares as to which such person is the record
owner. In such case, the written demand must set forth the number of Shares
covered by such demand. Where the number of Shares is not expressly stated, the
demand will be presumed to cover all Shares outstanding in the name of such
record owner. Beneficial owners who are not record owners and who intend to
exercise appraisal rights should instruct the record owner to comply strictly
with the statutory requirements with respect to the exercise of appraisal
rights.
Within 120 days after the Effective Time, either the Company, as the
surviving corporation in the Merger (the "Surviving Corporation"), or any
stockholder who has complied with the required conditions of Section 262 may
file a petition in the Delaware Court of Chancery (the "Delaware Chancery
Court") demanding a determination of the fair value of the Shares of the
dissenting stockholders. If a petition for an appraisal is timely filed, after a
hearing on such petition, the Delaware Chancery Court will determine
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which stockholders are entitled to appraisal rights and will appraise the Shares
formerly owned by such stockholders, determining the fair value of such Shares,
exclusive of any element of value arising from the accomplishment or expectation
of the Merger, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Delaware Chancery Court is to take into account all relevant factors.
Stockholders considering seeking appraisal should note that the "fair value"
of their Shares determined under Section 262 could be more than, the same as or
less than $5.40 per share of Common Stock and $12.50 per share of Series D
Preferred Shares, and that opinions of investment banking firms as to fairness,
from a financial point of view, are not opinions as to fair value under Section
262. The cost of the appraisal proceeding may be determined by the Delaware
Chancery Court and taxed against the parties as the Delaware Chancery Court
deems equitable in the circumstances. Upon application of a dissenting
stockholder, the Delaware Chancery Court may order that all or a portion of the
expenses incurred by any dissenting stockholder in connection with the appraisal
proceeding, including without limitation, reasonable attorneys' fees and the
fees and expenses of experts, be charged pro rata against the value of all
Shares entitled to appraisal.
From and after the Effective Time, no stockholder who has duly demanded
appraisal in compliance with Section 262 will be entitled to vote for any
purpose the Shares subject to such demand or to receive payment of dividends or
other distributions on such Shares, except for dividends or distributions
payable to stockholders of record at a date prior to the Effective Time. Holders
of Series D Preferred Shares are not entitled to receive any accrued but
undeclared and unpaid dividends.
At any time within 60 days after the Effective Time, any stockholder shall
have the right to withdraw such stockholder's demand for appraisal and to accept
the terms offered in the Merger Agreement; after this period, a stockholder may
withdraw such stockholder's demand for appraisal only with the consent of the
Surviving Corporation. If no petition for appraisal is filed with the Delaware
Chancery Court within 120 days after the Effective Time, stockholders' rights to
appraisal shall cease, and all stockholders who had previously demanded
appraisal shall thereafter be entitled to receive the Merger Consideration in
cash, without interest thereon, upon surrender of the certificates that formerly
represented their Shares. Inasmuch as the Company has no obligation to file such
a petition, and has no present intention to do so, any stockholder who desires
such a petition to be filed is advised to file it on a timely basis. However, no
petition timely filed in the Delaware Chancery Court demanding appraisal shall
be dismissed as to any stockholder without the approval of the Delaware Chancery
Court, and such approval may be conditioned upon such terms as the Delaware
Chancery Court deems just.
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THE MERGER
BACKGROUND OF THE OFFER AND THE MERGER
Set forth below is a description of the background of the Offer and the
Merger, including a summary of certain material meetings of the Board of
Directors of the Company regarding the transactions described herein. Until the
consummation of the Offer, the Board of Directors of the Company consisted of
the following eight individuals: Herbert Elish, Gordon C. Hurlbert, Michael C.
Jackson, John D. Kyle, James R. Mellor, Robert M. O'Hara, Harvey L. Sperry and
D. Gordon Strickland.
In October 1995, a representative of Lehman Brothers Inc. ("Lehman
Brothers") contacted representatives of The Fremont Group to inquire as to The
Fremont Group's potential interest in pursuing a transaction with the Company.
Following this contact, The Fremont Group initiated a review of certain publicly
available information concerning the Company.
On November 6, 1995, The Fremont Group entered into a confidentiality
agreement with Lehman Brothers on behalf of the Company, pursuant to which The
Fremont Group agreed to treat as confidential certain information provided to it
by or on behalf of the Company and agreed for a period of two years not to
acquire any voting securities of the Company without the consent of the Board of
Directors of the Company. On November 7, 1995, Lehman Brothers furnished to The
Fremont Group a descriptive memorandum containing limited non-public information
concerning the Company.
On November 30, 1995, in compliance with bid instructions provided by Lehman
Brothers, The Fremont Group submitted an initial indication of interest together
with a due diligence request list. Based on an indication of interest to acquire
all the outstanding Common Stock for $10 to $12 a share, The Fremont Group was
invited to attend a due diligence session at the Company's headquarters. On
January 11, 1996, The Fremont Group met with the senior management of the
Company and reviewed documents provided in a data room set up by the Company and
Lehman Brothers. Over the next several weeks, The Fremont Group and its advisors
engaged in a series of telephone conversations, plant tours and meetings with
senior and operating management of the Company to further investigate the
business, strategies and prospects of the Company. During this time period, The
Fremont Group, with the assistance of its outside advisors, also conducted a
detailed independent due diligence review of the Company's assets and
liabilities, including its underfunded pension plan liabilities, unfunded
retiree medical and health liabilities and potential environmental liabilities.
At the end of January 1996, The Fremont Group communicated to Lehman
Brothers that following its review of the data room documents, discussions with
senior management and its independent due diligence review of the assets and
liabilities of the Company, it was no longer willing to proceed at the valuation
levels indicated in its initial indication of interest of November 30, 1995. The
Fremont Group indicated that its current view was based on the understanding it
had now acquired with respect to the Company's significant off-balance sheet
liabilities and deteriorating operating performance and financial condition. The
Fremont Group communicated that it would, however, continue to have an interest
in pursuing a transaction with the Company at substantially lower valuations.
At the time, representatives of Lehman Brothers discouraged The Fremont
Group from further proceeding with its review of the Company or further
discussions, indicating that the Company's Board of Directors was unwilling to
accept an offer below the approximate range of $10 to $12 per share of Common
Stock provided by The Fremont Group in its initial indication of interest. At
the time of these discussions, the Common Stock was trading within a range of
approximately $8 to $10 per share.
In early March 1996, a representative of Lehman Brothers contacted a
representative of Fremont Partners, which had been formed in the meantime in
February 1996 to carry on the direct investment activities of The Fremont Group,
and suggested the Board of Directors of the Company might now be prepared to
consider Fremont Partners' proposal if Fremont Partners remained interested in
an acquisition of the Company. On March 7, 1996, Fremont Partners submitted a
transaction proposal that provided for the acquisition of all equity interests
in the Company and contemplated an arrangement where repayment
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of a portion of the existing senior notes would be contingent upon the receipt
of a specified level of net proceeds from the sale of the Company's consumer
products division, which was then actively being undertaken. Under this
structure, Fremont Partners indicated that it was prepared to pay $2.62 to $4.00
per share of Common Stock, assuming the disposition of the Company's consumer
products division.
On April 3, 1996, a representative of Lehman Brothers informed a
representative of Fremont Partners that following the sale of the consumer
products division, Lehman Brothers would no longer be actively working with the
Company. Lehman Brothers indicated that the Company continued to have a need for
new capital and that if Fremont Partners remained interested in a transaction
with the Company, Fremont Partners should communicate with the new Chief
Executive Officer, Mr. D. Gordon Strickland, directly. Fremont Partners
telephoned Mr. Strickland on April 3, 1996 and inquired whether the Company
would have an interest in pursuing a recapitalization transaction led by Fremont
Partners.
On April 4, 1996, Mr. Strickland provided Fremont Partners with a package of
updated financial information that detailed the Company's planned restructuring.
Fremont Partners held a number of discussions during the month of April with Mr.
Strickland and other members of senior management of the Company regarding a
potential recapitalization of the Company. On April 19, 1996, Mr. Strickland met
with Fremont Partners in Fremont Partners' offices in San Francisco. In this
meeting, representatives of Fremont Partners outlined a number of
recapitalization alternatives that generally involved a capital infusion by
Fremont Partners of up to $25 million in return for a substantial but minority
stake in the Company. Mr. Strickland expressed an interest in pursuing such a
transaction, but expressed concern with the proposed financial terms of the
proposed investment as it implied a valuation of the common equity below the
then-current market price of the Common Stock of approximately $6 per share. Mr.
Strickland agreed to discuss the proposal with members of the Board of Directors
of the Company and the Company's advisors. Several days later, Mr. Strickland
responded that the Company was unwilling to pursue a recapitalization with an
implied common equity valuation below current market prices.
On August 12, 1996, a representative of Fremont Partners spoke to Mr.
Strickland, inquiring as to the current status of its negotiations with its
noteholders concerning a financial restructuring of the Company. Mr. Strickland
indicated an interest in reopening discussions with Fremont Partners concerning
a possible investment in the Company. Fremont Partners requested updated
financial information with respect to the Company, which was provided. A series
of conversations were held over the next several weeks between senior management
of the Company and representatives of Fremont Partners, but did not result in
significant progress concerning the terms of a possible recapitalization
transaction.
On November 19, 1996, a representative of Fremont Partners spoke with Mr.
Strickland regarding the Company's recent public announcement that the holders
of the Company's long-term unsecured debt had sold such debt to third parties.
On December 18, 1996, a representative of Fremont Partners spoke to Mr.
Herbert Elish, Chairman of the Board of the Company, inquiring whether the
Company would have an interest in pursuing a recapitalization transaction lead
by Fremont Partners that would provide sufficient capital to the Company to
facilitate a repurchase of the Company's unsecured long-term debt from the new
debtholders.
On January 7, 1997, Mr. Elish requested that Fremont Partners contact the
Company's new financial advisor, CIBC Wood Gundy, in order to obtain updated
financial information needed to prepare and resubmit a transaction proposal.
In a series of conversations throughout January 1997, representatives of
Fremont Partners discussed a potential recapitalization of the Company with CIBC
Wood Gundy and the Company's senior management. Fremont Partners also reviewed
with the Company's senior management the progress of its various business and
financial restructuring efforts and the Company's operating prospects in the
aftermath of its disappointing performance in fiscal year 1996. Fremont Partners
also updated its independent due diligence review of the Company's assets and
liabilities, including its underfunded pension plan liabilities, unfunded
retiree medical and health liabilities and potential environmental liabilities.
On January 16,
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1997, Fremont Partners submitted to CIBC Wood Gundy a letter detailing the terms
of its recapitalization proposal. These terms included a new equity investment
of $25 million in the form of new preferred and new common equity with an
implied common equity valuation of approximately $2.00 per share.
On January 28, 1997, a representative of CIBC Wood Gundy contacted Fremont
Partners and indicated that CIBC Wood Gundy had presented Fremont Partners'
proposal to the Company's Board of Directors along with a number of other
transaction alternatives. According to the representative of CIBC Wood Gundy,
the Company's Board of Directors chose to pursue a refinancing transaction that
would not involve a new equity capital contribution, but instead would effect a
refinancing of the Company's existing unsecured debt obligations with a new
senior secured credit facility together with senior subordinated secured notes
with equity warrants. CIBC Wood Gundy indicated that it expected this
transaction would be completed within two to three weeks.
On March 12, 1997, a representative of Fremont Partners contacted CIBC Wood
Gundy and inquired regarding the apparent delay in completing the refinancing
previously discussed. CIBC Wood Gundy responded that it still expected the
refinancing transaction to be completed shortly. Fremont Partners submitted
another proposal letter to CIBC Wood Gundy that reiterated Fremont Partners'
interest in pursuing a recapitalization transaction and indicated a willingness
to improve its terms by providing an effective common equity valuation of
approximately $3.00 per share. CIBC Wood Gundy responded that the Board of
Directors remained unwilling to consider Fremont Partners' proposal and would
continue to pursue the refinancing alternative.
On May 23, 1997, a representative of CIBC Wood Gundy contacted Fremont
Partners and stated that the Company had received and was reviewing an
acquisition proposal from a third party and was willing to reconsider an
acquisition proposal from Fremont Partners. CIBC Wood Gundy indicated that the
refinancing transaction remained an alternative that was also under active
consideration. Fremont Partners commenced a series of discussions and meetings
with the Company's senior and operating management and Kerr's advisors that
culminated in a letter to Mr. Strickland, dated June 10, 1997 that proposed a
Fremont Partners acquisition of all Common Stock at a price of $4.50 per share.
The Company and its advisors responded to this proposal by asking Fremont
Partners to clear all due diligence issues and to resubmit its letter as a
formal offer with a marked-up purchase contract provided by counsel to the
Company by no later than June 16, 1997. Fremont Partners accelerated its already
commenced full due diligence review and prepared a final proposal, including a
contract mark-up, which Fremont Partners submitted to CIBC Wood Gundy, in
accordance with CIBC Wood Gundy's instructions, on June 16, 1997. The proposal
provided for, among other things, a tender offer for all outstanding shares of
Common Stock and Series D Preferred Shares at $4.50 per share and $8.50 per
share, respectively, to be followed by a back-end merger at the same price. The
proposal provided for an option for a number of newly issued shares of Common
Stock equal to approximately 19.9% of the then-outstanding shares of Common
Stock at an exercise price equal to the price to be paid for the Common Stock in
the tender offer, to be exercisable in certain circumstances, and for a
termination fee, payable in certain circumstances, of $5 million, plus expenses
not to exceed $1.5 million.
Fremont Partners and its legal counsel held a number of discussions over the
telephone with the Company and its advisors and counsel in the days following
June 16 to negotiate the terms of the proposed acquisition, including various
contractual provisions. On June 25, a member of the Company's Executive
Committee telephoned a representative of Fremont Partners and stated that the
Company was prepared to work with Fremont Partners toward the signing of a
definitive agreement and to recommend Fremont Partners' proposal to the
Company's Board of Directors, subject to resolution of a number of contractual
issues and subject to Fremont Partners' agreeing to pay $5.90 per share for the
Common Stock and $14.50 per share for the Series D Preferred Shares. Fremont
Partners and the Company and the Company's advisors negotiated over the next
several days to resolve the open issues including the price differential, the
amount of the termination fee and the circumstances under which the termination
fee would become payable and the Option would become exercisable.
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At a meeting of the Board of Directors of the Company held on June 30, 1997,
the Board of Directors unanimously approved the Merger Agreement, the Offer and
the Merger and determined that the terms of the Offer and the Merger are fair
to, and in the best interests of, the holders of both the Common Stock and the
Series D Preferred Shares, and unanimously recommend that stockholders of the
Company accept the Offer and tender their Shares. On June 30, 1997, CIBC Wood
Gundy delivered to the Company's Board of Directors its opinion to the effect
that, based on the assumptions, limited procedures and matters referred to
therein, the consideration to be received by the holders of Common Stock, on the
one hand, and the Series D Preferred Shares, on the other, pursuant to the Offer
and under the terms of the Merger Agreement, is fair to such holders (other than
Fremont or any other subsidiary of Fremont), from a financial point of view. The
written opinion of CIBC Wood Gundy is set forth in full as an exhibit to the
Company's Schedule 14D-9 which was mailed to stockholders of the Company.
Stockholders of the Company were urged to read that opinion in its entirety.
On Tuesday, July 1, 1997, Fremont Partners and the Company issued a joint
press release announcing the execution and delivery of the Merger Agreement.
On July 8, 1997, Parent commenced the Offer. Beginning on Monday, August 4,
1997, (the original expiration date of the Offer), Purchaser extended the Offer
several times to 12:00 noon, New York City time, Tuesday, August 26, 1997. On
August 24, 1997, the Company and the Pension Benefit Guaranty Corporation (the
"PBGC") entered into a definitive agreement pursuant to which the PBGC agreed to
dismiss its lawsuit then pending before the United States District court for the
Eastern District of Pennsylvania seeking to terminate the Company's pension
plan, withdraw its Notice of Determination and forbear from instituting new
proceedings with respect to the acquisition. Pursuant to the terms of the
definitive agreement, the Company agreed to (i) future enhanced pension plan
contributions, (ii) grant to the PBGC a second lien in the amount of $40.7
million secured by substantially all of the assets of the Company, (iii) various
restrictions on future secured indebtedness and (iv) provisions regarding notice
of certain events. The definitive agreement became effective upon the
consummation of the Offer. Approximately 93% of the outstanding shares of Common
Stock and 63% of the outstanding shares of Series D Preferred Shares were
tendered prior to the expiration of the Offer at noon on August 26, 1997. Parent
consummated the Offer on August 26, 1997.
On October 15, 1997, the Company filed a preliminary draft of this
Information Statement with the Securities and Exchange Commission (the
"Commission").
OPINION OF CIBC WOOD GUNDY AND LEHMAN BROTHERS FEE
OPINION OF CIBC WOOD GUNDY
FAIRNESS OPINION. CIBC Wood Gundy was retained by the Company to render an
opinion (the "Fairness Opinion") to the Board of Directors as to the fairness
from a financial point of view of the consideration to be received by the
holders of Common Stock, par value $0.50 per share (the "Common Stock"), on the
one hand, and to the holders of Class B Cumulative Convertible Preferred Stock,
Series D (the "Preferred Stock"), on the other, in a series of transactions
(collectively, the "Transactions") and pursuant to the Agreement and Plan of
Merger among the Company, Fremont Acquisition Company, LLC ("Fremont") and Kerr
Acquisition Corporation ("Purchaser"), dated as of July 1, 1997 (the "Merger
Agreement"). On June 30, 1997, pursuant to the Company's request, CIBC Wood
Gundy delivered its oral and written opinion to the Board of Directors of the
Company to the effect that, as of July 1, 1997, the effective date of the Merger
Agreement, the consideration to be received by the holders of the Company's
Common Stock, on the one hand, and Preferred Stock, on the other, was fair from
a financial point of view. CIBC Wood Gundy has consented to the use of its name
and the Fairness Opinion in this Information Statement.
THE SUMMARY OF THE OPINION OF CIBC WOOD GUNDY SET FORTH IN THIS INFORMATION
STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH
OPINION. STOCKHOLDERS ARE URGED TO READ THE OPINION IN ITS
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ENTIRETY FOR ASSUMPTIONS MADE, PROCEDURES FOLLOWED, OTHER MATTERS CONSIDERED AND
LIMITS OF THE REVIEW BY CIBC WOOD GUNDY. IN ARRIVING AT ITS OPINION, CIBC WOOD
GUNDY DID NOT ASCRIBE A SPECIFIC RANGE OF FAIR VALUE TO THE COMPANY, BUT MADE
ITS DETERMINATIONS AS TO THE FAIRNESS OF THE MERGER CONSIDERATION ON THE BASIS
OF THE FINANCIAL AND COMPARATIVE ANALYSIS DESCRIBED BELOW.
CIBC WOOD GUNDY'S OPINION WAS PREPARED FOR THE BOARD OF DIRECTORS AND IS
DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW AS OF JULY 1,
1997, OF THE CONSIDERATION TO BE RECEIVED BY THE HOLDERS OF THE COMPANY'S COMMON
STOCK, ON THE ONE HAND, AND PREFERRED STOCK, ON THE OTHER, PURSUANT TO THE
MERGER AGREEMENT. CIBC WOOD GUNDY'S FAIRNESS OPINION DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDERS AS TO HOW TO VOTE AT ANY SPECIAL MEETING OF
STOCKHOLDERS. IN ADDITION, CIBC WOOD GUNDY WAS NOT ASKED TO OPINE AS TO, AND ITS
OPINION DOES NOT ADDRESS, THE UNDERLYING BUSINESS DECISION OF THE BOARD TO
PROCEED WITH OR TO EFFECT THE TRANSACTION.
In connection with rendering its opinion, CIBC Wood Gundy, among other
things: (i) reviewed the Merger Agreement in substantially final form; (ii)
reviewed the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, and its Quarterly Report on Form 10-Q setting forth its
financial results for the period ended March 31, 1997; (iii) reviewed certain
operating and financial information, including projections provided to CIBC Wood
Gundy by the management of the Company relating to the Company's business and
prospects, which projections were not substantially different from those
provided to Fremont by the Company (the "Projections"); (iv) met with certain
members of the Company's senior management to discuss its operations, historical
financial statements and future prospects; (v) visited the Company's facilities;
(vi) reviewed Kerr's Annual Report to Shareholders for the fiscal year ended
December 31, 1996; (vii) reviewed the historical prices and trading volumes of
the Company's Common Stock and Preferred Stock; (viii) reviewed publicly
available financial data and stock market performance data of companies that it
deemed generally comparable to the Company; (ix) reviewed the terms of recent
acquisitions of companies that it deemed generally comparable to the Company;
and (x) conducted such other studies, analyses, inquiries and investigations as
it deemed appropriate.
With respect to the Projections, CIBC Wood Gundy assumed that they were
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the management of the Company as to the expected future
performance of the Company. CIBC Wood Gundy did not assume any responsibility
for the information or Projections provided to it, and CIBC Wood Gundy further
relied upon the assurances of the management of the Company that they have no
actual knowledge of any facts that would make the information or projections
provided to CIBC Wood Gundy incomplete or misleading. Stockholders are
cautioned, however, that the Projections are based on numerous variables and
assumptions that are inherently uncertain, including, without limitation,
general economic conditions and competitive conditions within the industry and
that the inclusion of such information should not be regarded as an indication
that the Company or any persons who received such information consider it other
than an estimate of future events. The Projections reflect the then current best
judgment of management of the Company as to the future financial performance of
the Company and are not necessarily indicative of future results of the Company,
which may be significantly more or less favorable than suggested by such
Projections. The material assumptions upon which the Projections were based
relate to various matters, including: 1) levels of industry growth in the
Company's markets; 2) the competitive environment in the plastic and closure
manufacturing market; 3) the degree of the Company's success in competing
against the new entrants in its markets; and 4) levels of indebtedness and debt
service requirements of the Company. These financial projections were not
publicly available and were not disseminated to any party other than the Board
of Directors and CIBC Wood Gundy. In arriving at its opinion, CIBC Wood Gundy
did not perform or obtain any independent appraisal of the assets of the
Company.
In rendering its opinion, CIBC Wood Gundy assumed, without independent
verification, the accuracy, completeness and fairness of all the financial and
other information that was available to it from public sources or that was
provided to it by the Company or its representatives. CIBC Wood Gundy's Fairness
Opinion is necessarily based on economic, market, financial and other conditions
as they existed on, and
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on the information made available to it as of, the date of such opinion. It
should be understood that, although subsequent developments may affect its
opinion, except as agreed upon by CIBC Wood Gundy, CIBC Wood Gundy does not have
any obligation to update, revise or reaffirm its opinion.
The following is a summary of the material factors considered and the
principal financial analyses performed by CIBC Wood Gundy to arrive at its
opinion dated June 30, 1997. In arriving at its opinion, CIBC Wood Gundy did not
quantify or attempt to reassign relative weights to the specific factors
considered and financial analyses performed.
1. STOCK TRADING HISTORY. CIBC Wood Gundy examined the history of the
trading prices and volume for the Common Stock and Preferred Stock. Although
the Company's Common Stock and Preferred Stock have traded on the New York
Stock Exchange, both under the symbol "KGM", there has been limited float on
these securities. As a result, the Common Stock and Preferred Stock are, to
a large extent, illiquid.
2. ANALYSIS OF CERTAIN OTHER PUBLICLY TRADED COMPANIES. CIBC Wood
Gundy compared selected historical share prices, earnings, operating and
financial ratios for the Company to the corresponding data and ratios for
selected plastic and closure manufacturing companies whose securities are
publicly traded and that CIBC Wood Gundy believed were comparable in terms
of lines of business and operations to the Company. Such data and ratios
included the ratio of market capitalization of common stock plus the
principal amount of long-term debt outstanding less cash on hand ("Total
Enterprise Value") to (x) latest twelve-month ("LTM") revenues, (y) LTM
operating earnings before depreciation, amortization, interest and taxes
("EBITDA") and (z) LTM operating earnings before interest and taxes
("EBIT"). The companies selected for this comparison were Crown Cork & Seal
Company, Inc., West Company, Inc., Owens-Illinois, Inc., SEDA Specialty
Packaging Corp., Sun Coast Industries, Inc., and Aptargroup, Inc. CIBC Wood
Gundy then compared those ratios to the ratios being paid for the Company in
the Transactions based upon the prices offered by Fremont for the Company's
Common Stock of $5.40 per share (the "Common Stock Offer") and the Company's
Preferred Stock of $12.50 per share (the "Preferred Stock Offer"). Based on
the Common Stock Offer and Preferred Stock Offer, the implied purchase price
of the Company's total equity was approximately $29.8 million, and the
implied total value of the Company pursuant to the Common Stock Offer and
Preferred Stock Offer (the "Transaction Value" defined as the total purchase
price of the Common Stock plus the total purchase price of the Preferred
Stock plus the principal amount of debt outstanding plus the amount of the
Company's underfunded pension plan and the Company's retiree health
liability, less cash, cash equivalents and investments of the Company) was
approximately $110.7 million.
An analysis of Total Enterprise Value to LTM revenue for the above
selected plastic and closure manufacturing companies yielded a range of
relevant multiples from 0.4x to 1.9x compared to 1.0x for the Company at the
Transaction Value. An analysis of Total Enterprise Value to LTM EBITDA for
plastic and closure manufacturing companies yielded a range of relevant
multiples from 5.1x to 9.7x compared to 7.6x for the Company at the
Transaction Value. An analysis of Total Enterprise Value to LTM EBIT for the
plastic and closure manufacturing companies yielded a range of relevant
multiples from 9.4x to 16.5x compared to 19.8x for the Company at the
Transaction Value.
In arriving at its opinion, CIBC Wood Gundy took into account that, in
general, the multiples available to the Company at the Common Stock Offer of
$5.40 per share and Preferred Stock Offer of $12.50 per share compared
favorably to the multiples derived for the selected companies. CIBC Wood
Gundy noted that no company utilized in the above comparable company
analysis is identical to the Company. Accordingly, an analysis of the
foregoing is not purely mathematical and involves complex considerations and
judgments concerning differences in financial and operating characteristics
of the comparable companies and other factors that could affect their public
trading value.
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3. COMPARABLE PRECEDENT TRANSACTION ANALYSIS. CIBC Wood Gundy
conducted a review of selected plastic and closure manufacturing company
transactions in which a majority ownership position was purchased. These
transactions were analyzed to provide a reference point as to the
"enterprise" valuation multiples for Kerr. From the universe of transactions
selected, there was a wide disparity in the multiples, which was directly
related to the quality and size of the markets where the target company
operated. Therefore, the transactions were further separated into a small
peer group consisting of transactions where the target company operated in
similar markets (the "Comparable Transactions"). The small peer group
consists of the following transactions (target company/acquiring company):
CFI Industries, Inc./Ivex Packaging Corp.; American Safety Closure
Corp./SEDA Specialty Packaging Corp.; Wheaton Inc./Alusuisse-Lonza Holding
Ltd.; CarnaudMetalbox/Crown Cork & Seal company, Inc.; Constar International
Inc./Crown Cork & Seal Company, Inc.; and Continental Plastic Containers
Inc./Viatech, Inc. CIBC Wood Gundy calculated multiples for each transaction
based on the ratios of Total Enterprise Value to each company's
pre-acquisition LTM revenues, EBITDA and EBIT. An analysis of Total
Enterprise Value to LTM revenues for these companies yielded a range of
relevant multiples from 0.6x to 1.1x compared to 1.0x for the Company at the
Transaction Value. An analysis of Total Enterprise Value to LTM EBITDA for
these companies yielded a range of relevant multiples from 4.8x to 13.2x
compared to 7.6x for the Company at the Transaction Value. An analysis of
Total Enterpirse Value to LTM EBIT for these companies yielded a range of
relevant multiples from 8.8x to 27.4x compared to 19.8x for the Company at
the Transaction Value.
In arriving at its opinion, CIBC Wood Gundy took into account that, in
general, the multiples available to the Company at the Common Stock Offer of
$5.40 per share and Preferred Stock Offer of $12.50 per share compared
favorably to the multiples derived for the selected transactions. CIBC Wood
Gundy noted that no transaction utilized in the above selected acquisition
transaction analysis is identical to the Transactions. Accordingly, an
analysis of the foregoing is not purely mathematical and involves complex
considerations and judgments concerning differences in financial and
operating characteristics of the acquired companies in such transactions and
other factors that could affect their acquisition and public trading values.
CIBC Wood Gundy also reviewed the premium of offer price to the trading
price one month prior to the announcement dates for the Comparable
Transactions and compared these premiums to the premiums represented by the
Common Stock Offer and the Preferred Stock Offer. The one-month premiums
paid in the Comparable Transactions ranged from -36.0% to 46.9%, compared to
a one-month premium paid for the Company's Common Stock of 127.4% and
Preferred Stock of 78.6%.
4. DISCOUNTED CASH FLOW ANALYSIS. CIBC Wood Gundy performed a
discounted cash flow analysis for the Company on a stand-alone basis based
upon the Projections prepared by management of the Company. The discounted
cash flow analysis estimated the theoretical present value of the Company
based on the sum of (i) the discounted cash flows that the Company could
generate over a five-year period and (ii) a terminal value for the Company
assuming the Company performs in accordance with the Projections.
In arriving at its opinion, CIBC Wood Gundy took into account that, in
general, the Common Stock Offer of $5.40 per share and Preferred Stock Offer
of $12.50 were within the range of present values of the Common Stock and
Preferred Stock derived from the discounted cash flow analysis based upon
the Projections.
CIBC Wood Gundy's calculation of a theoretical terminal value of the
Company was based upon a multiple of EBITDA at the end of the fifth year.
This terminal value and the cash flows generated by the Company were
discounted using a discount rate to derive the Total Enterprise Value of the
Company. The value of the equity was calculated by taking the Total
Enterprise Value and subtracting the principal amount of long-term debt
outstanding, preferred stock, the Company's underfunded pension plan and the
Company's underfunded retiree health liability and adding cash on hand.
Using
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discount rates ranging from 12% to 20% and exit multiples of LTM EBITDA
ranging from 5.0x to 6.0x, CIBC Wood Gundy estimated that, based on a
discounted cash flow analysis of the Projections, the Total Enterprise Value
of the Company ranged from $95.0 million to $143.4 million and the common
equity value of the Company ranged from $2.51 to $13.55 per share.
In addition to the financial analyses set forth above, CIBC Wood Gundy
considered a number of qualitative factors in arriving at its opinion,
including, without limitation, the following: (i) the Company's current
businesses, operations, and prospects and the possibility that the Company's
operating results from its current operations could stagnate without raising and
expending significant amounts of capital; (ii) the competitive environment in
the plastic and closure manufacturing market; (iii) the Company's inconsistent
historical operating record; (iv) the lack of institutional research analyst
coverage, which decreases the visibility of the Company in the financial
markets; (v) the recent distressed trading of certain of the Company's
securities; (vi) the unsuccessful previous attempt by the Company to complete a
sale transaction; (vii) the Company operating in violation of certain covenants
under its debt instruments over an 18-month period; and (viii) the litigation by
the Pension Benefit Guarantee Corporation seeking termination of the Company's
pension plan.
The summary set forth above is not a complete description of the analysis
performed by CIBC Wood Gundy. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily translated to
summary description. Accordingly, notwithstanding the separate factors
summarized above, CIBC Wood Gundy believes that its analyses must be considered
as a whole and that selecting portions of its analyses and the factors
considered by it, without considering all analyses and factors, would create an
incomplete view of the evaluation process underlying its opinion. In performing
its analyses, CIBC Wood Gundy made numerous assumptions with respect to industry
performance, business and economic conditions and other matters. The analyses
performed by CIBC Wood Gundy are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than suggested
by such analyses.
The Board of Directors selected CIBC Wood Gundy as its financial advisor
because CIBC Wood Gundy is a nationally recognized investment banking firm with
substantial experience in transactions similar to the Transaction. As part of
its investment banking business, CIBC Wood Gundy is regularly engaged in the
valuation of businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes.
Pursuant to an amendment to an engagement letter, dated June 30, 1997, CIBC
Wood Gundy will earn a fee of $250,000 for rendering the Fairness Opinion (the
"Fairness Opinion Fee"). The Company also agreed to pay CIBC Wood Gundy a fee
equal to $890,000, such fee being payable upon consummation of the Transaction,
against which fee the Fairness Opinion Fee would be credited. The Company has
also agreed to reimburse the CIBC Wood Gundy for its reasonable out-of-pocket
expenses, including the reasonable fees and expenses of its legal counsel, and
to indemnify CIBC Wood Gundy against certain liabilities arising out of or in
connection with the services rendered by CIBC Wood Gundy under the engagement,
including liabilities under federal securities laws. The terms of the fee
arrangement with CIBC Wood Gundy, which are customary in transactions of this
nature, were negotiated at arm's length between the Company and CIBC Wood Gundy
and, at the time it received CIBC Wood Gundy's Fairness Opinion, the Board of
Directors of the Company was aware of such arrangements.
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LEHMAN BROTHERS FEE
The Company also retained Lehman Brothers in October 1995 to render
financial advisory services. Pursuant to an engagement letter, dated October 27,
1995, the Company agreed to (a) pay Lehman Brothers a retainer of $100,000 and
(b) pay Lehman Brothers a fee of 1% of the Consideration (as therein defined)
involved in the sale of the Company, if the Company is sold during the term of
the Agreement or within 24 months thereafter if sold to a buyer identified by
Lehman Brothers. The Company paid Lehman Brothers $795,000 in payment of such 1%
fee upon the completion of the Offer. The Company has also agreed to reimburse
Lehman Brothers' reasonable out-of-pocket expenses (including the fees and
expenses of Lehman Brothers' counsel), and indemnify and defend Lehman Brothers
and certain related persons against certain liabilities in connection with the
engagement.
PURPOSE OF THE OFFER AND THE MERGER
The purpose of the Offer and the Merger is to enable Parent, through
Purchaser, to acquire, in one or more transactions, control of the Board, and
substantially all the equity interest in, the Company. The Offer was intended to
increase the likelihood that the Merger will be completed promptly.
Pursuant to the Merger Agreement and prior to the consummation of the Offer,
(i) Messrs. Herbert Elish, Gordon C. Hurlbert, Michael C. Jackson, John D. Kyle,
James R. Mellor, Robert M. O'Hara and D. Gordon Strickland retired or resigned
as directors of the Company, such retirements became effective upon the
consummation of the Offer, and (ii) Parent designated the following persons to
be appointed as directors of the Company, which appointments became effective
upon the consummation of the Offer: Gregory P. Spivy and Mark N. Williamson. The
Board of Directors of the Company accepted the foregoing retirements, and
appointed the two persons designated by Parent to the Board of Directors.
Accordingly, upon the consummation of the Offer, the two designees of Parent
became directors of the Company.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Information with respect to certain contracts, agreements, arrangements, or
understandings between the Company and certain of its executive officers,
directors, or affiliates is set forth below.
MANAGEMENT CONTRACTS. Prior to consummation of the Offer, each of D. Gordon
Strickland, President and Chief Executive Officer, Robert S. Reeves, Senior Vice
President, Richard H. Dittmar, Vice President, Larry R. Knipple, Vice President
and Geoffrey A. Whynot, Vice President and Chief Financial Officer had entered
into an employment agreement with the Company. Mr. Strickland's agreement
provided for his service as the Chief Executive Officer of the Company, was for
an indefinite term and could be terminated by either party as set forth in the
agreement. The agreement also provided for an initial annual salary of $300,000,
bonus payment opportunities upon attainment of Company and individual
performance goals, participation in the Company's pension, welfare and incentive
benefit plans, certain one-time payments in connection with any loss experienced
on the sale of Mr. Strickland's Los Angeles residence (including a related tax
gross-up payment) and a car allowance. At the time of his termination Mr.
Strickland's annual salary remained at $300,000. Pursuant to the agreement, as
amended, upon his termination without cause or upon a change in control of the
Company, Mr. Strickland was entitled to receive payment of his salary (in a lump
sum) and certain insurance benefits with respect the twenty-four month severance
period following such removal, and certain one-time payments in connection with
any loss experienced on the sale of Mr. Strickland's Lancaster, Pennsylvania
residence (including a related tax gross-up payment).
Mr. Reeves' agreement provided for his service as a vice president of the
Company, was for an indefinite term and could be terminated by either party as
set forth in the agreement. The agreement also provided for an initial annual
salary of $150,000, a one-time payment of $25,000 and for participation in such
fringe benefit programs as are generally available to executives of the Company.
At the time of his termination Mr. Reeves' annual salary was $224,000. Pursuant
to the agreement, as amended, upon his termination without cause, Mr. Reeves was
entitled to receive payment of his salary and certain insurance benefits with
respect the eighteen-month severance period following such removal.
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Mr. Dittmar's agreement provided for his service as Vice President-Corporate
Employee Relations of the Company, was for an indefinite term and could be
tereminated by either party as set forth in the agreement. The agreement also
provided for an initial annual salary of $115,000, for the grant of an option
with respect to 4,000 shares of common stock, bonus payment opportunities upon
attainment of company and individual performance goals and participation in the
company's incentive bonus and employee stock ownership plans. At the time of his
termination Mr. Dittmar's annual salary was $122,508. Pursuant to the agreement,
as amended, Mr. Ditmar was entitled to receive payment of his salary and certain
insurance benefits with respect the six-month severance period following his
termination without cause, or with respect to the twelve-month period following
his termination upon a change of control.
Mr. Knipple's agreement provided for his service as Secretary of the
Company, was for an indefinite term and could be terminated by either party as
set forth in the agreement. The agreement also provided for an initial annual
salary of $90,000 and for participation in such fringe benefit programs as are
generally available to executives of the Company. At the time of his termination
Mr. Knipple's annual salary was $141,000. Pursuant to the agreement, as amended,
upon his termination without cause, Mr. Knipple was entitled to receive payment
of his salary and certain insurance benefits with respect the twelve-month
severance period following such removal.
Mr. Whynot's agreement provided for his service as Assistant Vice President
and Comptroller, General Accounting and External Reporting of the Company, was
for an indefinite term and could be terminated by either party as set forth in
the agreement. The agreement also provided for an initial annual salary of
$84,000 and for participation in such fringe benefit programs as are generally
available to executives of the Company. At the time of his termination Mr.
Whynot's annual salary was $145,008. Pursuant to the agreement, as amended, upon
his termination without cause, Mr. Whynot was entitled to receive payment of his
salary and certain insurance benefits with respect the twelve-month severance
period following such removal. Each of such agreements, and the employment of
each of such persons with the Company, was terminated following completion of
the Offer.
CERTAIN CONSIDERATION RECEIVED. The Company estimates that the aggregate
value of all benefits received by Messrs. Strickland, Reeves, Dittmar, Knipple
and Whynot in connection with the tender in the Offer of shares individually
owned, shares held in their accounts in the Company's employee stock ownership
plans, and the acceleration and cashout of certain option shares in connection
with the Merger was $322,870.50. The Company estimates that the aggregate value
of the foregoing for each of Messrs. Strickland, Reeves, Dittmar, Knipple and
Whynot was valued at $155,608.50, $63,132, $28,935, $43,668 and $31,527,
respectively. In addition, such individuals become entitled to receive cash
severance payments from the Company in connection with such individuals'
termination of employment following the consummation of the Offer. The aggregate
value of the payments and other benefits to be received by Messrs. Strickland,
Reeves, Dittmar, Knipple and Whynot following termination of employment with the
Company is approximately $869,664.16, $385,224, $126,687, $145,295 and $150,860,
respectively. See "THE MERGER AGREEMENT--Other Matters--Management Contracts and
Change in Control Agreements."
STOCK OPTION PLANS. Pursuant to the Merger Agreement, at the Effective
Time, the Company will use reasonable efforts to provide that each outstanding
option to purchase shares of Common Stock granted under any of its stock option
plans shall be cancelled and in consideration therefor will receive the Option
Price (as defined in "THE MERGER AGREEMENT--Options"). Upon receipt of the
Option Price, the underlying stock option will be cancelled. See "THE MERGER
AGREEMENT--Options". All holders of stock options, including directors and
officers of the Company, have executed option cancellation agreements.
DIRECTOR COMPENSATION. Until August 26, 1997, the directors who were not
employees of the Company were compensated for services as directors at the rate
of $22,500 per year and $500 for each meeting of the Board of Director attended.
Mr. Elish, for serving as Chairman of the Board, also received an annual fee of
$50,000. In recognition of the large amount of time Mr. Elish had devoted to the
Company's restructuring efforts, the Board voted to pay Mr. Elish an additional
$75,000 fee for 1997. In addition, the Company had established an unfunded
retirement plan for directors of the Company who
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serve in such capacity for ten years or more, retire after February 1, 1985, and
do not receive any other retirement benefits from the Company. Pursuant to such
plan, the Company paid $1,000 per month for not more than ten years to a
qualifying director. In 1993, the six directors who were not employees of the
Company each received options to purchase 10,000 shares of Common Stock at a
price of $8.19 per share pursuant to the Company's Stock Option Plan for
Non-Employee Directors. Except in the case of a change in control of the
Company, these options were not exercisable unless and until the closing price
of the Common Stock on the New York Stock Exchange reaches $12.50 per share and
remains at or above that level for at least 10 consecutive trading days. Upon
his election to the Board in 1996, Mr. Elish received options to purchase 10,000
shares of Common Stock at a price of $3.9375 per share pursuant to the Company's
Stock Option Plan for Non-Employee Directors. Except in the case of a change in
control of the Company, these options were not exercisable unless and until the
closing price of the Common Stock on the New York Stock Exchange reaches $10.00
per share and remains at or above that level for at least 10 consecutive trading
days. In 1992, the Company's Board of Directors adopted the Common Stock
Purchase Plan for Directors pursuant to which non-employee directors may elect
to defer the receipt of all or a portion of their fees. The amounts deferred are
contributed to a trust which will then purchase Common Stock using such amounts
on behalf of the participating directors. The Common Stock Purchase Plan for
Directors became effective on October 1, 1992. All holders of stock options have
executed option cancellation agreements.
DIRECTOR LIABILITY AND INDEMNIFICATION. Under the Delaware General
Corporation Law, a corporation has the power to indemnify any director or
officer against expenses, judgments, fines, and settlements incurred in a
proceeding, other than an action by or in the right of the corporation, if the
person acted in good faith and in a manner that the person reasonably believed
to be in the best interests of the corporation or not opposed to the best
interests of the corporation, and, in the case of a criminal proceeding, had no
reasonable cause to believe the conduct of the person was unlawful. In the case
of an action by or in the right of the corporation, the corporation has the
power to indemnify any officer or director against expenses incurred in
defending or settling the action if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation; provided, however, that no indemnification may be
made when a person is adjudged liable to the corporation, unless a court
determines such person is entitled to indemnity for expenses, and then such
indemnification may be made only to the extent such court shall determine. The
Delaware General Corporation Law requires that to the extent an officer or
director of a corporation is successful on the merits or otherwise in defense of
any third-party or derivative proceeding, or in defense of any claim, issue, or
matter therein, the corporation must indemnify the officer or director against
expenses incurred in connection therewith.
Under the Delaware General Corporation Law, a corporation may adopt a
provision in its certificate of incorporation that eliminates or limits the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director; provided, however,
that such provision may not eliminate or limit director monetary liability for:
(i) breaches of the director's duty of loyalty to the corporation or its
stockholders; (ii) acts or omissions not in good faith or involving intentional
misconduct or knowing violations of laws; (iii) the payment of unlawful
dividends or unlawful stock repurchases or redemptions; or (iv) transactions in
which the director received an improper personal benefit. The Company's
Certificate of Incorporation includes such a provision.
The Company's By-Laws provided that the Company will, to the fullest extent
permitted under and in accordance with the Delaware General Corporation Law,
indemnify any and all of its directors and officers, including former directors
or officers, and any employee, who so serves as an officer or director of any
corporation at the request of the Company.
The Merger Agreement also contains covenants that will require the Surviving
Corporation to maintain the Company's current director and officer liability
coverage (or replacement insurance with similar coverage) for a period of six
years after the Effective Time and to indemnify the officers and directors of
the Company. See "THE MERGER AGREEMENT--Indemnification and Insurance."
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a summary of the anticipated material Federal income tax
consequences to stockholders in general who exchange their Common Stock for cash
pursuant to the Merger. This summary is based on existing Federal income tax
law, which is subject to change, possibly retroactively. This summary does not
discuss all aspects of Federal income taxation which may be important to a
particular stockholder in light of his individual investment circumstances, such
as a stockholder who is subject to special tax rules (e.g., financial
institutions, insurance companies, broker-dealers, tax-exempt organizations, and
foreign persons) or who received his Common Stock as compensation for services
rendered or pursuant to the exercise of an employee stock option. In addition,
this summary does not discuss any state, local, foreign, or other tax
considerations. This summary assumes that stockholders have held, and will hold,
their shares of Common Stock as "capital assets" (generally, property held for
investment) under the Internal Revenue Code of 1986, as amended. Each
stockholder is urged to consult his tax advisor as to the particular Federal,
state, local, foreign, and other tax consequences, in light of his specific tax
circumstances, of tendering Common Stock pursuant to the Transaction.
The receipt of cash for Shares pursuant to the Merger will be a taxable
transaction for U.S. Federal income tax purposes. In general, a stockholder who
receives cash in exchange for Shares in the Merger will recognize gain or loss
for Federal income tax purposes equal to the difference, if any, between the
amount of cash received and the stockholder's tax basis in the Shares tendered.
Gain or loss will be determined separately for each block of Shares (i.e.,
Shares acquired at the same time and price) exchanged pursuant to the Merger.
Such gain or loss will generally be capital gain or loss, subject to tax at the
rates described below.
A holder of Shares who perfects his stockholder's appraisal rights, if any,
under the DGCL probably will recognize gain or loss at the Effective Time in an
amount equal to the difference between the "amount realized" and such
stockholder's adjusted tax basis of such Shares. For this purpose, although
there is no authority to this effect directly on point, the amount realized
generally should equal the trading price per share of the Shares at the
Effective Time. Ordinary interest income and/or capital gain (or capital loss)
should be recognized by such stockholder at the time of actual receipt of
payment to the extent that such payment exceeds (or is less than) the amount
realized at the effective time.
Under the recently enacted Taxpayer Relief Act of 1997, net capital gain
(i.e., generally, capital gain in excess of capital loss) recognized by an
individual upon the sale of a capital asset that has been held for more than 18
months will generally be subject to tax at a rate not to exceed 20%. Net capital
gain recognized by an individual from the sale of a capital asset that has been
held for more than 12 months but not for more than 18 months will continue to be
subject to tax at a rate not to exceed 28%, and capital gain recognized from the
sale of a capital asset that has been held for 12 months or less will continue
to be subject to tax at ordinary income tax rates. In addition, capital gain
recognized by a corporate taxpayer will continue to be subject to tax at the
ordinary income tax rates applicable to corporations.
REGULATORY APPROVAL
The Purchaser has determined that a Pre-Merger Notification under the
Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, is not required
with respect to the Offer and the Merger. No other regulatory approval is
required for the Merger.
Nevertheless, the Federal Trade Commission (the "FTC") and the Antitrust
Division of the Department of Justice (the "Antitrust Division") frequently
scrutinize the legality under the antitrust laws of transactions such as the
Purchaser's Merger pursuant to the Merger Agreement and the Merger. At any time
before the Merger, the Antitrust Division or the FTC could take such action
under the antitrust laws as it deems necessary or desirable in the public
interest, including seeking to enjoin the Merger pursuant to the Merger
Agreement or otherwise or seeking divesture of Shares acquired by the Purchaser
or divestiture of substantial assets of Fremont or its subsidiaries. Private
parties, as well as state governments, may also bring legal action under the
antitrust laws under certain circumstances. Based upon an examination of
publicly available information relating to the businesses in which Fremont and
the Company are engaged, Fremont and the Purchaser believe that the Merger will
not violate the antitrust laws. Nevertheless, there can be no assurance that a
challenge to the Merger on antitrust grounds will not be made or, if such a
challenge is made, of the result.
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THE MERGER AGREEMENT
The following is a summary of the material terms of the Merger Agreement.
This summary is not a complete description of the terms and conditions thereof
and is qualified in its entirety by reference to the full text thereof, a copy
of which is attached hereto as Annex I.
MERGER AGREEMENT
The following is a summary of certain provisions of the Merger Agreement.
The summary is qualified in its entirety by reference to the Merger Agreement
which is incorporated herein by reference and a copy of which has been filed
with the Commission as an exhibit to the Schedule 14D-1. The Merger Agreement
may be examined and copies may be obtained at the places and in the manner set
forth in Section 9 of this Offer to Purchase.
THE OFFER. The Merger Agreement provides that the Purchaser will commence
the Offer and that, upon the terms and subject to the prior satisfaction or
waiver of the conditions of the Offer, the Purchaser will purchase all Shares
validly tendered pursuant to the Offer. The Merger Agreement provides that,
without the written consent of the Company, the Purchaser will not (i) decrease
the Common Per Share Amount or the Series D Per Share Amount, (ii) decrease the
number of Shares sought in the Offer, (iii) amend or waive satisfaction of the
Minimum Condition, or (iv) impose additional conditions of the Offer in any
manner adverse to the holders of Shares, except that if on the initial scheduled
Expiration Date all conditions to the Offer shall not have been satisfied or
waived, the Purchaser may, from time to time, in its sole discretion, extend the
Expiration Date. The Merger Agreement provides that if, immediately prior to the
Expiration Date, as it may be extended, the Shares tendered and not withdrawn
pursuant to the Offer equal less than 90% of the outstanding Common Stock or
Series D Preferred Shares, the Purchaser may extend the Offer for a period not
to exceed 5 business days, so long as the Purchaser expressly irrevocably waives
any condition (other than the Minimum Condition) that subsequently may not be
satisfied during such extension of the Offer.
THE MERGER. Following the consummation of the Offer, the Merger Agreement
provides that, subject to the terms and conditions thereof, at the Effective
Time the Purchaser shall be merged with and into the Company and, as a result of
the Merger, the separate corporate existence of the Purchaser shall cease and
the Company shall continue as the surviving corporation (sometimes referred to
as the "Surviving Corporation").
The respective obligations of Fremont and the Purchaser, on the one hand,
and the Company, on the other hand, to effect the Merger are subject to the
satisfaction on or prior to the Closing Date (as defined in the Merger
Agreement) of each of the following conditions: (i) Fremont or the Purchaser or
their affiliates shall have made or cause to be made, the Offer and shall have
purchased Shares pursuant to the Offer, unless such failure to purchase is a
result of a breach of Fremont's and the Purchaser's obligations under the Merger
Agreement (ii) the Merger Agreement shall have been approved and adopted by the
requisite vote of the holders of Shares, if required by applicable law, in order
to consummate the Merger; and (iii) no statute, rule or regulation judgment,
writ, decree, order or injunction shall have been enacted or promulgated by any
governmental authority which prohibits the consummation of the Merger, and there
shall be no order or injunction of a court of competent jurisdiction in effect
precluding the consummation of the Merger.
At the Effective Time of the Merger (i) each issued and outstanding Share
(other than Shares that are owned by the Company as treasury stock, any Shares
owned by Fremont, the Purchaser or any Shares which are held by stockholders
properly exercising dissenters' rights under Delaware law) will be converted
into the right to receive the Common Per Share Amount or the Series D Per Share
Amount, as the case may be, paid pursuant to the Offer and (ii) each issued and
outstanding share of the common stock, par value $.01 per share, of the
Purchaser will be converted into one share of common stock of the Surviving
Corporation and shall constitute the only outstanding shares of capital stock of
the Surviving Corporation.
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THE COMPANY'S BOARD OF DIRECTORS. The Merger Agreement provides that
promptly upon the purchase by the Purchaser of any Shares pursuant to the Offer,
Fremont shall be entitled to designate such number of directors, rounded up to
the next whole number, on the Company's Board of Directors as will give Fremont
representation on the Board of Directors equal to at least that number of
directors which equals the product of the total number of directors on the
Company's Board of Directors (giving effect to the directors designated by
Fremont and including directors serving as officers of the Company) multiplied
by the percentage that the number of Shares beneficially owned by the Purchaser
or any of its affiliates (including Shares as are accepted for payment pursuant
to the Offer, but excluding Shares held by the Company) bears to the number of
Shares outstanding. The Company will, upon request of the Purchaser, promptly
increase the size of the Board of Directors or use its best efforts to secure
the resignations of such number of its incumbent directors as is necessary to
enable Fremont's designees to be elected to the Company's Board of Directors,
provided that (i) in the event that Fremont's designees are appointed or elected
to the Company's Board of Directors, until the Effective Time the Company's
Board of Directors will have at least one director who is a director as of the
date of the execution of the Merger Agreement and who is neither an officer of
the Company nor a designee, stockholder, affiliate or associate (within the
meaning of Federal securities laws) of Fremont (one or more of such directors,
the "Independent Directors") and (ii) if no Independent Directors remain, the
other directors will designate one person to fill one of the vacancies who is
neither an officer of the Company nor a designee, stockholder, affiliate or
associate of the Purchaser, such person so designated being deemed an
Independent Director. The Company's obligation to appoint Fremont's designees to
the Company's Board of Directors is subject to compliance with Section 14(f) of
the Exchange Act and Rule 14f-1 promulgated thereunder.
STOCKHOLDERS' MEETING. Pursuant to the Merger Agreement, the Company will,
if required by applicable law in order to consummate the Merger, duly call, give
notice of, convene and hold a special meeting of its stockholders as promptly as
practicable following the acceptance for payment and purchase of Shares by the
Purchaser pursuant to the Offer for the purpose of considering and taking action
upon the approval of the Merger and the adoption of the Merger Agreement. The
Merger Agreement provides that the Company will, if required by applicable law
in order to consummate the Merger, prepare and file with the Commission a
preliminary proxy or information statement relating to the Merger and the Merger
Agreement and use its best efforts (i) to obtain and furnish the information
required to be included by the Commission in the Proxy Statement (as hereinafter
defined) and, after consultation with Fremont, to respond promptly to any
comments made by the Commission with respect to the preliminary proxy or
information statement and cause a definitive proxy or information statement,
including any amendment or supplement thereto (the "Proxy Statement") to be
mailed to its stockholders, provided that no amendment or supplement to the
Proxy Statement will be made by the Company without consultation with Fremont
and its counsel and (ii) to obtain the necessary approvals of the Merger and the
Merger Agreement by its Stockholders. If the Purchaser acquires at least a
majority of the outstanding shares of Common Stock, the Purchaser will have
sufficient voting power to approve the Merger, even if no other stockholder
votes in favor of the Merger. The Company has agreed to include in the Proxy
Statement the recommendation of the Company's Board of Directors that
stockholders of the Company vote in favor of the approval of the Merger and the
adoption of the Merger Agreement.
The Merger Agreement provides that in the event that Fremont or the
Purchaser acquires at least 90% of outstanding shares of Common Stock and Series
D Preferred Shares, respectively, pursuant to the Offer or otherwise, Fremont,
the Purchaser and the Company will, at the request of Fremont and subject to the
terms of the Merger Agreement, take all necessary and appropriate action to
cause the Merger to become effective as soon as practicable after such
acquisition, without a meeting of stockholders of the Company, in accordance
with Delaware law.
OPTIONS. Pursuant to the Merger Agreement, at the Effective Time, the
Company will use reasonable efforts (without incurring any liability in
connection therewith) to provide that (i) each then-outstanding option to
purchase shares of Common Stock (the "Options") granted under any of the
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Company's 1984 Stock Option Plan, 1987 Stock Option Plan, 1993 Stock Option
Plan, 1988 Non-Employee Directors Plan or 1993 Non-Employee Director Plan, each
as amended (collectively, the "Option Plans"), whether or not then exercisable
or vested, shall be cancelled and in consideration therefor will receive an
amount in cash equal to the product of (A) the difference between the Common Per
Share Amount and the per share exercise price of such Option and (B) the number
of Shares subject to such Option (such amount, the "Option Price"). The Company
will obtain all necessary consents or releases from holders of the Options to
effect the foregoing. Upon receipt of the Option Price, the Option will be
cancelled. The surrender of an Option to the Company will be deemed a release of
any and all rights a holder had or may have had in respect of such Option.
Except as may be otherwise agreed to by Fremont or the Purchaser and the
Company, the Company (i) shall cause the Option Plans to terminate as of the
Effective Time, and (ii) following the Effective Time, shall take all actions
necessary to ensure that no holder of Options or any participant in the Option
Plans shall have any right thereunder to acquire any equity securities of the
Company, the Surviving Corporation or any subsidiary thereof.
INTERIM OPERATIONS; COVENANTS. Pursuant to the Merger Agreement, the
Company has agreed that, except as expressly contemplated or provided by the
Merger Agreement or the Option Agreement or agreed to in writing by Fremont,
after the date of execution of the Merger Agreement, and prior to the time the
designees of the Purchaser constitute a majority of the Company's Board of
Directors (the "Appointment Date"), the business of the Company will be
conducted only in the ordinary and usual course and to the extent consistent
therewith, the Company will use its reasonable best efforts to preserve its
business organization intact and maintain its existing relations with customers,
suppliers, employees, creditors and business partners, and (a) the Company will
not, directly or indirectly, (i) issue, sell, transfer or pledge or agree to
sell, transfer or pledge any treasury stock of the Company beneficially owned by
it, except upon the exercise of Options or other rights to purchase shares of
Common Stock pursuant to the Option Plans outstanding on the date of the Merger
Agreement or upon exercise of outstanding warrants or conversion of outstanding
Series D Preferred Shares; (ii) amend its Certificate of Incorporation or By-
Laws or similar organizational documents; or (iii) split, combine or reclassify
the outstanding Shares of the Company; and (b) the Company shall not (i)
declare, set aside or pay any dividend or other distribution payable in cash,
stock or property with respect to its capital stock; (ii) issue, sell, pledge,
dispose of or encumber any additional shares of, or securities convertible into
or exchangeable for, or options, warrants, calls, commitments or rights of any
kind to acquire, any shares of capital stock of any class of the Company, other
than Shares reserved for issuance on the date of the Merger Agreement pursuant
to the exercise of warrants or Options outstanding on the date of the Merger
Agreement or upon the conversion of Series D Preferred Shares; (iii) transfer,
lease, license, sell, mortgage, pledge, dispose of, or encumber any assets, or
incur any indebtedness or other liability other than in the ordinary course of
business, or mortgage, pledge or encumber any assets or modify any indebtedness;
(iv) redeem, purchase or otherwise acquire, directly or indirectly, any of its
capital stock; (v) grant any increase in the compensation payable or to become
payable by the Company to any of its executive officers or adopt any new or
amend or otherwise increase or accelerate the payment or vesting of the amounts
payable or to become payable under any existing bonus, incentive compensation,
deferred compensation, severance, profit sharing, stock option, stock purchase,
insurance, pension, retirement or other employee benefit plan, agreement or
arrangement; (vi) enter into any employment or severance agreement with or,
except in accordance with the existing written policies of the Company, grant
any severance or termination pay to any officer, director or employee of the
Company; (vii) permit any insurance policy naming it as a beneficiary or a loss
payable payee to be cancelled or terminated without notice to Fremont except in
the ordinary course of business and consistent with past practice unless the
Company shall have obtained a comparable replacement policy; (viii) enter into
any material contract or material transaction relating to the purchase of assets
other than in the ordinary course of business; assume, guarantee or become
liable for the obligations of any person, except in the ordinary course of
business and consistent with past practice; (ix) modify, amend or terminate any
of its material contracts or waive, release or assign any material rights or
claims, except in the ordinary course of business and consistent with past
practice; (x) make any loans, advances or capital contributions to or
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investments in any other person; incur or assume any long-term debt, or except
in the ordinary course of business, incur or assume any short-term indebtedness
in amounts not consistent with past practice except for borrowings under the
Company's existing credit facility in the ordinary course of business and
consistent with past practice; (xi) pay, discharge or satisfy any claims or
liabilities (whether absolute, accrued, asserted or unasserted, contingent or
otherwise) other than in the ordinary course of business and consistent with
past practices or reflected or reserved against in the consolidated financial
statements of the Company; (xii) adopt a plan of liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other reorganization
of the Company (other than the Merger); (xiii) take or agree to take, any action
that would or is reasonably likely to result in any of the conditions to the
Merger not being satisfied, or would make any representation or warranty of the
Company contained in the Merger Agreement inaccurate in any respect, at or prior
to the Effective Time, or that would materially impair the Company's ability to
consummate the Merger or materially delays such consummation; (xiv) redeem the
Rights or terminate, amend or modify the Rights Plan prior to the consummation
of the Offer; (xv) change any of the accounting methods used by it unless
required by generally accepted accounting principles ("GAAP"), make any material
tax election, change any material tax election already made, adopt any material
tax accounting method, change any material tax accounting method unless required
by GAAP, enter into any closing agreement, settle any tax claim or assessment or
consent to any tax claim or assessment or any waiver of the statute of
limitations for any such claim or assessment; or (xvi) enter into any agreement
with respect to the foregoing or take any action with the intent of causing any
of the conditions to the Offer set forth in Section 14 not to be satisfied.
Pursuant to the Merger Agreement, the Purchaser has agreed that, promptly
following the consummation of the Offer, the Purchaser will join with the
defendants in the action entitled KUPFERBERG V. NORIAN, ET AL. (Del. Ch. Civ.
Act. No. 12709) in a motion to dismiss or withdraw such action with prejudice,
and will not assert or permit the Company to assert any claim against the
defendants thereunder relating to the subject matter thereof.
NO SOLICITATION. Pursuant to the Merger Agreement, the Company has agreed
to notify the Purchaser immediately if any proposals are received by, any
information is requested from, or any negotiations or discussions are sought to
be initiated or continued with the Company or its representatives, in each case
in connection with any Takeover Proposal (as defined below) or the possibility
or consideration of making a Takeover Proposal ("Takeover Proposal Interest")
indicating, in connection with such notice, the name of the Person (as defined
in the Merger Agreement) indicating such Takeover Proposal Interest and the
terms and conditions of any proposals or offers. In addition, the Company has
agreed that it will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted prior to the
date of the Merger Agreement with respect to any Takeover Proposal Interest and
that it will keep Fremont informed, on a current basis, on the status and terms
of any Takeover Proposal Interest. In addition, pursuant to the Merger
Agreement, the Company has agreed that the Company will not (and the Company
will use its reasonable best efforts to ensure that its officers, directors,
employees, investment bankers, attorneys, accountants and other agents do not),
directly or indirectly (i) initiate, solicit or encourage, or take any action to
facilitate the making of, any offer or proposal which constitutes or is
reasonably likely to lead to any Takeover Proposal, (ii) enter into any
agreement with respect to any Takeover Proposal, or in the event of an
unsolicited written Takeover Proposal for the Company engage in negotiations or
discussion with, or provide information or data to, any Person (other than
Fremont, any of its affiliates or representatives and except for information
which has been previously publicly disseminated by the Company) relating to any
Takeover Proposal, except that the Merger Agreement does not prohibit the
Company and the Company's Board of Directors from (i) taking and disclosing to
the Company's stockholders a position with respect to a tender or exchange offer
by a third party pursuant to Rules 14d-9 and 14e-2 promulgated under the
Exchange Act, or (ii) making such disclosure to the Company's stockholders as,
in the good faith judgment of the Board, after receiving advice from outside
counsel, is required under applicable law. A "Takeover Proposal" means any
tender or exchange offer involving the Company, any proposal for a merger,
consolidation or other business combination involving the Company,
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any proposal or offer to acquire in any manner a substantial equity interest in,
or a substantial portion of the business or assets of, the Company (other than
immaterial or insubstantial assets or inventory in the ordinary course of
business or assets held for sale), any proposal or offer with respect to the
Company or any proposal or offer with respect to any other transaction similar
to any of the foregoing with respect to the Company other than pursuant to the
transactions effected pursuant to the Merger Agreement.
Notwithstanding the foregoing, prior to the acceptance of Shares pursuant to
the Offer, the Company may furnish information concerning its business to any
Person pursuant to confidentiality agreements and negotiate a Takeover Proposal
if (a) such Person submitted on an unsolicited basis a bona fide written
proposal to the Company relating to any such transaction which the Company's
Board of Directors determines in good faith, after receiving advice from a
nationally recognized investment banking firm, represents a superior transaction
to the Offer and the Merger and which is not conditioned upon obtaining
financing and (b) in the opinion of the Company's Board of Directors, only after
receipt of advice from outside legal counsel to the Company, the failure to
provide such information or access or to engage in such discussions or
negotiations would create a reasonable possibility of a breach of the fiduciary
duties of the Company's Board of Directors to the Company's stockholders under
applicable law (a Takeover Proposal which satisfied clauses (a) and (b), a
"Superior Proposal"). Within two business days following receipt by the Company
of a Superior Proposal, the Company must notify Fremont of the receipt thereof.
The Company must then provide Fremont any material nonpublic information
regarding the Company provided to the other party which was not provided to
Fremont. At any time after two business days following notification to Fremont
of the Company's intent to do so, the Company's Board of Directors may terminate
the Merger Agreement pursuant to its terms and enter into an agreement with
respect to a Superior Proposal, provided that the Company, concurrently with
entering into such agreement, pay or cause to be paid, the Termination Fee (as
defined below), plus any amount payable at the time for reimbursement of
expenses. Except as permitted under the terms of the Merger Agreement, neither
the Company's Board of Directors nor any committee thereof shall (i) approve or
recommend, or propose to approve or recommend, any Takeover Proposal, (ii) enter
into any agreement with respect to any Takeover Proposal or (iii) withdraw or
modify, or propose to withdraw or modify, in a manner adverse to Fremont or the
Purchaser, the approval or recommendation of the Company's Board of Directors,
or any such committee thereof, of the Offer, the Merger Agreement or the Merger.
INDEMNIFICATION AND INSURANCE. Pursuant to the Merger Agreement, for a
period of five years after the Effective Time, the Certificate of Incorporation
and By-Laws of the Surviving Corporation shall not be amended, repealed or
otherwise modified in any manner that would adversely affect the rights
thereunder of individuals who as of the date of the Merger Agreement were
directors, officers, employees, fiduciary, agents or otherwise entitled to
indemnification under the Certificate of Incorporation, By-Laws or
indemnification agreements (the "Indemnified Parties"). The Merger Agreement
provides that the Company shall, to the fullest extent permitted under Delaware
law and regardless of whether the Merger becomes effective, indemnify, defend
and hold harmless, and after the Effective Time, Fremont, the Purchaser and the
Surviving Corporation shall jointly and severally, to the fullest extent
permitted under Delaware law, indemnify and hold harmless, each Indemnified
Party against any costs or expenses (including reasonable attorneys' fees),
judgments, fines, losses, claims, damages, liabilities and amounts paid in
settlement in connection with any claim, action, suit proceeding or
investigation, including without limitation, liabilities arising out of the
Merger. The Merger Agreement also provides that Fremont or the Surviving
Corporation will maintain the Company's existing officers' and directors'
liability insurance ("D&O Insurance") for a period of not less than six years
after the Effective Time, provided, that if the aggregate annual premiums for
such D&O Insurance at any time shall exceed 200% of the per annum rate of
premium currently paid by the Company for such insurance as in effect on the
date of the Merger Agreement, then Fremont will cause the Company or the
Surviving Corporation to provide the maximum coverage then available at an
annual premium equal to 200% of such rate.
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REPRESENTATIONS AND WARRANTIES. Pursuant to the Merger Agreement, the
Company has made customary representations and warranties to Fremont and the
Purchaser with respect to, among other things, its organization, capitalization,
authority relative to the Merger, financial statements, public filings, conduct
of business, employee benefit plans, intellectual property, employment matters,
compliance with laws, tax matters, litigation, environmental matters, material
contracts, potential conflicts of interest, brokers' fees, real property,
insurance, accounts receivable and inventory, vote required to approve the
Merger Agreement, undisclosed liabilities, its rights plan, information in the
Proxy Statement and the absence of any material adverse effect on the Company
since December 31, 1996. In addition, the Company has represented that, subject
to certain exceptions, no material licensor, vendor, supplier, licensee or
customer of the Company has cancelled or otherwise modified its relationship
with the Company.
TERMINATION; FEES. The Merger Agreement may be terminated and the
transactions contemplated therein abandoned at any time prior to the Effective
Time, whether before or after approval of the stockholders of the Company, (a)
by mutual written consent of Fremont and the Company; (b) by either the Company
or Fremont if there is a material breach by the other, which breach cannot or
has not been cured within 10 days of receipt of notice thereof; (c) by Fremont
if (i) the Company's Board of Directors withdraws, modifies or changes its
recommendation in respect of the Merger Agreement in a manner adverse to
Fremont; (ii) subject to the "No Solicitation" provision, if (X) the Company's
Board of Directors recommends any proposal other than Fremont's proposal in
respect of a Takeover Proposal, (Y) the Company continues discussions with a
third party concerning a Takeover Proposal for more than 20 business days after
the receipt thereof, or (Z) a Takeover Proposal containing a proposed price is
commenced or made public and the Company does not reject such Takeover Proposal
within 20 business days of its receipt, or if sooner, the date its existence
first becomes publicly disclosed; and (iii) if any person other than Gabelli
Funds, Inc. and its affiliates acquires beneficial ownership of at least 15% of
the outstanding Common Stock; (d) by the Company in order to allow it to enter
into a transaction with a third party, which transaction the Company's Board of
Directors has determined is more favorable to the Company's stockholders than
the proposed transaction with Fremont, PROVIDED, that the Company gives notice
thereof and it makes simultaneous payment to Fremont of the Termination Fee and
reimbursement of expenses (as discussed below); (e) by Fremont if (i) the Offer
shall have expired or been terminated without any Shares being purchased
thereunder by the Purchaser as the result of the occurrence of any of the
conditions set forth in Annex I to the Merger Agreement or (ii) prior to the
purchase of Shares pursuant to the Offer, the Company shall have breached any
representation, warranty or covenant or other agreement contained in the Merger
Agreement, which breach would give rise to the failure of a condition set forth
in paragraphs (d) or (e) of Annex I to the Merger Agreement and such breach
cannot or has not been cured within 10 days of receipt of notice thereof; (f) by
either the Company or Fremont if a court of competent jurisdiction or
governmental entity shall have issued an order, decree or ruling or taken any
other actions, in each case permanently enjoining, restraining or otherwise
prohibiting the Offer, the Merger and the transaction contemplated by the Merger
Agreement; or (g) by either the Company or Fremont if, without any material
breach on its respective part, the purchase of Shares pursuant to the Offer
shall not have occurred on or before 120 days from the date of the Merger
Agreement.
In accordance with the Merger Agreement, if (A) Fremont shall have
terminated the Merger Agreement pursuant to the foregoing clauses, (c)(i) or
(c)(ii)(X); or (B)(i) if Fremont shall have terminated the Merger Agreement
pursuant to the foregoing clauses (c)(ii)(Y), (c)(ii)(Z), (c)(iii) or (e)(ii)
and (2) within 18 months of any such termination the Company shall have entered
into a definitive agreement with respect to a Takeover Proposal or a Takeover
Proposal with respect to the Company shall have been consummated; or (C) the
Company shall have terminated the Merger Agreement pursuant to the foregoing
clause (d), then in either case the Company shall pay simultaneously with such
termination pursuant to clause (d) and promptly, but in no event later than two
business days after the date of such termination or event if pursuant to clauses
(c) or (e)(ii), to Fremont a termination fee (the "Termination Fee") of
$2,000,000 plus an amount, not in excess of $1,500,000, equal to Fremont's
actual and reasonably documented reasonable out-of-pocket expenses incurred by
Fremont and the Purchaser in connection with
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the Offer, the Merger, the Merger Agreement and the consummation of the
transactions contemplated thereby, which amount shall be payable by wire
transfer.
OPTION AGREEMENT
The following is a summary of certain provisions of the Option Agreement.
The summary is qualified in its entirety by reference to the Option Agreement
which is incorporated herein by reference and a copy of which has been filed
with the Commission as an exhibit to the Schedule 14D-1. The Option Agreement
may be examined and copies may be obtained at the places and in the manner set
forth in Section 9 of this Offer to Purchase.
As a condition and inducement to Fremont's and Purchaser's entering into the
Merger Agreement, concurrently with the execution and delivery of the Merger
Agreement, Fremont and the Company have entered into an Option Agreement, dated
July 1, 1997, pursuant to which, among another things, the Company has granted
Fremont an irrevocable option to purchase up to 782,685 (approximately 19.9%)
newly issued shares of Common Stock at $5.40 per share (the "Option Shares").
The Option can be exercised by the Parent (or its designee) under the following
circumstances: (a) any corporation, partnership, individual, trust,
unincorporated association, or other entity or "person" (as defined in Section
13(d)(3) of the Exchange Act) other than Fremont or any of its affiliates (i)
commences a bona fide tender offer or exchange offer for any shares of Common
Stock, the consummation of which would result in beneficial ownership by such
third party (together with its affiliates and associates) of 15% or more of the
then outstanding Common Stock (either on a primary or fully diluted basis); (ii)
acquires beneficial ownership of 15% of the Common Stock, other than the Gabelli
Funds, Inc. and its affiliates; (iii) solicits proxies in a "solicitation"
subject to proxy rules under the Exchange Act, executes any written consent or
become a "participant" in any "solicitation" as defined in Regulation 14A under
the Exchange Act), in each case with respect to the Common Stock, or (b) any of
the termination events described in Section 8.1(g) or (h) of the Merger
Agreement that would allow Fremont to terminate the Merger Agreement has
occurred (but without the necessity of Fremont having terminated the Merger
Agreement).
In addition, the Option Agreement provides that in the event of any change
in Common Stock or in the number of outstanding shares of Common Stock by reason
of a stock dividend, split up, recapitalization, combination, exchange of shares
or similar transaction or any other change in the corporate or capital structure
of the Company (including the declaration or payment of an extraordinary
dividend of cash, securities or other property), the type and number of Option
Shares to be issued by the Company upon exercise of the Option shall be adjusted
appropriately, and proper provision made in the agreements governing such
transaction so that Fremont will receive upon exercise of the Option the number
and class of shares or other securities or property that Fremont would have
received in respect to the Common Stock if the Option had been exercised
immediately prior to such event, or the record date therefor, as applicable. If
the Company enters into an agreement (i) to consolidate with or merge into any
person, other than Fremont or one of its subsidiaries, and is not the continuing
or surviving corporation, (ii) to permit any person, other than Fremont or one
of its subsidiaries, to merge into the Company, and the Company is not the
continuing or surviving corporation, but in connection with such merger, the
then outstanding shares of Common Stock are changed into or exchanged for stock
or other securities of the Company or any other person or cash or any other
property, or then outstanding shares of Common Stock after such merger represent
less than 50% of the corporation or (iii) to sell or otherwise transfer all or
substantially all of its assets to any person, other than Fremont or one of its
subsidiaries, then, in each case, proper provision must be made in such
governing agreements so that Fremont will receive upon exercise of the Option
the number and class of shares or other securities or property that Fremont
would have received in respect of any Common Stock if the Option had been
exercised immediately prior to such transaction.
In addition, the Total Profit (as defined below) that Fremont may make upon
the exercise of the Option is capped at $1,000,000. Total Profit means the
aggregate amount (before taxes) of the following:
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(i)(x) the net cash amounts received by Fremont pursuant to the sale of Option
Shares (or any securities into which such Option Shares are converted or
exchanged) to any unaffiliated party, less (y) Fremont's purchase price of such
Option Shares and (ii) any Notional Total Profit, which is, with respect to any
number of shares as to which Fremont may propose to exercise the Option, the
Total Profit determined as of the date of such proposal assuming that the Option
were exercised on such date for such number of shares and assuming that such
shares, together with all other shares of Common Stock held by Fremont and its
affiliates as of such date, were sold for cash at the closing market price for
the Common Stock as of the close of business on the preceding trading day (less
customary brokerage commissions).
The Option Agreement terminates, and the Option expires, on the earlier of
(i) the Effective Time and (ii) to the extent that a notice to exercise the
Option has not theretofore been given by Fremont, six months after termination
of the Merger Agreement.
GUARANTEE
The following is a summary of certain provisions of the Guarantee. The
summary is qualified in its entirety by reference to the Guarantee which is
incorporated herein by reference and a copy of which has been filed with the
Commission as an exhibit to the Schedule 14D-1. The Guarantee may be examined
and copies may be obtained at the places and in the manner set forth in Section
9 of this Offer to Purchase.
As a condition and inducement to the Company's entering into the Merger
Agreement, concurrently with execution and delivery of the Merger Agreement,
Fremont Partners and the Company executed the Guarantee pursuant to which, among
other things, Fremont Partners has agreed to unconditionally and irrevocably
guarantee, for the benefit of the Company the performance of all obligations of
Fremont and the Purchaser pursuant to the Merger Agreement. Fremont Partners has
represented in the Guarantee that it has funds available to it sufficient to
purchase, or cause the purchase of the Shares in accordance with the terms of
the Merger Agreement, and to pay, or cause to be paid, all amounts due (or which
will, as a result of the transactions contemplated by the Merger Agreement
become due) in respect of any indebtedness of the Company for borrowed money
outstanding as of the date of the consummation of the Offer. The Guarantee
terminates upon the consummation of the purchase by the Purchaser, Fremont or
any of its affiliates of any Shares pursuant to the Offer.
OTHER MATTERS
MANAGEMENT CONTRACTS AND CHANGE IN CONTROL AGREEMENTS. Prior to the
consummation of the Offer, each of D. Gordon Strickland, President and Chief
Executive Officer, Robert S. Reeves, Senior Vice President, Richard H. Dittmar,
Vice President, Larry Knipple, Vice President and Geoffrey A. Whynot, Vice
President and Chief Financial Officer had an employment agreement with the
Company.
Mr. Strickland had an employment agreement with the Company for an
indefinite term until terminated by either Mr. Strickland or the Company as set
forth in the agreement. Effective August 31, 1997, Mr. Strickland was removed
from his office as President and Chief Executive Officer of the Company.
Pursuant to the terms of his employment agreement and pursuant to a letter
agreement, dated August 29, 1997, Mr. Strickland will receive payment of his
salary and certain insurance benefits for a period of twenty-four months
following such removal and will have certain indebtedness to the Company, in the
amount of approximately $138,975.98, forgiven. In addition, Mr. Strickland
received payment in the amount of $113,652.16 as a tax gross-up in connection
with the loan forgiveness, and $95,312.50 for his stock options pursuant to a
Stock Option Cancellation Agreement and Consent. The aggregate value of the
payments and other benefits to be received by Mr. Strickland following
termination of employment with the Company is approximately $869,664.16 (not
including the stock option payments).
Mr. Reeves had an employment agreement with the Company for an indefinite
term until terminated by either Mr. Reeves or the Company as set forth in the
agreement. Effective September 2, 1997, Mr. Reeves' employment with the Company
was terminated. As provided in Mr. Reeves' employment agreement, Mr. Reeves will
continue to receive payment of his salary and certain insurance benefits for a
period of eighteen months following his termination of employment by the
Company. The aggregate value of the payments and other benefits to be received
by Mr. Reeves following termination of employment with the Company is
approximately $385,224.
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Mr. Dittmar had an employment agreement with the Company for an indefinite
term until terminated by either Mr. Dittmar or the Company as set forth in the
agreement. Effective August 31, 1997, Mr. Dittmar's employment with the Company
was terminated. As provided in Mr. Dittmar's employment agreement, Mr. Dittmar
will continue to receive payment of his salary and certain insurance benefits
for a period of 12 months following his termination of employment by the
Company. The aggregate value of the payments and other benefits to be received
by Mr. Dittmar following termination of employment with the Company is
approximately $126,687.
Mr. Knipple had an employment agreement with the Company for an indefinite
term until terminated by either Mr. Knipple or the Company as set forth in the
agreement. Effective August 31, 1997, Mr. Knipple's employment with the Company
was terminated. As provided in Mr. Knipple's employment agreement, Mr. Knipple
will continue to receive payment of his salary and certain insurance benefits
for a period of 12 months following his termination of employment by the
Company. The aggregate value of the payments and other benefits to be received
by Mr. Knipple following termination of employment with the Company is
approximately $145,295.
Mr. Whynot had an employment agreement with the Company for an indefinite
term until terminated by either Mr. Whynot or the Company as set forth in the
agreement. Effective September 15, 1997, Mr. Whynot's employment with the
Company was terminated. As provided in Mr. Whynot's employment agreement, Mr.
Whynot will continue to receive payment of his salary and certain insurance
benefits for a period of 12 months following his termination of employment by
the Company. The aggregate value of the payments and other benefits to be
received by Mr. Whynot following termination of employment with the Company is
approximately $150,860.
MANAGEMENT. Effective as of August 31, 1997, the Board of Directors of the
Company appointed (i) Richard D. Hofmann to serve as President and Chief
Executive Officer of the Company and (ii) Lawrence C. Caldwell to serve as Chief
Financial Officer, Treasurer and Secretary. Each of D. Gordon Strickland, Robert
S. Reeves, Richard H. Dittmar, Larry R. Knipple and Geoffrey A. Whynot were
removed from their respective offices, by August 31, 1997, except for Mr.
Reeves, whose effective date of removal was September 2, 1997.
On September 26, 1997, Mrs. Richard D. Hoffman, Mrs. Lawrence C. Caldwell,
Mrs. Daniel R. Gresham and Mrs. Elizabeth Straight (collectively, the
"Stockholders") purchased shares of common stock of the Purchaser ("Purchaser
Common Stock") in the aggregate amount of $900,000, representing approximately
1.8% of the issued and outstanding shares of the Purchaser. The Stockholders'
shares of Purchaser Common Stock will be converted into one share of Common
Stock of the Company at the time of the Merger. Mrs. Hoffman's spouse, Richard
D. Hofmann, is the President and Chief Executive Officer of the Company; Mrs.
Caldwell's spouse, Lawrence C. Caldwell, is the Chief Financial Officer,
Treasurer and Secretary of the Company; Mrs. Gresham's spouse is a principal of
New Canaan Investments, Inc. ("NCI") a private company headquarted in Stamford,
Connecticut engaged in making equity investments and acquisitions. Mrs.
Straight's late husband was associated with NCI.
The shares of Purchaser Common Stock purchased by the Stockholders are
subject to (i) restrictions on transfer, except in certain limited circumstances
or until the occurrence of certain events; (ii) a call option by the Purchaser
(or the surviving corporation after the Merger); and (iii) a right of first
refusal by the Purchaser (or by the Surviving Corporation after the Merger).
FINANCIAL ARRANGEMENTS
In connection with the consummation of the Offer, the Company entered into
that certain Loan and Security Agreement, dated as of August 26, 1997, (the
"Loan and Security Agreement") by and between the Company and NationsBank of
Texas, N.A. ("NationsBank") as Lender, pursuant to which the Company borrowed an
aggregate of $62 million dollars which were used, among other things, (i) to
refinance the outstanding principal balance of funded indebtedness (including
its 9.45% Senior Series A
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<PAGE>
and 8.99% Series B Notes and its credit facility with Madeleine L.L.C.) in the
amount of approximately $58 million (including premium, and accrued and unpaid
interest) of the Company at the time of the consummation of the Offer, (ii) pay
a portion of the fees and expenses incurred in connection with the Offer and
(iii) to provide for working capital and general corporate purposes of the
Company after the consummation of the Offer. NationsBank received a first
priority, perfected security interest in all of the tangible and intangible
assets of the Company.
Pursuant to the Loan and Security Agreement, NationsBank, in its capacity as
initial Lender, provided the Company with credit facilities in the aggregate
amount of up to $62 million consisting of a $20 million revolving credit
facility (which includes a sublimit for the issuance of standby and commercial
letters of credit) (the "Revolving Credit Facility"), a $32 million term loan
facility (the "Term Loan Facility") and a $10 million capital expenditure
facility (the "CAPEX Facility" and together with the Revolving Credit Facility
and the Term Loan Facility, the "Senior Credit Facilities").
The Revolving Credit Facility bears interest at a rate equal to LIBOR plus
225 basis points or the Base Rate (defined as the higher of (i) the NationsBank
prime rate and (ii) the Federal Funds rate), at all time subject to applicable
maximum legal interest rates. The Term Loan Facility and the CAPEX Facility bear
interest at a rate equal to LIBOR plus 275 basis points or the Base Rate plus 50
basis points, in each case at all times subject to applicable maximum legal
interest rates. The Company may select interest periods of 1, 2, 3 or 6 months
for LIBOR loans, subject to availability. A default rate of interest applies on
all loans in the event of default at a rate per annum of 2% above the applicable
interest rate.
The Revolving Credit Facility terminates and all amounts outstanding
thereunder will be due and payable in full five years from the closing of the
Offer (the "Closing"). The Term Loan Facility is subject to repayment according
to scheduled amortization, with the final payment of all amounts outstanding,
plus accrued interest due five years from the Closing or upon termination of the
Revolving Credit Facility, whichever is earlier. The CAPEX Facility also is
subject to amortization, with the final payment of all amounts outstanding, plus
accrued interest, due five years from the Closing or upon termination of the
Revolving Credit Facility, whichever is earlier.
The Loan and Security Agreement provides for prepayment of the Senior Credit
Facilities provided that the Company pays liquidated damages in an amount equal
to the appropriate percentage of the maximum approved amount of the Senior
Credit Facilities: (i) 1.0% if such termination or reduction occurs during the
first year following the Closing, (ii) 0.50% if such termination or reduction
occurs during the second year following the Closing and (iii) 0.25% if such
termination or reduction occurs at any time thereafter. However, no such payment
is required upon termination in connection with refinancing of the Senior Credit
Facilities with NationsBank or any of its affiliates. Parent and the Purchaser
each have guar-anteed the payment obligations of the Company under the Loan and
Security Agreement.
Parent and the Purchaser estimate that the total amount of funds required by
the Purchaser to fund the aggregate Merger Consideration payable in respect of
the remaining 275,962 shares of Common Stock and 180,006 shares of Series D
Preferred Shares outstanding will be $3,740,269.80, excluding any fees and
expenses related thereto. It is anticipated that the source of the funds will be
the cash on hand of the Purchaser.
In addition, on August 24, 1997, the Company entered into a definitive
agreement with the Pension Benefit Guaranty Corporation (the "PBGC") relating to
the pension liability of the Company. Pursuant to the terms of the definitive
agreement, the PBGC agreed to dismiss its lawsuit that had been pending before
the United States District Court for the Eastern District of Pennsylvania
seeking to terminate the Company's Retirement Income Plan, withdraw its Notice
of Determination and forbear from institution new proceedings with respect to
the acquisition of the Company by the Purchaser. The Company agreed to (i)
future enhanced pension plan contributions, (ii) grant to the PBGC a second lien
in the amount of up to $40.7 million on substantially all of the assets of the
Company, (iii) various restrictions on future secured indebtedness and (iv)
provisions regarding notice of certain events.
33
<PAGE>
THE COMPANY
BUSINESS
The Company, founded in 1903, is a major producer of plastic packaging
products and, until March 15, 1996, also operated the Consumer Products
Business.
Present operations include the manufacture and sale of plastic packaging
products, including child-resistant closures, tamper-evident closures,
prescription packaging products, jars, other closures and containers and the
sale of glass prescription bottles (the "Plastic Products Business" or
"Continuing Operations"). Operations in the discontinued Consumer Products
Business included the manufacture and sale of caps and lids and the sale of
glass jars and a line of pickling spice and pectin products for home canning
together with the sale of other related products, including iced tea tumblers
and beverage mugs, as well as the manufacture and sale of metal crown business
and commercial glass container manufacturing business (collectively, the
"Consumer Products Business" or "Discontinued Operations").
DISCONTINUED OPERATIONS
SALE OF CONSUMER PRODUCTS BUSINESS
On March 15, 1996, the Company sold to Alltrista Corporation ("Alltrista")
for $14,417,000 certain assets of the Consumer Products Business, consisting of
the manufacturing assets, supplies, work in process inventory and certain
trademarks and a perpetual and exclusive license to use the name "Kerr" in the
sale of home canning supplies (the "sale of the Consumer Products Business").
The Company also assigned to Alltrista the lease on the Jackson, Tennessee plant
where the Company manufactured metal caps and lids for the Consumer Products
Business. The Company also appointed Alltrista as sales agent to sell the
inventory of home canning supplies produced by the Company before March 15,
1996. The Company received $17,391,000 during the remainder of 1996 from the
sale of its Consumer Products Business inventory and the collection of accounts
receivable of the Consumer Products Business. The Company used the proceeds i)
to reduce debt and the level of advances under the Company's Accounts Receivable
Agreement, ii) to fund the cash costs of the restructuring of the Company
undertaken during 1996 and iii) for working capital purposes. The Company has
received $613,000 from Alltrista in 1997 for receivables collected by Alltrista
on the Company's behalf.
On March 15, 1996, the Company announced a restructuring which involved the
consolidation of the Company's wide mouth jar and closure manufacturing facility
into its existing tamper-evident closure facility in Bowling Green, Kentucky and
the relocation of the Company's principal executive office from Los Angeles,
California to Lancaster, Pennsylvania where the headquarters of the Company's
plastic products business was located. The restructuring, which was completed by
the end of 1996, is expected to result in annualized pretax cost savings of
approximately $6,500,000 primarily from reduced costs for employment, rent
payments, manufacturing overhead, utilities and freight. The full benefit of
these cost savings should be realized in 1997.
In connection with the sale of assets of the Consumer Products Business and
the restructuring, the Company reported in the first quarter of 1996 a one-time
pretax gain of approximately $2,900,000 on the sale of certain assets of the
Consumer Products Business and a one-time loss on the restructuring of
$7,700,000. In addition to the one-time charge on the restructuring, the Company
incurred additional non-recurring pretax charges of $2,400,000 during 1996 and
early 1997 for restructuring related costs that accounting rules require to be
expensed as incurred.
SALE OF COMMERCIAL GLASS CONTAINER BUSINESS
On February 28, 1992, the Company consummated the sale of substantially all
of its assets (the "Sale of the Glass Container Assets") relating to the
manufacture and sale of glass containers (the "Commercial Glass Container
Business") to Ball Corporation ("Ball") pursuant to the terms of an asset
purchase
34
<PAGE>
agreement for approximately $68,000,000 in cash. The Sale of the Glass Container
Assets was more fully described in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991 (the "1991 10-K").
The commercial glass container business manufactured and sold glass
containers for food and, to a lesser extent, medicine, pharmaceuticals, beer,
beverages and distilled spirits in a variety of shapes, designs and sizes
ranging from fractional ounce to gallon capacity in flint (clear), and to one
and one-half quart capacity in amber. The Company's glass container customers
principally consisted of larger national companies with multi-plant operations
which purchase their requirements from a number of suppliers.
The Company manufactured its glass containers both in response to and in
anticipation of customer orders. Glass containers were sold nationally by the
Company's sales force.
The glass container markets in which the Company's Commercial Glass
Container Business participated prior to the Sale of the Glass Container Assets
were highly competitive and included a number of large and well-established
competitors who competed for sales on the basis of price, service, quality of
product and proximity to customers.
Sand, soda ash, limestone, recycled glass and corrugated packaging materials
were the principal materials used by the Company's Commercial Glass Container
Business in the manufacture and sale of glass containers. During 1992, all of
these materials were readily available, on a contract or open-market basis, from
a large number of suppliers and the Company was not dependent upon any single
supplier for any of these materials.
The primary sources of energy used by the Company's Commercial Glass
Container Business were natural gas and electricity. In recent years, due to the
increased availability and sources of natural gas, the Company entered into
natural gas purchase contracts with gas suppliers in an effort to reduce prices
paid for gas. During 1992, the Company did not experience any significant
interruption at its production facilities resulting from shortages of energy.
As part of the transaction, the Company agreed to indemnify Ball for
environmental costs required by law to be incurred by Ball and which result from
events that occurred prior to the Sale of the glass Container Assets at the
glass container plants purchased or leased by Ball, except for (i) up to
$900,000 in costs incurred in connection with certain remediation activities
required with respect to specified areas of environmental concern ("AECS")
involving the Company's glass container plants purchased by Ball and except for
(ii) all amounts in excess of $1.4 million that may be incurred in connection
with the remediation of AECS. The Company remains liable for all environmental
costs relating to the plants leased by Ball except for those costs resulting
from the operation of such plants by Ball. The Company has established reserves
that it believes are adequate for these liabilities.
As a result of the Sale of the Glass Container Assets, the Company no longer
operates its Commercial Glass Container Business.
SALE OF THE METAL CROWN BUSINESS
On December 11, 1992, the Company sold substantially all of its assets (the
"Sale of the Metal Crown Assets") relating to the manufacture and sale of metal
crowns for beer and beverage bottles (the "Metal Crown Business") to Crown Cork
& Seal Company, Inc. ("Crown Cork") pursuant to the terms of an asset purchase
agreement for approximately $7,200,000 in cash. Included among the assets of the
Metal Crown Business sold to Crown Cork were substantially all of the assets of
the Company's Arlington, Texas plant. The Sale of the Metal Crown Assets was
more fully described in the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 24, 1992.
The Metal Crown Business manufactured and sold metal crowns for beer and
beverage bottles. The metal crowns were sold nationally by the Company's sales
force. During 1992, the Company believed that it
35
<PAGE>
was one of the three largest manufacturers of metal crowns for beer bottles. The
primary raw materials used in the manufacture of the metal crowns were tinplate
and steel, which were readily available from a number of suppliers.
As a result of the Sale of the Metal Crown Assets, the Company no longer
operates its Metal Crown Business.
PRINCIPAL PRODUCTS AND MARKETS; SALES AND CUSTOMERS
Plastic closures are sold to customers in the pharmaceutical, food,
distilled spirits, toiletries and cosmetics and household chemical industries.
Prescription plastic closures and containers and glass prescription bottles are
sold to drug wholesalers, drug chains and independent pharmacists. Plastic
bottles and jars are sold to customers in the pharmaceutical and toiletries and
cosmetics industries. The products of the Company are sold nationally,
principally by the Company's sales force.
No customer accounted for more than 10% of the Company's net sales in 1996,
1995, 1994, 1993 or 1992.
In 1996, the Plastic Products Business accounted for all of the Company's
net sales. The Plastic Products Business accounted for approximately 79% of the
Company's total net sales in 1995. The Consumer Products Business accounted for
approximately 21% of the Company's total net sales in 1995. Of the Company's
total net sales in 1994, the Plastic Products Business accounted for
approximately 77% and the Consumer Products Business accounted for approximately
23% (the Home Canning Supplies Business represented substantially all of the
Consumer Products Business. The Consumer Products Business sold its products
primarily through food brokers to grocery retailers, food wholesalers and mass
merchandisers).
The Plastic Products segment accounted for approximately 77% of the
Company's total net sales in 1993 and the Consumer Products Business accounted
for approximately 23% of the Company's total net sales in 1993.
In 1992, the Plastic Products Business accounted for approximately 73% of
the Company's total net sales from the Continuing Businesses and the Consumer
Products Business accounted for approximately 27% of the Company's total net
sales.
COMPETITION
Competition in the markets in which the Company operates is highly
fragmented and the Company has a number of large competitors who compete for
sales on the basis of price, service and quality of product. The Company
believes that it is one of the three largest manufacturers of child-resistant
plastic closures. The Company has one major competitor in the market for
prescription plastic closures and containers and glass prescription bottles, who
has substantially larger market share than the Company. The Company also
believes it is the largest domestic manufacturer of plastic closures
incorporating a tamper-evident feature for the liquor market and that it has
been one of the largest suppliers of single and double walled jars to the
personal care and cosmetic markets.
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<PAGE>
Previously, the Company's one major competitor in the Home Canning Supplies
Business was Alltrista Corporation. At the time, the Company believed that it
had a significant share of the market for home canning caps, lids and jars.
Similarly, prior to the Sale of the Glass Container Assets in 1992, the
Company's one major competitor in the Home Canning Supplies Business was Ball.
The Company believed in 1992 that it had a significant share of the market for
home canning caps, lids and jars.
BACKLOG
The Company does not believe that recorded sales backlog is or has been a
significant factor in its business.
RAW MATERIALS AND SUPPLIES; FUEL AND ENERGY MATTERS
The primary raw materials used by the Company are resins. The Company has
historically been able to obtain adequate supplies of resins from a number of
sources. However, since resins are derived from petroleum or fossil fuel,
shortages of petroleum or fossil fuel could affect the supply of resins. From
time to time, the Company has experienced substantial fluctuations in the cost
of resin. To the extent that the Company is unable to pass on resin cost
increases, the cost increases could have a significant impact on the results of
operations of the Company. The Company, consistent with industry practice, is
generally able to pass through resin cost increases for all product lines.
However, in times of rapidly increasing resin prices, as occurred in late 1994
and during the first half of 1995, the Company's ability to pass through the
full impact of resin price increases on a timely basis is limited; although in
1992 and 1993, the majority of the Company's sales of Plastic Products were made
pursuant to agreements that provided for increases in the cost of resin to be
passed on to the customer.
Prior to the Sale of the Glass Container Assets, the Company purchased glass
jars for its Home Canning Business from a single supplier under a multi-year
contract. The Company believed that it could obtain adequate supplies of glass
jars from alternate sources at reasonable prices if its current supply was
interrupted. In addition to glass jars, the primary raw material used by the
Company's Home Canning Supplies Business in the manufacture of its caps and lids
was tinplate. During 1992, 1993 and 1994, the Company was able to obtain
adequate supplies of these items from a number of sources.
PRODUCT DEVELOPMENT, ENGINEERING, PATENTS AND LICENSING
The Company maintains active research and development, and engineering
groups. These groups are responsible for i) developing new products and
enhancements to existing products, ii) improving manufacturing technology in
order to reduce costs, and iii) ensuring that products meet stringent designed
quality standards. The Company believes that its ability to market innovative,
high-quality products provides the Company with a competitive advantage. To the
extent competitors are more successful than the Company in introducing and
marketing new products, the Company's sales and profitability could be adversely
affected.
Expenditures related to the Company's research and development group during
the years ended December 31, 1996, 1995 and 1994 were $1,991,000, $1,708,000 and
$2,110,000, respectively.
Expenditures related to the Company's engineering group during the years
ended December 31, 1996, 1995 and 1994 were $1,493,000, $1,618,000, and
$1,496,000, respectively.
Although the Company owns a number of United States patents, including
patents for its tamper-evident closures and certain of its child-resistant
closures, it is of the opinion that no one or combination of these patents is of
material importance to its business. The Company has granted licenses on some of
its patents, although the income from these sources is not material.
37
<PAGE>
In 1992, The Company carried on a product development and engineering
program with respect to its Plastic Products Business and a product development
program with respect to its Consumer Products Business. Expenditures for such
programs were not material in the year ended December 31, 1992.
ENVIRONMENTAL MATTERS; LEGISLATION
The Company is subject to laws and regulations governing the protection of
the environment, including, among others, laws and regulations governing
disposal of waste, discharges into water and emissions into the atmosphere. The
Company's expenditures for environmental control equipment in each of the last
five years have not been material and the standards required by such regulations
have not significantly affected the Company's operations.
The Company is a party or a potentially responsible party in several
administrative proceedings and lawsuits involving liability for cleanup of
certain offsite disposal facilities under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA" or "Superfund") and similar
state laws. See "Legal Proceedings."
Several states have enacted recycling laws which require consumers to
recycle certain items including containers, and which require product, container
and resin manufacturers to promote recycling efforts. These mandatory recycling
laws are not expected to have an adverse effect on the Company's business.
SEASONALITY
With respect to the Company's Continuing Operations after the sale of the
assets of the Consumer Products Business, seasonality does not have a material
effect on the operations of the Company. Prior to 1996, when the Company
operated the Consumer Products Business, its sales and earnings were usually
higher in the second and third calendar quarters and lower in the first and
fourth calendar quarters, since most of the sales by the Consumer Products
Business occurred in the second and third calendar quarters. In addition,
substantially all returns of home canning supplies occurred in the fourth
calendar quarter of each year. Because of the foregoing factors, the Company
generally recorded lower levels of profitability in the first and fourth
quarters.
Previously, the Company's Home Canning Supplies Business normally
manufactured its inventory of caps and lids in anticipation of expected orders,
and, consistent with practice followed in the industry, granted extended payment
terms to home canning customers and accepts, subject to certain limitations, the
return of unsold home canning merchandise in the fourth calendar quarter of each
year. Although demand for home canning supplies can be adversely affected by
poor crop growing conditions, such as occurred in 1993, demand for home canning
supplies tends to be stronger in times of recession or economic uncertainty.
WORKING CAPITAL
In general, the working capital practices followed by the Company are
typical of the businesses in which it operates. The seasonal nature of the
Company Consumer Products Business required periodic short-term borrowing by the
Company.
As of September 30, 1997, the Company's Revolving Credit Facility with
NationsBank met the working capital needs of the Company. The Revolving Credit
Facility permits the Company to borrow against its trade accounts receivable and
inventory and the maximum amount that can be advanced to the Company at any time
is $20,000,000.
As of December 31, 1996, the Company had an Accounts Receivable Agreement
that met the working capital needs of the Company. The Agreement permitted the
Company to sell its trade accounts receivable on a nonrecourse basis. Under the
Agreement, the maximum amount that could be advanced to the
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<PAGE>
Company pursuant to the sale of trade accounts receivable at any time was
$8,500,000. The Company retained collection and service responsibility, as agent
for the purchaser, over any receivables sold.
In 1996 and up to August 25, 1997, the Company was in default with respect
to interest coverage and net worth covenants under the Loan Agreements which
govern the unsecured Senior Notes and Bank Note issued by the Company. In
connection with the consummation of the Offer, the Company repaid all of its
existing indebtedness.
The Company received approximately $3,669,000 from the sale of real property
located in Santa Ana, California in April 1997.
As of December 31, 1995, the Company had an Accounts Receivable Agreement to
meet the seasonal working capital needs of the Company. The agreement permitted
the Company to sell its trade accounts receivable on a nonrecourse basis. Under
the agreement, the maximum amount that could be advanced to the Company pursuant
to the sale of trade accounts receivable at any time was $13,500,000, which
amount was reduced on April 15, 1996 to $10,000,000. The reduction occurred
because the sale of assets of the Consumer Products Business reduced the working
capital needs of the Company. The Company retained collection and service
responsibility, as agent for the purchaser, over any receivables sold.
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<PAGE>
PROPERTIES
The Company's manufacturing activities are conducted at the four facilities
described in the following table.
<TABLE>
<CAPTION>
BUILDING AREA
LOCATION PURPOSE OF FACILITY (SQUARE FEET)
- ------------------------------------------------------ ---------------------- -------------
<S> <C> <C>
Lancaster, Pennsylvania............................... Plastic Closure and 490,000
Container Plant;
Warehouses
Jackson, Tennessee.................................... Plastic Closure, Vial 198,000
and Bottle Plant;
Warehouse
Ahoskie, North Carolina............................... Plastic Closure Plant; 153,000
Warehouse
Bowling Green, Kentucky............................... Plastic Closure Plant; 168,000
Warehouse
</TABLE>
The Lancaster, Pennsylvania and Ahoskie, North Carolina facilities are owned
by the Company. The Jackson, Tennessee and Bowling Green, Kentucky facilities
are leased by the Company. The Company's principal executive offices are located
at 500 New Holland Avenue, Lancaster, Pennsylvania 17602. In addition, the
Company rents three area sales offices.
In the opinion of the Company's management, its manufacturing facilities are
suitable and adequate for the purposes for which they are being used.
In 1996, the Company's plastic products manufacturing facilities operated at
approximately 72% of capacity, and at 64% of capacity in 1995. In 1994, the
Company's plastic products manufacturing facilities operated at 74% of capacity
and its cap and lid manufacturing facility in Jackson, Tennessee operated at
approximately 26% of capacity, primarily because of the relocation from Chicago
(see below). In 1993, the plastic products manufac-turing facilities and the cap
and lid manufacturing facilities operated at approximately 83% and 76% of
capacity, respectively. In 1992, the Company's plastic products manufacturing
facilities operated at approximately 84% of capacity, and the cap and lid
manufacturing facilities operated at approximately 50% of capacity.
Prior to April, 1997, the Company also leased a 170,000 square foot plastic
jar and closure plant and a warehouse facility in Santa Fe Springs, California.
In 1995, the Company owned land and buildings in Santa Ana, California used in
connection with a former glass container manufacturing plant. In 1994, the
Company relocated its home canning cap and lid manufacturing operations from
Chicago, Illinois to a leased 168,000 square foot manufacturing facility in
Jackson, Tennessee (which lease was assigned to Alltrista pursuant to the Sale
of the Consumer Products Business) and permanently ceased operations in its
leased facility in Chicago.
During 1992, the Company's manufacturing activities with respect to its
Commercial Glass Container Business were conducted at the four facilities
described in the following table.
<TABLE>
<CAPTION>
BUILDING AREA
LOCATION PURPOSE OF FACILITY (SQUARE FEET)
- --------------------------------------------------- -------------------------- -------------
<S> <C> <C>
Dunkirk, Indiana................................... Glass Plant; Warehouse 638,000
Plainfield, Illinois............................... Glass Plant; Warehouse 542,000
Santa Ana, California.............................. Glass Plant; Warehouse 285,000
Sand Springs, Oklahoma............................. Glass Plant; Warehouse 271,000
</TABLE>
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<PAGE>
Pursuant to the asset purchase agreement for the Sale of the Glass Container
Assets, Ball purchased the Plainfield Plant and the Sand Spring Plant, leased
the Santa Ana Plant from the Company in 1992 and currently leases the Dunkirk
Plant from the Company. In January 1993, Ball terminated its leases of the Santa
Ana Plant. The Company sold this property in April 1997.
LEGAL PROCEEDINGS
On July 30, 1997, a purported holder of the Series D Preferred Shares filed
a complaint entitled DR. ALAN LATIES VS. KERR GROUP, INC. ET AL., Civil Action
No. 15825-NC, against the Company and its directors (the "Defendants") in the
Court of Chancery of the State of Delaware in and for New Castle County. The
complaint seeks certification of the action as a class action and declaratory
judgment that the acquisition is unfair to the holders of the Series D Preferred
Shares. In addition, the complaint seeks an order (i) enjoining the Defendants
and any entities acting in concert with them from taking any action to
consummate any of the transactions contemplated by the Merger Agreement; (ii)
awarding plaintiff and the class unspecified damages against defendants jointly
and severally and directing Defendants to account to the Class for their
profits; and (iii) awarding costs and expenses to plaintiff including reasonable
attorneys' fees. Defendants believe that the suit is without merit and intend to
defend the suit vigorously.
On February 11, 1997, the State Teachers Retirement System ("Teachers")
filed and served a complaint against the Company for unlawful detainer of
certain premises located at 1840 Century Park East, Los Angeles, California, the
Company's former principal executive offices (TEACHERS V. KERR GROUP, INC., ET
AL., No. BC165 718, Superior Court of California, County of Los Angeles). The
complaint seeks, among other remedies, past due rent in the amount of $44,915
and damages in the amount of $1,512 per day. On February 18, 1997, after the
Company relinquished possession of the premises, Teachers agreed that the
Company need not file an answer to the complaint. However, counsel for Teachers
advised that Teachers may elect to amend the complaint to state a claim for
breach of contract. The Company and Teachers are currently in settlement
negotiations. There can be no assurance, however, that settlement will be
reached or that settlement will be reached on the terms currently being
proposed. A reserve has been established for the estimated cost of settlement.
In November 1996, the Company was named a third-party defendant in ADHESIVES
RESEARCH, INC., ET AL. V. ALFORD INDUSTRIES, ET AL. v. A&A Waste Oil Co., Inc.,
et al., No. 1:CV-95-1975 (M.D.Pa.). This suit was brought in the United States
District Court for the Middle District of Pennsylvania initially by numerous
plaintiffs seeking to recover from named defendants their costs to clean up
environmental contamination at a site in Newberry Township, York County,
Pennsylvania known as the Industrial Solvents & Chemical Company ("ISCC") site.
Certain defendants identified other parties, including the Company, as third-
party defendants in this litigation. The third-party complaint alleges that the
Company and other parties generated hazardous substances that have been or are
threatened to be released at the ISCC site. The third-party complaint further
alleges claims for cost recovery and contribution under federal and state law
for costs incurred or to be incurred in connection with those releases or
threatened releases. The Company is participating in negotiations to resolve its
liability through payment based on a formula that takes into account the
Company's allocated share of liability. The Company has already paid certain
past costs associated with cleanup of the ISCC site. Under current settlement
proposals, the Company's remaining payment would be approximately $20,000. There
can be no assurance, however, that settlement will be reached or that settlement
will be reached on the terms currently being proposed. A reserve has been
established for the estimated cost of settlement.
As the Company reported in its Quarterly Report on Form 10-Q for the quarter
ended June 30, 1990, on April 12, 1990, the State of New Jersey, Department of
Environmental Protection and Energy ("NJDEPE"), filed a lawsuit in the United
States District Court for the District of New Jersey against the Company, among
others, entitled STATE OF NEW JERSEY, DEPARTMENT OF ENVIRONMENTAL PROTECTION V.
GLOUCESTER ENVIRONMENTAL MANAGEMENT SERVICES, INC., ET AL., No. 84-0152
(D.N.J.). The suit alleges that the Company was a "generator" of hazardous
wastes and other hazardous substances which were disposed of at the
41
<PAGE>
Gloucester Environmental Management Services, Inc. ("GEMS") facility in the
Township of Gloucester. The suit seeks cleanup costs, compensatory and treble
damages, and a declaration that the Company and others are responsible for
NJDEPE's past and future response costs at the GEMS site. On March 27, 1990,
NJDEPE issued a Directive to the Company and other parties pursuant to the New
Jersey Spill Compensation and Control Act, N.J.S.A. 58:10-23.11 et seq. Pursuant
to the Directive, the Company and other parties have been ordered to undertake
the second phase of remedial action at the site, including the construction and
operation of a groundwater treatment system and operation of the remedial action
performed in the first phase, and to reimburse NJDEPE's alleged past and future
response costs. The estimated cost of second phase remedial action related to
the GEMS site is approximately $20 million. The amount that the NJDEPE is
seeking as reimbursement for past costs and damages is approximately $10
million. In October, 1995 the Company entered into a de minimis settlement
agreement with the State of New Jersey and the United States to resolve all
outstanding claims. In exchange for a payment of approximately $205,000, the
Company will be dismissed from the lawsuit in accordance with the terms of a
Consent Decree which is expected to be entered by the Court within six months.
The Company has not admitted any liability for disposal of wastes at the GEMS
site. The Company is one of approximately ninety companies participating in the
de minimis settlement. One of the Company's insurance carriers has agreed to pay
the cost of settlement and defense of this matter, subject to an agreement to
arbitrate whether coverage is available for approximately $75,000 in settlement
funds. Thus, the Company's maximum exposure in connection with this site is
$75,000, however, the Company believes it will incur no costs related to this
site.
As the Company reported in its Quarterly Report on Form 10-Q for the quarter
ended June 30, 1990, in March 1986, the Company and other parties were
designated by the United States Environmental Protection Agency ("EPA") as
potentially responsible parties ("PRPs") responsible for the cleanup of certain
hazardous wastes that have been disposed of at the Wayne Waste Oil ("WWO") site
located near Columbia City, Indiana. In October 1986, the Company and other PRPs
entered into a Consent Order with the EPA which allowed the PRPs to complete a
Remedial Investigation and Feasibility Study for the WWO site. In March 1990,
the EPA issued a Record of Decision ("ROD") for the site. The ROD documents the
EPA's cleanup plan for the site, which includes capping the former municipal
landfill, groundwater extraction and treatment, and soil vapor extraction. On
July 20, 1992, a Consent Decree between the EPA and the PRPs at the site was
entered in the United States District Court for the Northern District of
Indiana, captioned United States v. Active Products Corp., No. F91-00247.
Remedial construction has been completed, however, operation and maintenance
obligations remain. At this time the Company does not anticipate further
expenditures in connection with this matter.
As the Company reported in its Quarterly Report on Form 10-Q for the quarter
ended June 30, 1990, in September 1985, the Company and other parties were
designated by the EPA as PRPs responsible for the cleanup of certain hazardous
wastes that have been disposed of at the Northside Sanitary Landfill ("NSL")
site located northwest of Indianapolis, Indiana. The EPA has combined the NSL
site with the adjacent Environmental Conservation and Chemical Corporation
("ECC") site. On November 12, 1991, a Consent Decree between the EPA and the
PRPs at the site was entered by the United States District Court for the
Southern District of Indiana, captioned United States v. Aluminum Corporation of
America, No. IP91 591C. Based upon the Company's percentage share of the total
amount of wastes disposed of at the site, the Company estimates its remaining
share of the costs under the Consent Decree will be approximately $5,000. A
reserve has been established for such costs.
As the Company reported in its Quarterly Report on Form 10-Q for the quarter
ended June 30, 1990, in November 1981, the EPA advised the Company that it was
one of several companies that had disposed of wastes at the Carolawn Company
("CC") site located in Chester County, South Carolina. At the time of notice,
the EPA had completed certain cleanup activities at the CC site and requested
that the Company and other parties which had disposed of wastes at the site
contribute to the cost of these activities. On August 31, 1983, an action,
UNITED STATES OF AMERICA V. CAROLAWN COMPANY, INC., ET AL., No. 83-2162-0, was
42
<PAGE>
commenced in the United States District Court for the District of South
Carolina. On June 23, 1988, a Partial Consent Decree was entered in the United
States District Court for the District of South Carolina (No. 83-2162-0). On
December 4, 1991, a Partial Consent Decree For Remedial Design And Construction
at the CC site was entered by the United States District Court for the District
of South Carolina (No. 0-91-2177-0). Negotiations are currently underway to
amend the Partial Consent Decree to address operations and maintenance of the
remedy. Based upon the Company's percentage share of the total amount of wastes
disposed of at the CC site, the Company estimates its share of operation and
maintenance costs will be approximately $16,500. A reserve has been established
for such costs.
As the Company reported in its Quarterly Report on Form 10-Q for the quarter
ended June 30, 1990, in February 1986, the Company was advised by the EPA that
Phoenix Closures, inc. ("Phoenix") was one of several companies which disposed
of wastes at the American Chemical Services ("ACS") site located near Griffith,
Indiana. The EPA indicated that the wastes were disposed of by Phoenix's Chicago
plant between 1955 and 1975. The Company has advised the EPA that it did not
lease the Chicago plant during the period from 1955 to 1975. The Company has
also advised Phoenix of its responsibilities with respect to environmental
matters, including the environmental matters at the ACS site, under the lease
relating to the Chicago plant.
Management believes, based on current knowledge and the advice of the
Company's counsel, that the outcome of the litigation and governmental
proceedings discussed in the preceding paragraphs will not have a material
adverse effect on the Company.
43
<PAGE>
MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and Series D Preferred Shares were both listed on
the New York Stock Exchange under the symbols "KGM" and "KGMD", respectively,
until August 27, 1997, when the New York Stock Exchange suspended trading in the
Common Stock and the Series D Preferred Shares and moved to delist the Shares.
As of September 4, 1997, there were approximately 897 and 39 holders of record
of the Company's Common Stock and Series D Preferred Shares, respectively. The
following table sets forth, for each of the calendar quarters indicated, the
high and low reported sales price per share of Common Stock and of Series D
Preferred Shares on the Common Stock and Series D Preferred Shares on the New
York Stock Exchange Composite Tape and quarterly cash dividends based on
published financial sources:
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
--------------------------- ----------------------------
CASH CASH
CALENDAR YEAR HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
- ---------------------------------------------------------- ------- ------- ----- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
1997
First Quarter........................................... $ 2 5/8 $ 1 7/8 $-- $ 7 5/8 $ 4 1/4 $--
Second Quarter.......................................... 4 1/4 2 -- 14 4 1/4 --
Third Quarter(through August 26, 1997).................. 5 1/2 4 5/8 -- 15 11 1/2 --
1996
First Quarter........................................... $ 9 7/8 $ 5 3/4 $-- $20 $17 3/4 $.425
Second Quarter.......................................... 6 1/4 3 3/4 -- 18 1/8 13 1/2 --
Third Quarter........................................... 4 3/8 2 3/8 -- 14 12 1/8 --
Fourth Quarter.......................................... 4 3/8 2 1/8 -- 12 3/8 7 1/2 --
1995
First Quarter........................................... $ 9 3/8 $ 6 7/8 $-- $20 5/8 $19 1/8 $.425
Second Quarter.......................................... 8 3/8 7 1/8 -- 20 1/8 19 1/4 .425
Third Quarter........................................... 8 1/2 7 -- 20 1/4 19 .425
Fourth Quarter.......................................... 10 3/8 6 1/2 -- 20 16 3/8 .425
</TABLE>
The cumulative Series D Preferred shares annual dividend requirement is
$828,580, or $1.70 per share. The Company has not declared a dividend on its
Series D Preferred Shares since the first quarter of 1996. The cumulative amount
of undeclared dividends as of August 26, 1997 is $1,174,000, or $1.70 per share.
Under the terms of the Merger Agreement, the Company is not permitted to declare
or pay dividends on either the Common Stock or the Series D Preferred Shares. No
portion of the cumulative dividends on the Series D Preferred Shares dividend
requirement will be paid as part of or in connection with the Merger.
44
<PAGE>
SELECTED FINANCIAL DATA
Set forth below is certain selected consolidated financial and other
information with respect to the Company, excerpted or derived from the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996 and its
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, both
filed with the Commission pursuant to the Exchange Act.
The following summary is qualified in its entirety by reference to such
reports and other documents and all of the financial information (including any
related notes) contained therein. Such reports and other documents may be
inspected and copies may be obtained from the Commission in the manner set forth
in "AVAILABLE INFORMATION."
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR
ONE MONTH EIGHT MONTH NINE MONTH PREDECESSOR
PERIOD ENDED PERIOD ENDED PERIOD ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, AUGUST 26, SEPTEMBER 30, ------------------------------------------
1997 1997 1996 1996 1995 1994 1993
--------------- ------------- -------------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................. $ 9,819 $ 76,488 $ 80,488 $ 107,369 $ 109,187 $ 106,792 $ 98,533
Gross profit.......................... 2,429 18,152 17,431 24,305 24,582 33,012 29,121
Earnings (loss) from continuing
operations before interest and
income taxes (a).................... 708 (1,385) (11,929) (12,722) (1,416) 7,152 6,562
Earnings (loss) from continuing
operations before income taxes...... 469 (5,295) (15,473) (17,425) (6,024) 3,534 2,576
Provision (benefit) for income taxes
(b)................................. 183 -- (2,189) 6,837 (2,401) 1,441 (711)
------ ------------- -------------- --------- --------- --------- ---------
Earnings (loss) from continuing
operations.......................... 286 (5,295) (13,284) (24,262) (3,623) 2,093 1,865
Earnings (loss) from discontinued
operations--
Consumer Products Business (c)...... -- -- 1,564 1,969 (1,684) 1,311 (2,198)
Metal Crown Business (d)............ -- -- (133) -- -- -- --
Extraordinary loss on retirement of
debt................................ -- (4,419) -- -- -- -- (1,300)
------ ------------- -------------- --------- --------- --------- ---------
Net earnings (loss)................... 286 (9,714) (11,853) (22,293) (5,307) 3,404 (1,633)
Preferred stock dividends (e)......... -- 552 621 829 829 829 829
------ ------------- -------------- --------- --------- --------- ---------
Net earnings (loss) applicable to
common stockholders................. 286 (10,266) (12,474) $ (23,122) $ (6,136) $ 2,575 $ (2,462)
------ ------------- -------------- --------- --------- --------- ---------
------ ------------- -------------- --------- --------- --------- ---------
Earnings (loss) per common share:
Earnings (loss) per common share
from continuing operations
(a)(b)............................ $ .06 ($ 1.47) ($ 3.54) $ (6.38) $ (1.16) $ 0.34 $ 0.28
Earnings (loss) per common share
from discontinued operations--
Consumer Products Business (c).... -- -- 0.37 0.50 (0.44) 0.36 (0.60)
Metal Crown Business (d).......... -- -- -- -- -- -- --
Extraordinary loss per common
share............................. -- (1.11) -- -- -- -- (0.35)
------ ------------- -------------- --------- --------- --------- ---------
Net earnings (loss) per common share.. .06 (2.58) (3.17) $ (5.88) $ (1.60) $ 0.70 $ (0.67)
------ ------------- -------------- --------- --------- --------- ---------
------ ------------- -------------- --------- --------- --------- ---------
Cash dividends per common share....... $ -- $ -- $ -- $ -- $ -- $ -- $ --
<CAPTION>
1992
---------
<S> <C>
Net sales............................. $ 92,557
Gross profit.......................... 25,731
Earnings (loss) from continuing
operations before interest and
income taxes (a).................... 3,953
Earnings (loss) from continuing
operations before income taxes...... 287
Provision (benefit) for income taxes
(b)................................. 119
---------
Earnings (loss) from continuing
operations.......................... 168
Earnings (loss) from discontinued
operations--
Consumer Products Business (c)...... 2,419
Metal Crown Business (d)............ (5,284)
Extraordinary loss on retirement of
debt................................ --
---------
Net earnings (loss)................... (2,697)
Preferred stock dividends (e)......... 829
---------
Net earnings (loss) applicable to
common stockholders................. $ (3,526)
---------
---------
Earnings (loss) per common share:
Earnings (loss) per common share
from continuing operations
(a)(b)............................ $ (0.18)
Earnings (loss) per common share
from discontinued operations--
Consumer Products Business (c).... 0.66
Metal Crown Business (d).......... (1.44)
Extraordinary loss per common
share............................. --
---------
Net earnings (loss) per common share.. $ (0.96)
---------
---------
Cash dividends per common share....... $ --
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
AT PREDECESSOR PREDECESSOR
SEPTEMBER AT YEARS ENDED DECEMBER 31,
30, SEPTEMBER 30, -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ------------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
Net property, plant and
equipment................. $ 38,828 $ 40,180 $ 38,890 $ 46,818 $ 48,341 $ 40,424 $ 36,383
Total assets................ 148,257 99,724 85,526 119,497 122,660 115,866 102,501
Senior debt (f)............. 31,667 45,004 45,044 50,000 50,000 50,000 --
Subordinated long-term
debt...................... 0 0 -- -- -- -- 40,000
Stockholders' equity before
pension adjustment........ 50,286 21,987 11,547 34,047 38,260 34,899 36,464
Excess of additional pension
liability over
unrecognized prior service
cost, net of tax
benefits.................. -- (8,623) (8,245) (10,140) (5,207) (6,835) --
----------- ------------- --------- --------- --------- --------- ---------
Stockholders' equity........ $ 50,286 $ 13,364 $ 3,302 $ 23,907 $ 33,053 $ 28,064 $ 36,464
----------- ------------- --------- --------- --------- --------- ---------
----------- ------------- --------- --------- --------- --------- ---------
Weighted average number of
common shares
outstanding............... 5,000 3,933 3,933 3,842 3,674 3,669 3,675
</TABLE>
- ----------------------------------
(a) The loss from continuing operations before interest and income taxes for the
nine month period ended September 30, 1997 includes pretax financing costs
of $2,396,000. The loss from continuing operations before interest and
income taxes for the nine month period
45
<PAGE>
ended September 30, 1996 includes pretax restructuring costs of $9,436,000
and financing costs of $245,000. The loss from continuing operations before
interest and income taxes for 1996 includes pretax restructuring costs of
$10,011,000 and financing costs of $1,600,000. See Note 3 of notes to
financial statements for further discussion. The loss from continuing
operations before interest and income taxes for 1995 includes a pretax loss
on revaluation of land of $1,000,000.
(b) The provision for income taxes for 1996 includes a charge of $13,691,000
($3.48 per common share) to provide a valuation reserve against its deferred
income tax asset. The benefit for income taxes for 1993 includes a tax
benefit of $369,000 ($0.10 per common share) related to a reduction in the
income tax valuation reserve. See Note 5 of notes to consolidated financial
statements for further information.
(c) Gain on sale of discontinued operations for 1996 include a $2,102,000
after-tax gain ($0.53 per common share) on the sale of the manufacturing
assets of the Consumer Products Business. See Note 4 of notes to financial
statements. The 1993 loss for the Consumer Products Business includes a
$2,754,000 after-tax loss ($0.75 per common share) associated with the
relocation of the Company's home canning cap and lid manufacturing
operations.
(d) Loss from discontinued operations--Metal Crown Business in 1992 includes a
$2,600,000 after-tax loss ($0.71 per common share) on sale of the business.
(e) The Company has not declared a dividend on its Class B, Series D Preferred
Stock since the first quarter of 1996. The cumulative amount of undeclared
dividends as of December 31, 1996 is $622,000. Under the terms of an
agreement with its lenders, the Company is not permitted to declare or pay
any dividends on its preferred stock at December 31, 1996.
(f) As of December 31, 1996 and 1995, the Company's outstanding senior debt was
classified as a current liability because the Company was in default of
certain financial covenants for which waivers have been received for a
period of less than one year.
CERTAIN PROJECTIONS
KERR GROUP, INC.
ESTIMATED FINANCIAL STATEMENT ITEMS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Net Sales........................................................................................ $ 114.1 $ 119.9 $ 130.2
Earnings (Loss) Before Interest and Taxes........................................................ $ 6.7 $ 10.3 $ 12.0
Total Current Assets............................................................................. $ 30.8 $ 31.3 $ 33.9
Total Assets..................................................................................... 80.7 78.0 78.0
Total Current Liabilities........................................................................ 11.3 12.9 14.0
Long-Term Pension and SERP Liabilities........................................................... 12.1 8.4 4.5
Long-Term Retiree Health Liability(a)............................................................ 2.6 2.6 2.6
Other Long-Term Liabilities...................................................................... 1.1 1.1 1.1
Total Liabilities................................................................................ 73.0 68.4 65.4
Capital Expenditures............................................................................. $ 9.3 $ 9.7 $ 11.2
Reduction in Pension Liability................................................................... 1.8 3.7 3.8
Payments associated with restructuring, net of tax............................................... 1.7 0.0 0.0
</TABLE>
- ------------------------
(a) Does not include the unaccrued portion of the Accumulated Benefit Obligation
In Excess Of Plan Assets, which at December 31, 1996 was $6.8 million. The
Accumulated Benefit Obligation In Excess Of Plan Assets as disclosed in the
Notes to the Company's Financial Statements at and for the year ended
December 31, 1996 equaled $9.3 million.
In June 1997, the Company provided Fremont with revised forecasts for the
fiscal year ending December 31, 1997 which incorporated actual financial results
through April 1997. These revised forecasts showed increased net sales of
approximately $116.6 million but reduced profitability, with Earnings Before
Interest and Taxes forecast at approximately $6.2 million. The forecasts for the
fiscal years ending December 31, 1998 and 1999 were not revised.
THE PROJECTIONS WERE NOT PREPARED WITH A VIEW TO PUBLIC DISCLOSURE OR COMPLIANCE
WITH PUBLISHED GUIDELINES OF THE COMMISSION OR THE GUIDELINES
46
<PAGE>
ESTABLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS REGARDING
PROJECTIONS OR FORECASTS AND ARE INCLUDED HEREIN ONLY BECAUSE SUCH INFORMATION
WAS PROVIDED TO FREMONT. THESE FORWARD-LOOKING STATEMENTS (AS THAT TERM IS
DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995) ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE PROJECTIONS. THE PROJECTIONS REFLECT NUMEROUS ASSUMPTIONS,
ALL MADE BY MANAGEMENT OF THE COMPANY, WITH RESPECT TO INDUSTRY PERFORMANCE,
GENERAL BUSINESS, ECONOMIC, MARKET AND FINANCIAL CONDITIONS AND OTHER MATTERS,
ALL OF WHICH ARE DIFFICULT TO PREDICT, MANY OF WHICH ARE BEYOND THE COMPANY'S
CONTROL AND NONE OF WHICH WERE SUBJECT TO APPROVAL BY FREMONT OR THE PURCHASER.
ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT THE ASSUMPTIONS MADE IN PREPARING
THE PROJECTIONS WILL PROVE ACCURATE, AND ACTUAL RESULTS MAY BE MATERIALLY
GREATER OR LESS THAN THOSE CONTAINED IN THE PROJECTIONS. THE INCLUSION OF THE
PROJECTIONS HEREIN SHOULD NOT BE REGARDED AS AN INDICATION THAT ANY OF FREMONT,
THE PURCHASER, THE COMPANY OR THEIR RESPECTIVE AFFILIATES OR REPRESENTATIVES
CONSIDERED OR CONSIDER THE PROJECTIONS TO BE A RELIABLE PREDICTION OF FUTURE
EVENTS, AND THE PROJECTIONS SHOULD NOT BE RELIED UPON AS SUCH. NONE OF FREMONT,
THE PURCHASER, THE COMPANY AND ANY OF THEIR RESPECTIVE AFFILIATES OR
REPRESENTATIVES HAS MADE, OR MAKES ANY REPRESENTATION TO ANY PERSON REGARDING
THE INFORMATION CONTAINED IN THE PROJECTIONS AND NONE OF THEM INTENDS TO UPDATE
OR OTHERWISE REVISE THE PROJECTIONS TO REFLECT CIRCUMSTANCES EXISTING AFTER THE
DATE WHEN MADE OR TO REFLECT THE OCCURRENCE OF FUTURE EVENTS EVEN IN THE EVENT
THAT ANY OR ALL OF THE ASSUMPTIONS UNDERLYING THE PROJECTIONS ARE SHOWN TO BE IN
ERROR. THESE PROJECTIONS HAVE NOT BEEN COMPILED, REVIEWED, OR EXAMINED BY THE
COMPANY'S INDEPENDENT AUDITORS AND, THEREFORE, THE INDEPENDENT AUDITORS PROVIDE
NO FORM OF ASSURANCE THEREON.
47
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS--NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 COMPARED TO
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996
RESULTS OF OPERATIONS
As of August 27, 1997, the purchase method of accounting was used to record
the acquisition of the Company. Such accounting generally results in increased
amortization and depreciation reported in future periods. Accordingly, the
accompanying financial statements of the predecessor and the Company are not
comparable in all material respects since those financial position, results of
operations, and cash flows of the Company before and after application of the
purchase method of accounting.
CONTINUING OPERATIONS
Net sales for the nine month period ended September 30, 1997 were
$86,307,000 as compared to $80,488,000 for the nine month period ended September
30, 1996, an increase of $5,819,000 or 7%. The increase in net sales for the
nine month period ended September 30, 1997 over the comparable period in 1996
was due primarily to higher unit sales, which accounted for $3,364,000 of the
increase, and improved pricing and product mix of $2,455,000 related to
prescription packaging and pharmaceutical packaging.
Cost of sales for the nine month period ended September 30, 1997 were
$65,726,000 as compared to $63,057,000 for the nine month period ended September
30, 1996, an increase of $2,669,000 or 4%. The increase in cost of sales was
primarily the result of higher unit sales.
Gross profit as a percent of net sales for the nine month period ended
September 30, 1997 increased to 24% as compared to 22% for the nine month period
ended September 30, 1996 due, primarily, to lower manufacturing costs,
particularly because of higher production levels, and, secondarily, improved
pricing of prescription packaging and pharmaceutical packaging.
Research and development, selling, warehouse, plant and general
administrative expenses decreased $992,000 or 5% during the nine month period
ended September 30, 1997. The decrease was primarily due to lower costs
resulting from the restructuring of the Company.
During the nine month period ended September 30, 1997, the Company incurred
costs of $2,396,000 for professional fees in connection with its refinancing
efforts consisting primarily of fees paid to the owners of the Company's
unsecured debt and fees paid to the Company's financial and legal advisors.
During the nine month period ended September 30, 1996, the Company incurred
costs of $245,000 for professional fees related to its refinancing efforts.
During the first quarter of 1996, the Company recorded a pretax loss of
$7,500,000 for certain costs associated with the restructuring of the Company,
which included moving the corporate headquarters from Los Angeles, California to
Lancaster, Pennsylvania and relocating the wide-mouth jar operations from Santa
Fe Springs, California to Bowling Green, Kentucky. The pretax loss consisted of
reserves for i) severance, workers' compensation and insurance continuation
costs of $3,000,000, ii) costs associated with subleasing the two facilities of
$2,300,000, iii) asset retirements of $1,600,000 and iv) other costs of
$600,000.
In addition, during the nine month period ended September 30, 1996, the
Company incurred an unusual pre-tax loss of $1,936,000 for restructuring costs
primarily related to relocation of personnel and equipment.
Net interest expense increased $605,000 during the nine month period ended
September 30, 1997 as compared to the same period in 1996, primarily as a result
of the Company's unsecured debt accruing interest at the default rate beginning
in the second quarter of 1997.
48
<PAGE>
The loss before income taxes decreased $10,647,000 during the nine month
period ended September 30, 1997 as compared to the same period in 1996, due
primarily to i) the $9,436,000 pretax loss in 1996 related to the restructuring,
ii) lower manufacturing costs in 1997 and iii) improved pricing of prescription
packaging and pharmaceutical packaging.
The benefit for income taxes decreased $2,372,000 during the nine month
period ended September 30, 1997 as compared to the same period in 1996,
primarily as a result of the valuation reserve recorded against the Company's
net deferred income tax asset during 1997. The increase in the valuation reserve
eliminated the tax benefit the Company would have generated during the first
nine months of 1997, and was required because of the continuing unwaived
convenant defaults under loan agreements governing the Company's $50,900,000
principal amount of unsecured debt. During the third and fourth quarters of
1996, a valuation reserve was provided to eliminate the tax benefit recorded
during the first nine months of 1996.
At November 21, 1997, the Company had cash and cash equivalents of
$1,000,000. The Company had borrowed $6,800,000 under its revolving credit
agreement and had additional advances available under the agreement of
$8,473,000.
At December 31, 1996, the Company had unused sources of liquidity consisting
of cash and cash equivalents of $9,107,000, additional advances available under
the Receivable Agreement of $3,965,000, a tax net operating loss carryforward of
$28,300,000, a minimum tax credit carryforward of $1,068,000 and other tax
credit carryforwards of $417,000.
DISCONTINUED OPERATIONS
During the first quarter of 1996, the Company sold the manufacturing assets
of the Consumer Products Business for a purchase price of $14,417,000. The
Company recorded a pretax gain of $2,607,000 ($1,564,000 after-tax) in
connection with this sale. This pretax gain has been reduced by $5,800,000 of
reserves for (i) retiree health care and pension expenses of $3,800,000, (ii)
severance pay, workers compensation claims and insurance continuation costs of
$1,000,000, (iii) professional fees of $500,000, (iv) asset retirements of
$300,000, and (v) other costs of $200,000. The ultimate required amount of the
reserves related to the disposal of the Consumer Products Business is expected
to approximate the original estimate.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In the first quarter of 1997, the Financial Accounting Standards Board
adopted Statement No. 128, Earnings per Share (FASB No. 128) and Statement No.
129, Disclosure of Information about Capital Structure (FASB No. 129). FASB No.
128 simplifies the computation of earnings per common share by replacing primary
and fully diluted presentations with the new basic and diluted disclosures. FASB
No. 129 establishes standard for disclosing information about an entity's
capital structure. These statements will be adopted by the Company effective
December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1997, the principal sources of cash were
$3,669,000 received in April from the sale of real estate in Santa Ana,
California and borrowings under the Company's Secured Revolving Credit Facility
of $3,758,000. The principal uses of cash were to fund i) capital expenditures
of $7,961,000, ii) a reduction in the level of advances under the Company's
Accounts Receivable Facility of $3,861,000, iii) cash costs of the Company's
financing efforts of $3,742,000 and iv) cash costs of the restructuring of
$1,535,000.
During the first nine months of 1996, the principal source of cash was
$14,417,000 received from the sale of the manufacturing assets of the Consumer
Products Business. The principal uses of cash were to
49
<PAGE>
fund i) pretax losses, ii) net debt retirements of $5,600,000 and iii) cash
costs of the restructuring of $4,064,000.
The Company has not declared a dividend on its Class B, Series D Preferred
Stock since the first quarter of 1996. The cumulative amount of undeclared
dividends as of August 26, 1997 was $1,174,000. Under accounting rules, such
dividends are not accrued until declared, however, for financial reporting
purposes the amount of such dividends are shown on the face of the income
statement as a deduction to arrive at net earnings (loss) applicable to common
stockholders.
On August 26, 1997, Parent and Purchaser completed the Offer, and Parent
acquired the Common Stock and Preferred Stock from shareholders who tendered
their shares pursuant to the Offer. Subject to the terms of the Merger
Agreement, shares of Common Stock and Preferred Stock not tendered will be
converted into the right to receive $5.40 net per share of Common Stock and
$12.50 net per share of Preferred Stock pursuant to the Merger.
On August 24, 1997, the Company and the Pension Benefit Guaranty Corporation
(the "PBGC") entered into a definitive agreement pursuant to which the PBGC
agreed to dismiss its lawsuit now pending before the United States District
Court for the Eastern District of Pennsylvania seeking to terminate the
Company's pension plan, withdraw its Notice of Determination and forbear from
instituting new proceedings with respect to the acquisition. Pursuant to the
terms of the definitive agreement, the Company agreed to (i) future enhanced
pension plan contributions, (ii) grant to the PBGC a second lien in the amount
of $40.7 million secured by substantially all of the assets of the Company,
(iii) various restrictions on future secured indebtedness and (iv) provisions
regarding notice of certain events. The definitive agreement became effective
upon the consummation of the Offer.
In connection with the Merger and the consummation of the Offer, the Company
entered into a Loan and Security Agreement, dated as of August 26, 1997 (the
"Loan and Security Agreement"), for an aggregate amount of $62 million. The
credit facilities were used, among other things, (i) to refinance the
outstanding principal balance of funded indebtedness (including premium, and
accrued and unpaid interest) of the Company at the time of the consummation of
the Offer, (ii) to pay a portion of the fees and expenses incurred in connection
with the Offer and (iii) to provide for working capital and general corporate
purposes of the Company after the consummation of the Offer. The credit
facilities are guaranteed by the tangible and intangible assets of the Company.
Pursuant to the Loan and Security Agreement the credit facilities consisted
of a $20 million revolving credit facility (which includes a sublimit for the
issuance of standby and commercial letters of credit) (the "Revolving Credit
Facility"), a $32 million term loan facility (the "Term Loan Facility") and a
$10 million equipment acquisition facility (the "CAPEX Facility" and together
with the Revolving Credit Facility and the Term Loan Facility, the "Senior
Credit Facilities").
The Revolving Credit Facility bears interest at a rate equal to LIBOR plus
225 basis points or the Base Rate (defined as the higher of (i) the bank's prime
rate and (ii) the Federal Funds rate), at all times subject to applicable
maximum legal interest rates. The Term Loan Facility and the CAPEX Facility bear
interest at a rate equal to LIBOR plus 275 basis points or the Base Rate plus 50
basis points, in each case at all times subject to applicable maximum legal
interest rates. The Company may select interest periods of 1, 2, 3 or 6 months
for LIBOR loans, subject to availability. A default rate of interest applies on
all loans in the event of default at a rate per annum of 2% above the applicable
interest rate.
The Revolving Credit Facility terminates and all amounts outstanding
thereunder will be due and payable in full five years from the closing of the
Offer (the "Closing"). The Term Loan Facility is subject to repayment according
to scheduled amortization, with the final payment of all amounts outstanding,
plus accrued interest, due five years from the Closing or upon termination of
the Revolving Credit Facility, whichever is earlier. The CAPEX Facility also is
subject to amortization, with the final payment of all amounts outstanding, plus
accrued interest due five years from the Closing or upon termination of the
50
<PAGE>
Revolving Credit Facility, whichever is earlier. The Loan and Security Agreement
provides for prepayment of the Senior Credit Facilities provided that the
Company pays liquidated damages.
On August 26, 1997, the Company refinanced all of its existing indebtedness,
including its 9.45% Senior Series A and 8.99% Series B Notes and its credit
facility with Madeleine L.L.C., through a secured credit facility with
NationsBank.
YEAR 2000
Management has initiated an enterprise-wide program to prepare the Company's
computer systems and applications for the Year 2000. The Company expects to
resolve a majority of the issues through software upgrades currently available
and hardware replacements already planned. The Company expects to incur higher
than normal internal staffing costs as well as consulting costs due to the time
constraints and tightening labor market. The Company expects to be significantly
Year 2000 ready by the end of 1998. However, there can be no assurance that the
systems of other companies which the Company relies upon will be timely
converted or that any such failure to convert by another company would not have
an adverse effect on the Company's ability to continue business in an efficient
manner.
RESULTS OF OPERATIONS--1996 COMPARED TO 1995
CONTINUING OPERATIONS
Net sales of the Company decreased 1.7% to $107,369,000 in 1996 from
$109,187,000 in 1995 due primarily to lower unit sales of tamper-evident
closures and, to a lesser degree, wide-mouth jars and closures.
The Company's manufacturing facilities operated at approximately 72% of
capacity during 1996.
Cost of sales of the Company decreased to $83,064,000 in 1996 compared to
$84,605,000 in 1995 primarily due to lower unit sales.
Gross profit as a percent of net sales increased slightly to 22.6% for 1996
as compared to 22.5% for 1995.
Research, selling, warehouse, general and administrative expenses decreased
$418,000 or 1.7% during 1996, as compared to 1995.
The loss before unusual items, interest and taxes increased to $1,111,000 in
1996 as compared to $416,000 in 1995. Although full-year results have worsened,
the trend in earnings has improved. Earnings before unusual items, interest and
taxes for the second half of 1996 improved to $2,750,000, as compared to a loss
before unusual items, interest and taxes for the first half of 1996 of
$3,861,000. This improvement was the result of reduced unit costs due to
increased production and lower costs resulting from the effects of restructuring
the Company. The loss in the first half of 1996 also reflected increased
reserves for customer rebates and inventory obsolescence.
The increase in reserves for customer rebates was due to the completion of a
detailed analysis by the Company in the first quarter of 1996 of the historical
amount and timing of customer deductions, and credit memos and other payments
issued by the Company, by customer category, which required an increase in the
accrual. The increase in reserves for inventory obsolescence is the result of
including certain additional types of closures in the calculation of the reserve
beginning in 1996, because the Company believed it represented a more accurate
measure of such contingency.
During the first quarter of 1996, the Company recorded an unusual pretax
loss of $7,500,000 for certain costs associated with the restructuring of the
Company, which included moving the corporate headquarters from Los Angeles,
California to Lancaster, Pennsylvania and relocating the wide-mouth jar
operations from Santa Fe Springs, California to Bowling Green, Kentucky. The
pretax loss consisted of
51
<PAGE>
reserves for i) severance pay, workers' compensation claims and insurance
continuation costs of $3,000,000, ii) costs associated with terminating the
leases of the two vacated facilities of $2,300,000, iii) asset retirements of
$1,600,000 and iv) other costs of $600,000. During 1996, the Company made cash
payments related to such reserves for i) severance pay and related costs of
$2,638,000, ii) costs associated with terminating the leases of the two
facilities of $478,000 and iii) other costs of $89,000.
In addition, during 1996, the Company incurred unusual pretax losses of
$2,511,000 for restructuring costs primarily related to relocation of personnel
and equipment. Accounting rules require these costs to be expensed as incurred.
The relocation of the corporate headquarters and the wide-mouth jar
manufacturing operation have been completed. The cost to complete the
restructuring is expected to approximate the original estimate. The
restructuring is expected to result in annualized pretax cost savings of
approximately $6,500,000 primarily from reduced costs for employment, rent
payments, manufacturing overhead, utilities and freight. The full benefit of
these cost savings should be realized in 1997.
During 1996, the Company incurred financing costs of $1,600,000 consisting
of i) fees paid to the Company's advisors in its negotiations with lenders, ii)
reimbursement of the lenders' fees paid to their advisors in the negotiations,
iii) certain fees associated with prospective lenders and iv) expensing of a
portion of the previously capitalized financing costs associated with the
existing debt.
Net interest expense increased $95,000 during 1996 compared to 1995.
The change in the provision for income taxes during 1996 as compared to 1995
was the result of the Company recording a charge of $13,691,000 to provide a
valuation reserve against its deferred income tax asset. The valuation reserve
was provided due to the uncertainty related to the Company's financing as
described below under "Liquidity and Capital Resources."
Due to competitive pressures, there are occasions when the Company is unable
to pass on cost increases to customers. Other than the inability on all
occasions to pass on cost increases, inflation and changes in prices did not
have a material effect on the Company's results of operations.
DISCONTINUED OPERATIONS
During 1996, the Company sold the manufacturing assets and liquidated
primarily all of the working capital of its discontinued Consumer Products
Business. In connection with such sale, the Company recorded $4,900,000 of
reserves consisting of i) severance pay, workers' compensation claims and
insurance continuation of $1,400,000, ii) retiree health care and pension
expenses of $1,200,000, iii) estimated net costs associated with elimination of
operations and liquidation of working capital of $1,100,000, iv) professional
fees of $700,000, v) asset retirements of $300,000, and vi) other costs of
$200,000. After deductions for such reserves, the Company incurred in 1996 a
pretax gain of $3,503,000 ($2,102,000 after-tax) in connection with the sale of
the manufacturing assets of the Consumer Products Business.
During 1996, the Company made cash payments related to such reserves for i)
net costs associated with elimination of operations and liquidation of working
capital of $1,079,000, ii) severance pay and related costs of $1,215,000, iii)
professional fees of $665,000 and iv) other costs of $199,000.
The aggregate amount of reserves related to the disposal of the Consumer
Products Business is expected to approximate the original estimate.
Net sales of the Consumer Products Business declined to $18,317,000 in 1996
compared to $29,808,000 in 1995 due to the sale of the business. The after-tax
loss related to the operations of the Consumer Products Business declined to
$133,000 in 1996 compared to a loss of $1,684,000 in 1995 due to the sale of the
business.
52
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
On March 15, 1996, the Company sold certain assets, including the
manufacturing assets, of the Consumer Products Business for a purchase price of
$14,417,000. From March 16, 1996, through December 31, 1996, the Company
received $17,391,000 from the sale by the Company of the inventory of the
Consumer Products Business and from the collection of the related accounts
receivable. The Company used these proceeds primarily to (i) reduce debt by
$9,100,000, (ii) reduce the level of advances under the Company's Accounts
Receivable Agreement by $4,342,000, (ii) fund the $5,716,000 cash costs of the
restructuring of the Company, (iv) fund the $3,158,000 of cash costs associated
with the sale of assets, and elimination of operations and liquidation of
working capital of the Consumer Products Business, and (v) increase its cash
balances by $5,203,000. Other significant uses of cash during 1996 were payments
to the pension plan of $6,989,000, of which $3,224,000 was related to the 1995
plan year minimum pension contribution.
During 1995, the principal use of cash flow was to fund investing
activities, primarily capital expenditures of $10,859,000. Cash flow was
provided primarily through net advances on accounts receivable sold under the
Company's Accounts Receivable Agreement of $7,357,000.
During 1995, the Company contributed 250,000 shares of its Common Stock, at
a price of $7.56 per share, to the Kerr Group, Inc. Retirement Income Plan. The
contribution reduced the Company's recorded pension liability by $1,891,000.
During 1996 and 1995, the Company funded its defined benefit pension plan by
$3,245,000 more than the accrued pension expense related to the 1995 plan year.
Although the amount of the annual pension contribution is dependent upon a
variety of factors, the Company expects to fund amounts in excess of its accrued
pension expense for the foreseeable future.
The Company did not declare a dividend on its Class B, Series D Preferred
Stock in 1996. The cumulative amount of undeclared dividends as of December 31,
1996 was $622,000. Under accounting rules, such dividends are not accrued until
declared, however, for financial reporting purposes the amount of such dividends
are shown on the face of the income statement as a deduction to arrive at net
earnings (loss) was applicable to common stockholders. Under the terms of the
Merger Agreement, the Company was not permitted to declare or pay any dividends
on its preferred stock at prior to the consummation of the Merger.
Since the third quarter of 1990, the Company has not declared and dividends
on its Common Stock. The Company's Senior Note Agreement restricted the payment
of dividends on Common Stock. Under such restrictions, the payment of Common
Stock dividends was not permitted at December 31, 1996.
The ratio of current assets to current liabilities at December 31, 1996 and
1995 was 0.5 and 0.6, respectively. The ratio of current assets to current
liabilities was less than 1.0 due to the classification of the Company's
outstanding Senior Notes as a current liability because the Company was in
default of certain financial covenants for which waivers has been received for a
period of less than one year. At December 31, 1996 and 1995, the ratio of total
debt to total capitalization was 94% and 70%, respectively. The increase in the
ratio of total debt to total capitalization was due to lower stockholders'
equity, primarily the result of providing a valuation reserve against the
Company's net deferred tax asset.
The Company's net deferred income tax assets as of December 31, 1996 have
been eliminated by a valuation reserve of $13,691,000. The valuation reserve had
been provided due to the uncertainty related to the Company's financing as
described below.
As of December 31, 1996, the Company had an Accounts Receivable Agreement
(Receivable Agreement) which matured on March 7, 1997 that met the working
capital needs of the Company. The Receivable Agreement permitted the Company to
sell its trade accounts receivable on a nonrecourse basis. Under the Receivable
Agreement, the maximum amount that could be advanced to the Company pursuant
53
<PAGE>
to the sale of trade accounts receivable at any time was $8,500,000. The Company
retained collection and service responsibility, as agent for the purchaser, over
any receivables sold. Advances under such Receivable Agreement were subject to
certain limitations. As of December 31, 1996, receivables as shown on the
accompanying Consolidated Balance Sheet were reduced by net proceeds of
$3,861,000 from advances pursuant to the sale of receivables under the Company's
Receivable Agreement. The Receivable Agreement contained covenants identical to
the Senior Notes.
In 1996 and up to August 25, 1997, the Company was in default with respect
to interest coverage and net worth covenants under the Loan Agreements which
govern the unsecured Senior Notes and Bank Note issued by the Company. Under the
terms of the Loan Agreements relating to the Senior Notes and the Bank Note, the
Company was not permitted to sell the accounts receivable under the Accounts
Receivable Agreement because of the default. The Company had discussions with
the owners of the Senior Notes and BankNote regarding obtaining an extension of
the waiver which expired on March 7, 1997. The discussions with the owners also
included negotiations for the purchase by the Company of the Senior Notes and
the Bank Note. The funds for the purchase of the Senior Notes and Bank Note
would be obtained from a senior secured loan and a subordinated secured loan
which the Company was discussed with institutional lenders and with respect to
which loan agreements are being negotiated. Consummation of a purchase of the
Senior Notes and Bank Note never occurred.
At December 31, 1996, the Company had unused sources of liquidity consisting
of cash and cash equivalents of $9,107,000, additional advances available under
the Receivable Agreement of $3,965,000, a tax net operating loss carryforward of
$28,300,000, a minimum tax credit carryforward of $1,068,000 and other tax
credit carryforwards of $417,000.
RESULTS OF OPERATIONS--1995 COMPARED TO 1994
CONTINUING OPERATIONS
Net sales of the Company increased 2.2% to $109,187,000 in 1995 from 1994
due primarily to the pass through of resin price increases. The Company's
manufacturing facilities operated at approximately 72% of capacity during 1995.
Cost of sales of the Company increased to $84,605,000 in 1995 compared to
$73,780,000 in 1994 primarily due to higher resin costs.
Gross profit as a percent of net sales decreased to 22.5% for 1995 as
compared to 30.9% for 1994 due to substantially higher resin costs and
competitive pricing, primarily in the wide mouth jar and closure business.
Research, selling, warehouse, general and administrative expenses decreased
$862,000 or 3.3% during 1995, as compared to 1994.
The loss before unusual items, interest and taxes was $416,000 in 1995
compared to earnings before unusual items, interest and taxes of $7,152,000 in
1994 primarily due to substantially higher resin costs and competitive pricing,
primarily in the wide mouth jar and closure business.
In 1995, the Company incurred a $1,000,000 unusual loss related to the
write-down in the book value of land formerly used by the Company as a glass
container manufacturing plant. Such write-down was necessitated by additional
declines in the market value of commercial real estate in Southern California
during 1995.
Net interest expense increased $990,000 during 1995 compared to 1994 due to
higher levels of debt and interest charged on advances under the Accounts
Receivable Agreement.
54
<PAGE>
DISCONTINUED OPERATIONS
Net sales of the Consumer Products Business decreased 7.9% to $29,808,000 in
1995 compared to 1994 due primarily to lower unit sales as a result of adverse
growing conditions in 1995.
The after-tax loss related to the operations of the Consumer Products
Business was $1,684,000 in 1995 compared to net earnings of $1,311,000 in 1994.
The 1995 loss was due to the sale of higher cost inventory produced during 1994,
higher customer rebates and lower sales volume due to adverse weather
conditions.
LIQUIDITY AND CAPITAL RESOURCES
During 1995, the principal use of cash flow was to fund investing
activities, primarily capital expenditures of $10,859,000. Cash flow was
provided primarily through net advances on accounts receivable sold under the
Company's Accounts Receivable Agreement of $7,357,000.
During 1994, the principal use of cash flow was to fund capital expenditures
of $14,176,000. Cash flow was provided through the reduction of the Company's
cash balances of $9,068,000 and cash from financing activities of $5,457,000.
During 1994, inventories increased by $5,578,000, due primarily to higher
quantities and costs of resin, and higher quantities of finished goods.
During 1995, the Company contributed 250,000 shares of its Common Stock, at
a price of $7.56 per share, to the Kerr Group, Inc. Retirement Income Plan. The
contribution reduced the Company's recorded pension liability by $1,891,000.
During 1996 and 1995, the Company funded its defined benefit pension plan by
$3,245,000 more than the accrued pension expense related to the 1995 plan year.
The Company has not declared a dividend on its Class B, Series D Preferred
Stock since the first quarter of 1996. The cumulative amount of undeclared
dividends as of December 31, 1996 is $622,000. Under accounting rules, such
dividends are not accrued until declared, however, for financial reporting
purposes the amount of such dividends are shown on the face of the income
statement as a deduction to arrive at net earnings (loss) was applicable to
common stockholders. Under the terms of an agreement with its lenders, the
Company was not permitted to declare or pay any dividends on its preferred stock
at December 31, 1996.
Since the third quarter of 1990, the Company has not declared any dividends
on its Common Stock. The Company's Senior Note Agreement restricted the payment
of dividends on Common Stock. Under such restrictions, the payment of Common
Stock dividends was not permitted at December 31, 1996.
The ratio of current assets to current liabilities at December 31, 1996 and
1995 was 0.5 and 0.6, respectively. The ratio of current assets to current
liabilities was less than 1.0 due to the classification of the Company's
outstanding Senior Notes as a current liability because the Company was in
default of certain financial covenants for which waivers had been received for a
period of less than one year. At December 31, 1996 and 1995, the ratio of total
debt to total capitalization was 94% and 70%, respectively. The increase in the
ratio of total debt to total capitalization was due to lower stockholders'
equity, primarily the result of providing a valuation reserve against the
Company's net deferred tax asset.
The Company's net deferred income tax assets as of December 31, 1996 have
been eliminated by a valuation reserve of $13,691,000. The valuation reserve was
been provided due to the uncertainty related to the Company's financing as
described below.
55
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational filing requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). In accordance
therewith, the Company files periodic reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission") under
the Exchange Act relating to its business, financial condition and other
matters. The Company was required to disclose in such proxy statements certain
information, as of particular dates, concerning the Company's directors and
officers, there remuneration, stock options granted to them, the principal
holders of the Company's securities and any material interest of such persons in
transactions with the Company. Such reports, proxy statements and other
information may be inspected and copied at the Commission's office at 450 Fifth
Street, N.W., Washington D.C. 20549, and at the regional offices of the
Commission located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511; and 7 World Trade Center, 13th Floor, New
York, New York 10048. Copies of such material may also be obtained upon payment
of the Commission's prescribed fees by writing to the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington D.C. 20549. The
Commission also maintains a Web site (http://www.sec.gov) that contains reports,
proxy and information statements regarding registrants, such as the Company,
that file electronically with the Commission.
56
<PAGE>
PRINCIPAL STOCKHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT
As of September 4, 1997, there were 275,962 shares of Common Stock and
180,006 shares of Series D Preferred Shares issued and outstanding. Each share
of Common Stock is entitled to one vote in respect of matters submitted to the
stockholders of the Company. The following table sets forth certain information,
as of September 4, 1997, with respect to the beneficial ownership of shares of
Common Stock by (i) all persons known by the Company to be the beneficial owners
of more than 5% of the outstanding shares of Common Stock (as derived solely
from the Company's review of Schedules 13D and 13G on file with the Commission
and from correspondence received from or telephone conversations with certain
stockholders of the Company), (ii) each director of the Company, (iii) all
directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT AND NATURE OF SHARES
BENEFICIAL OWNER OWNERSHIP OUTSTANDING
- -------------------------------------------------------------------- ---------- ---------------
<S> <C> <C>
Kerr Acquisition Corporation........................................ 3,653,433 92.9%
50 Fremont Street, Suite 3700
San Francisco, California
Harvey Sperry....................................................... 0 *
Gregory P. Spivy.................................................... 0 *
Mark N. Williamson.................................................. 0 *
Richard D. Hofmann.................................................. 0 *
Lawrence C. Caldwell................................................ 0 *
All Directors and Executive Officers as a Group (5 in number)....... 0 *
</TABLE>
- ------------------------
*Less than one percent.
57
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Index...................................................................................................... F-1
Independent Auditors' Report............................................................................... F-2
Balance Sheets--December 31, 1996 and 1995................................................................. F-3
Statements of Earnings (Loss)--Three Years Ended December 31, 1996......................................... F-5
Statements of Cash Flows--Three Years Ended December 31, 1996.............................................. F-6
Statements of Common Stockholders' Equity--Three Years Ended December 31, 1996............................. F-7
Notes to Financial Statements.............................................................................. F-8
Condensed Balance Sheet--September 30, 1997................................................................ F-28
Condensed Statements of Earnings (Loss)--One Month Period Ended September 30, 1997, Eight Month Period
Ended August 26, 1997 and Nine Month Period Ended September 30, 1996..................................... F-29
Condensed Statements of Cash Flows--One Month Period Ended September 30, 1997, Eight Month Period Ended
August 26, 1997 and Nine Month Period Ended September 30, 1996........................................... F-30
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Kerr Group, Inc.
We have audited the financial statements of Kerr Group, Inc. as listed in
the accompanying index. In connection with our audits of the financial
statements, we have also audited the financial statement schedule as listed in
the accompanying index. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kerr Group, Inc. as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
The accompanying financial statements for 1996 have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is in default of its current loan agreements
and has not been successful as yet in securing a new credit facility which raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to this matter are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
KPMG PEAT MARWICK LLP
Harrisburg, Pennsylvania
March 25, 1997
F-2
<PAGE>
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Current assets
Cash and cash equivalents....................... $ 9,107 $ 3,904
Receivables--primarily trade accounts, less
allowance for doubtful accounts of $287 in
1996 and $212 in 1995......................... 9,710 7,154
Inventories.....................................
Raw materials and work in process............. 6,702 7,815
Finished goods................................ 8,034 9,933
------------ ------------
Total inventories............................. 14,736 17,748
Prepaid expenses and other current assets....... 27 3,106
Current net assets related to discontinued
operations.................................... 4 12,847
------------ ------------
Total current assets.......................... 33,584 44,759
------------ ------------
Property, plant and equipment, at cost
Land............................................ 427 427
Buildings and improvements...................... 8,624 12,881
Machinery and equipment......................... 87,207 86,646
Furniture and office equipment.................. 2,890 5,771
------------ ------------
99,148 105,725
Accumulated depreciation and amortization....... (60,258) (58,907)
------------ ------------
Net property, plant and equipment............. 38,890 46,818
Deferred income taxes............................. -- 8,057
Goodwill and other intangibles, net of
amortization of $2,749 in 1996 and $2,247 in
1995............................................ 5,682 6,983
Other assets...................................... 7,370 8,026
Non-current net assets related to discontinued
operations...................................... -- 4,854
------------ ------------
$ 85,526 $ 119,497
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Current liabilities
Short-term debt................................. $ 5,856 $ 6,500
Senior debt due 1997 through 2003 classified as
current....................................... 45,044 50,000
Accounts payable................................ 7,373 9,707
Current pension liability....................... -- 3,777
Other current liabilities....................... 5,622 5,113
------------ ------------
Total current liabilities..................... 63,895 75,097
------------ ------------
Pension liability................................. 13,935 18,318
Other long-term liabilities....................... 4,394 2,175
Stockholders' equity
Preferred Stock, 487 shares authorized and
issued, liquidation value of $21.28 per share
at December 31, 1996 and $20 per share at
December 31, 1995............................. 9,748 9,748
Common Stock, $.50 par value per share, 20,000
shares authorized, 4,226 shares issued........ 2,113 2,113
Additional paid-in capital...................... 27,239 27,239
Retained earnings (accumulated deficit)......... (20,640) 1,860
Treasury Stock, at cost, 293 shares............. (6,913) (6,913)
Excess of additional pension liability over
unrecognized prior service cost, net of tax
benefits...................................... (8,245) (10,140)
------------ ------------
Total stockholders' equity.................... 3,302 23,907
------------ ------------
$ 85,526 $ 119,497
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
STATEMENTS OF EARNINGS (LOSS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net sales......................................... $ 107,369 $ 109,187 $ 106,792
Cost of sales..................................... 83,064 84,605 73,780
------------ ------------ ------------
Gross profit.................................... 24,305 24,582 33,012
Research and development expenses................. 1,991 1,708 2,110
Plant administrative expenses..................... 5,013 4,490 4,707
Selling and warehouse expenses.................... 8,031 7,680 7,790
General corporate expenses........................ 10,381 11,120 11,253
Restructuring costs............................... 10,011 -- --
Financing costs................................... 1,600 -- --
Loss on revaluation of land....................... -- 1,000 --
Interest expense, net............................. 4,703 4,608 3,618
------------ ------------ ------------
Earnings (loss) from continuing operations
before income taxes........................... (17,425) (6,024) 3,534
Provision (benefit) for income taxes.............. 6,837 (2,401) 1,441
------------ ------------ ------------
Net earnings (loss) from continuing
operations.................................... (24,262) (3,623) 2,093
Discontinued operations:
Gain on sale of discontinued operations, net of
income tax provision of $1,401................ 2,102 -- --
Earnings (loss) from discontinued operations,
net of income tax provision (benefit) of
($89), ($1,117) and $904...................... (133) (1,684) 1,311
------------ ------------ ------------
Net earnings (loss) related to discontinued
operations...................................... 1,969 (1,684) 1,311
------------ ------------ ------------
Net earnings (loss)........................... (22,293) (5,307) 3,404
Preferred stock dividends......................... 829 829 829
------------ ------------ ------------
Net earnings (loss) applicable to common
stockholders................................ $ (23,122) $ (6,136) $ 2,575
------------ ------------ ------------
------------ ------------ ------------
Earnings (loss) per common share:
Earnings (loss) per common share from continuing
operations.................................... $ (6.38) $ (1.16) $ 0.34
Earnings (loss) per common share from
discontinued operations....................... 0.50 (0.44) 0.36
------------ ------------ ------------
Net earnings (loss) per common share.......... $ (5.88) $ (1.60) $ 0.70
------------ ------------ ------------
------------ ------------ ------------
Weighted average shares outstanding............... 3,933 3,842 3,674
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOW PROVIDED (USED) BY OPERATIONS
Earnings (loss) from continuing operations...... $ (24,262) $ (3,623) $ 2,093
Add (deduct) noncash items included in earnings
(loss)
Expenses associated with restructuring, in
excess of cash payments..................... 4,307 -- --
Expenses associated with financing............ 1,600 -- --
Depreciation and amortization................. 9,398 8,675 7,495
Change in deferred income taxes............... 7,080 (2,482) 1,705
Reduction in total pension liability, net..... (4,813) 294 (242)
Other, net.................................... (98) 130 258
Changes in other operating working capital
Receivables................................... (2,556) 7,268 (2,254)
Inventories................................... 1,964 661 (5,578)
Other current assets.......................... 937 1,267 (94)
Accounts payable.............................. (2,366) (2,936) 3,929
Accrued expenses.............................. (1,138) 1,674 (567)
Cash flow provided (used) by discontinued
operations.................................... 11,640 2,078 (4,420)
------------ ------------ ------------
Total cash flow provided (used) by operations... 1,693 13,006 2,325
CASH FLOW PROVIDED (USED) BY INVESTING ACTIVITIES
Continuing Operations:
Capital expenditures.......................... (2,091) (10,859) (14,176)
Proceeds from liquidation of long-term
certificates of deposit..................... -- 375 1,000
Other, net.................................... 377 (1,301) (2,587)
Discontinued Operations:
Capital expenditures.......................... (234) (981) (1,472)
Proceeds from sale of assets of Consumer
Products Business........................... 14,417 -- --
Other, net.................................... (1,840) 1,200 385
------------ ------------ ------------
Cash flow provided (used) by investing
activities.................................. 10,629 (11,566) (16,850)
CASH FLOW PROVIDED (USED) BY FINANCING
ACTIVITIES......................................
Repayment of Senior Notes and Note payable to
bank.......................................... (5,600) -- --
Net borrowings under lines of credit............ -- 1,000 5,500
Payments associated with financing.............. (1,312) -- --
Dividends paid.................................. (207) (829) (829)
Other, net...................................... -- 32 786
------------ ------------ ------------
Cash flow provided (used) by financing
activities.................................. (7,119) 203 5,457
CASH AND CASH EQUIVALENTS
Increase (decrease) during the year............. 5,203 1,643 (9,068)
Balance at beginning of the year................ 3,904 2,261 11,329
------------ ------------ ------------
Balance at end of the year.................... $ 9,107 $ 3,904 $ 2,261
------------ ------------ ------------
------------ ------------ ------------
SIGNIFICANT NON-CASH TRANSACTIONS
Contribution of 250,000 shares of Common Stock
to Pension Plan............................... $ -- $ 1,891 $ --
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
-------------------------------------------------------------------------------------
NUMBER OF EXCESS OF
SHARES OF RETAINED ADDITIONAL PENSION NOTES
COMMON ADDITIONAL EARNINGS LIABILITY OVER RECEIVABLE
STOCK COMMON PAID-IN (ACCUM. TREASURY UNRECOGNIZED PRIOR FROM ESOP
OUTSTANDING STOCK CAPITAL DEFICIT) STOCK SERVICE COST TRUSTS
----------- ------ ---------- -------- -------- ------------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993.. 3,667 $2,105 $27,145 $ 9,420 $(12,803) $(6,835) $(716)
Net earnings................ -- -- -- 3,404 -- -- --
Dividends on Preferred
Stock..................... -- -- -- (829) -- -- --
Pension adjustment.......... -- -- -- -- -- 1,628 --
Repayments on ESOP Trusts
notes receivable.......... -- -- -- -- -- -- 716
Issuance of Common Stock
under stock option
plans..................... 10 5 65 -- -- -- --
----- ------ ---------- -------- -------- ------- ---------
Balance, December 31, 1994.. 3,677 2,110 27,210 11,995 (12,803) (5,207) --
Net loss.................... -- -- -- (5,307) -- -- --
Dividends on Preferred
Stock..................... -- -- -- (829) -- -- --
Pension adjustment.......... -- -- -- -- -- (4,933) --
Contribution of Treasury
Stock to pension fund..... 250 -- -- (3,999) 5,890 -- --
Issuance of Common Stock
under stock option
plans..................... 6 3 29 -- -- -- --
----- ------ ---------- -------- -------- ------- ---------
Balance, December 31, 1995.. 3,933 2,113 27,239 1,860 (6,913) (10,140) --
Net loss.................... -- -- -- (22,293) -- -- --
Dividends on Preferred
Stock..................... -- -- -- (207) -- -- --
Pension adjustment.......... -- -- -- -- -- 1,895 --
----- ------ ---------- -------- -------- ------- ---------
Balance, December 31, 1996.. 3,933 $2,113 $27,239 $(20,640) $ (6,913) $(8,245) $--
----- ------ ---------- -------- -------- ------- ---------
----- ------ ---------- -------- -------- ------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL DESCRIPTION OF BUSINESS
The Company's operations consist of the manufacture and sale of a variety of
plastic packaging products including child-resistant closures, tamper-evident
closures, prescription packaging products, jars and other plastic closures and
containers.
The Company uses a significant amount of resin in its manufacturing process.
From time to time, the Company has experienced substantial increases in the cost
of resin. To the extent that the Company is unable to pass on resin cost
increases, the cost increases could have a significant impact on the results of
operations of the Company.
CASH EQUIVALENTS
Cash equivalents consist only of investments that have an original maturity
of three months or less, are readily convertible to known amounts of cash and
have insignificant risk of changes in value because of changes in interest
rates.
INVENTORIES
Inventories are valued at the lower of cost or market, determined by the use
of the first-in, first-out method.
DEPRECIATION, MAINTENANCE AND REPAIRS
Depreciation of property, plant and equipment is provided by the use of the
straight-line method over the estimated useful lives of the assets. The
estimated useful lives used in computing the depreciation provisions are as
follows:
<TABLE>
<S> <C>
Buildings and improvements.... 5 to 30 years
Machinery and equipment....... 3 to 15 years
Furniture and equipment....... 5 to 10 years
</TABLE>
The policy of the Company is to charge amounts expended for maintenance and
repairs to expense and to capitalize expenditures for major replacements and
betterments.
GOODWILL AND OTHER INTANGIBLES
The excess of cost over fair value of net tangible assets acquired during
1987 is amortized on a straight-line basis over 40 years. Other intangible
assets are being amortized by the straight-line method over their respective
initial estimated lives ranging from 2 to 17 years.
Effective January 1, 1996, the Company adopted Financial Accounting
Standards Board Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of (FASB No. 121). FASB 121
requires that impairments, measured using fair market value, are recognized
whenever events or changes in circumstances indicate that the carrying amount of
long-lived assets may not be recoverable. Adoption of this statement did not
affect the Company's results of operations. The assessment of the recoverability
of goodwill will be impacted if future operating cash flows are not achieved.
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue at the time the product is shipped to the
customer.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Financial Accounting Standards Board Statement No. 87 (FASB No. 87) requires
that a company record an additional minimum pension liability to the extent that
a company's accumulated pension benefit obligation exceeds the fair value of
pension plan assets and accrued pension liabilities. This additional minimum
pension liability is offset by an intangible asset, not to exceed prior service
costs of the pension plan. Amounts in excess of prior service costs are
reflected as a reduction in stockholders' equity.
The Company accounts for postretirement benefits in accordance with
Financial Accounting Standards Board Statement No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions (FASB No. 106). As more fully
described in Note 7, the Company has elected to amortize the impact of FASB No.
106 ratably over 20 years.
STOCK OPTIONS
Effective January 1, 1996, the Company adopted the Financial Accounting
Standards Board Statement No. 123, Accounting for Stock-Based Compensation (FASB
No. 123). FASB No. 123 requires the Company to choose between two different
methods of accounting for stock options. The statement defines a
fair-value-based method of accounting for stock options but allows an entity to
continue to measure compensation cost for stock options using the accounting
prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees (APB
No. 25). The Company has elected to continue using the accounting methods
prescribed by APB No. 25. The amount of the proforma compensation expense,
required to be disclosed under the FASB No. 123, is not material.
INCOME TAXES
The Company accounts for income taxes under the Financial Accounting
Standards Board Statement No. 109, Accounting for Income Taxes (FASB No. 109).
Under the asset and liability method of FASB No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under FASB No. 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
EARNINGS (LOSS) PER COMMON SHARE
Primary net earnings (loss) per common share are based on the weighted
average number of common shares outstanding and are after Preferred Stock
dividends (both declared and undeclared dividends).
Fully diluted net earnings (loss) per common share reflect when dilutive i)
the incremental common shares issuable upon the assumed exercise of outstanding
stock options and ii) the assumed conversion of the Preferred Stock and the
elimination of the related Preferred Stock dividends. The calculation of fully
diluted net earnings (loss) per common share for 1996, 1995 and 1994 was not
dilutive.
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL STATEMENT PREPARATION AND PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities as of December 31, 1996 and
1995, and the reported amounts of income and expenses for each of the three
years ended December 31, 1996. Actual results could differ from those estimates.
Included in other assets are certain assets held for sale consisting of real
property and buildings. Management has obtained a recent appraisal to support
the carrying value of such assets, however, the ultimate sales proceeds received
by the Company could differ from the appraisal amount depending on changes in
market conditions.
Certain reclassifications have been made to prior years' financial
statements to conform to the 1996 presentation.
NOTE 2--ISSUES AFFECTING LIQUIDITY
During the fourth quarter of 1996, the holders of $50,900,000 of the
Company's existing unsecured debt sold the debt. Representatives of the new
owners of the debt informed the Company that they do not intend to pursue the
previously announced restructuring of this debt, pursuant to which a portion of
this debt was to have been repaid with the proceeds of a new secured credit
facility, and the balance of which was to have been converted into preferred
stock and subordinated debt. The new owners initially indicated that they
preferred a restructuring that would involve the exchange of debt for
substantially all of the equity of the Company. The Company rejected such
exchange and there is no assurance that the Company and the owners of the debt
will reach an agreement on the terms of any such exchange.
The Company is presently in default with respect to interest coverage and
net worth covenants under the Loan Agreements which govern the unsecured Senior
Notes and Bank Note issued by the Company. Under the terms of the Loan
Agreements relating to the Senior Notes and the Bank Note, the Company is not
permitted to sell the accounts receivable under the Accounts Receivable
Agreement because of the default. The Company is in discussions with the owners
of the Senior Notes and Bank Note regarding obtaining an extension of the waiver
which expired on March 7, 1997. The discussions with the owners also include
negotiations for the purchase by the Company of the Senior Notes and the Bank
Note. The funds for the purchase of the Senior Notes and Bank Note would be
obtained from a senior secured loan and a subordinated secured loan which the
Company is discussing with institutional lenders and with respect to which loan
agreements are being negotiated. Consummation of any purchase of the Senior
Notes and Bank Note is subject to definitive agreements being reached with the
new lenders as well as the holders of the Senior Notes and Bank Note. There can
be no assurance that the owners of the Senior Notes and the Bank Note will
extend the waiver of the defaults, or agree to sell the Senior Notes and the
Bank Note for a purchase price that is acceptable to the Company or that the
senior secured loan and the subordinated secured loan can be obtained to finance
the purchase. In the event the Company does not obtain an extension of the
waiver, the Company does not intend to make its quarterly payment of interest
due under the Senior Notes and Bank Note due on March 31, 1997.
The lender proposing to make the subordinated secured loan to the Company
has indicated that it is willing to purchase the accounts receivable of the
Company through June 30, 1997 on terms and conditions acceptable to the lender
in its sole and reasonable discretion. The terms and conditions to be negotiated
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ISSUES AFFECTING LIQUIDITY (CONTINUED)
include, without limitation, pricing, credit criteria, reserves, servicing and
recourse. The lender's willingness to purchase the Company's accounts receivable
will be subject to the negotiation, execution and delivery of purchase documents
in form and substance satisfactory to the lender. There can be no assurance that
the Company and the lender will reach definitive agreement on the terms of such
purchase. The sale of the accounts receivable to this lender, in the absence of
a waiver of the existing default, will constitute a further default by the
Company under the existing Loan Agreements.
As part of its overall restructuring, the Company is involved in discussions
with the Pension Benefit Guaranty Corporation relating to the Company's pension
liabilities. The Company expects these discussions to continue.
The Company expects to receive approximately $3,500,000 from the sale of
real property located in Santa Ana, California in April 1997. The Company had
$5,164,000 in cash and cash equivalents on March 25, 1997. Assuming the Company
reaches satisfactory agreement with the lender regarding the new accounts
receivable facility, the Company believes that it will have sufficient funds
available to finance its working capital requirements through June 30, 1997.
NOTE 3--RESTRUCTURING AND FINANCING COSTS
During the first quarter of 1996, the Company recorded a pretax loss of
$7,500,000 for certain costs associated with the restructuring of the Company,
which included moving the corporate headquarters from Los Angeles, California to
Lancaster, Pennsylvania and relocating the wide-mouth jar operations from Santa
Fe Springs, California to Bowling Green, Kentucky. The pretax loss consisted of
reserves for i) severance pay, workers' compensation claims and insurance
continuation costs of $3,000,000, ii) costs associated with terminating the
leases of the two vacated facilities of $2,300,000, iii) asset retirements of
$1,600,000 and iv) other costs of $600,000. During 1996, the Company made cash
payments related to such reserves for i) severance pay and related costs of
$2,638,000, ii) costs associated with terminating the leases of the two
facilities of $478,000 and iii) other costs of $89,000. In addition to such cash
costs, during 1996 charges were made to reserves relating to asset retirements
of $1,499,000.
In addition, during 1996, the Company incurred pretax losses of $2,511,000
for restructuring costs primarily related to relocation of personnel and
equipment. Accounting rules require these costs to be expensed as incurred.
The relocation of the corporate headquarters and the wide mouth jar
manufacturing operation have been completed. Cash expenditures related to the
relocation are expected to be completed in early 1998. The cost to complete the
restructuring is expected to approximate the original estimate.
During 1996, the Company incurred financing costs of $1,600,000 consisting
of i) fees paid to the Company's advisors in its negotiations with lenders, ii)
reimbursement of the lenders' fees paid to their advisors in the negotiations,
iii) certain fees associated with prospective lenders and iv) expensing a
portion of the previously capitalized financing costs associated with the
existing debt.
NOTE 4--DISCONTINUED OPERATIONS
On March 15, 1996, the Company sold certain assets, including the
manufacturing assets, of the Consumer Products Business for a purchase price of
$14,417,000. From March 16, 1996 through December 31, 1996, the Company received
$17,391,000 from the sale by the Company of the inventory of the Consumer
Products Business and from the collection of the related accounts receivable.
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--DISCONTINUED OPERATIONS (CONTINUED)
In connection with such sale, the Company recorded $4,900,000 of reserves
consisting of i) severance pay, workers' compensation claims and insurance
continuation of $1,400,000, ii) retiree health care and pension expenses of
$1,200,000, iii) estimated net costs associated with elimination of operations
and liquidation of working capital of $1,100,000, iv) professional fees of
$700,000, v) asset retirements of $300,000, and vi) other costs of $200,000.
After deduction for such reserves, the Company incurred in 1996 a pretax gain of
$3,503,000 ($2,102,000 after-tax) in connection with the sale of the
manufacturing assets of the Consumer Products Business.
During 1996, the Company made cash payments related to such reserves for i)
net costs associated with elimination of operations and liquidation of working
capital of $1,079,000, ii) severance pay and related costs of $1,215,000, iii)
professional fees of $665,000 and iv) other costs of $199,000. In addition to
such cash costs, charges were made to such reserves relating to i)
reclassifications to retiree benefit plan liabilities of $1,220,000 and ii)
asset retirements of $251,000.
The aggregate amount of reserves related to the disposal of the Consumer
Products Business is expected to approximate the original estimate.
The results of the discontinued operations have been reported separately in
the Statement of Earnings (Loss). Summarized results of the discontinued
operations for the years ended December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales........................................ $ 18,317 $ 29,808 $ 32,364
Costs and expenses............................... 17,851 31,398 29,151
Allocated interest expense....................... 688 1,211 998
--------- --------- ---------
Earnings (loss) before income taxes.......... (222) (2,801) 2,215
Provision (benefit) for income taxes......... (89) (1,117) 904
--------- --------- ---------
Earnings (loss) from discontinued
operations................................. (133) (1,684) 1,311
Gain on sale of manufacturing assets......... 2,102 -- --
--------- --------- ---------
Total earnings (loss) related to discontinued
operations..................................... $ 1,969 $ (1,684) $ 1,311
--------- --------- ---------
--------- --------- ---------
</TABLE>
Interest expense was allocated to the Consumer Products Business based upon
the ratio of the Consumer Products Business net assets to total Company net
assets. Management believes that this allocation method is reasonable.
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--INCOME TAXES
Total income tax provision (benefit) for the years ended December 31, 1996,
1995 and 1994 was allocated as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax provision (benefit) from continuing operations
before valuation reserve........................ $ (6,854) $ (2,401) $ 1,441
Income tax valuation reserve adjustment related to
continuing operations........................... 13,691 -- --
--------- --------- ---------
Subtotal...................................... 6,837 (2,401) 1,441
Tax provision (benefit) from discontinued
operations...................................... 1,312 (1,117) 904
Stockholders' equity, related to excess of pension
liability over unrecognized prior service costs
before valuation reserve........................ 1,328 (3,281) 878
--------- --------- ---------
$ 9,477 $ (6,799) $ 3,223
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision (benefit) for income taxes related to continuing operations
for the years ended December 31, 1996, 1995 and 1994 consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current
U.S. Federal..................................... $ -- $ -- $ 81
State............................................ -- -- --
--------- --------- ---------
Total current...................................... -- -- 81
Deferred
U.S. Federal..................................... 5,402 (1,880) 1,090
State............................................ 1,435 (521) 270
--------- --------- ---------
Total deferred..................................... 6,837 (2,401) 1,360
--------- --------- ---------
Total provision (benefit) for income taxes....... $ 6,837 $ (2,401) $ 1,441
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--INCOME TAXES (CONTINUED)
The significant components of deferred income taxes (benefits) related to
continuing operations for the years ended December 31, 1996, 1995 and 1994 are
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Reduction of deferred income taxes attributable to
recognition of alternative minimum tax credits
and tax net operating loss carryforwards........ $ (5,200) $ (3,782) $ (16)
Temporary differences associated with
restructuring costs............................. (1,108) -- --
Temporary differences associated with the sales of
discontinued operations......................... 150 (466) 1,531
Additional costs inventoried for tax purposes..... (638) (44) 64
Excess (deficit) of pension contributions paid
over pension expense............................ 517 1,513 46
Excess (deficit) of tax over book depreciation,
including assets retired or sold................ 418 668 (19)
Other, net........................................ (993) (290) (246)
Plus: Increase in balance of valuation reserve for
deferred income tax assets related to the income
tax provision................................... 13,691 -- --
--------- --------- ---------
Total......................................... $ 6,837 $ (2,401) $ 1,360
--------- --------- ---------
--------- --------- ---------
</TABLE>
Total provision (benefit) for income taxes from continuing operations for
the years ended December 31, 1996, 1995 and 1994 differed from the amounts
computed by applying the U.S. Federal income tax rate of 34% to earnings (loss)
before income taxes as a result of the following:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax provision (benefit)....... $ (5,925) $ (2,048) $ 1,202
Increase (reduction) in provision resulting from:
State income tax provision (benefit), net of
Federal tax effect............................ (983) (358) 210
Increase in balance of valuation reserve for
deferred income tax assets related to the
income tax provision.......................... 13,691 -- --
Other, net...................................... 54 5 29
--------- --------- ---------
Actual tax provision (benefit)................ $ 6,837 $ (2,401) $ 1,441
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and liabilities at December 31, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards....................... $ 11,577 $ 6,882
Pension liabilities--
Excess of additional pension liability over
unrecognized prior service cost.................... 5,415 6,742
Accrued pension liability............................ (464) (19)
Tax credit carryforwards............................... 1,485 1,158
Accrued retiree health liability....................... 1,001 551
Accrued reserves associated with discontinued
operations........................................... 215 274
Inventory.............................................. 1,064 675
Accrued vacation pay................................... 532 461
Reserves associated with restructuring................. 1,108 --
Other.................................................. 507 670
--------- ---------
Total gross deferred income tax assets............... 22,440 17,394
Less valuation reserve for deferred income tax
assets............................................. (13,691) --
--------- ---------
Deferred income tax assets, net of valuation
reserve............................................ 8,749 17,394
Deferred income tax liabilities:
Property, plant and equipment, principally due to
differences in depreciation.......................... (6,116) (5,744)
Excess of book basis over tax basis of land and
buildings formerly used as a glass container
manufacturing plant.................................. (1,337) (1,252)
Other.................................................. (1,296) (590)
--------- ---------
Total gross deferred income tax liabilities.......... (8,749) (7,586)
--------- ---------
Net deferred income tax assets........................... $ -- $ 9,808
--------- ---------
--------- ---------
</TABLE>
The Company's net deferred income tax assets as of December 31, 1996 have
been eliminated by a valuation reserve of $13,691,000. The valuation reserve has
been provided due to the uncertainty related to the Company's financing as
described in Note 2 of the notes to the financial statements.
At December 31, 1996, the Company had net operating loss carryforwards for
Federal income tax purposes of $28,300,000 which are available to offset future
Federal taxable income, expiring in the years 2006 through 2011.
The Company also has an alternative minimum tax credit carryforward of
$1,068,000 and other tax credit carryforwards (primarily investment tax credits)
of $417,000, expiring in the years 1999 through 2009, which are available to
reduce future Federal income taxes, if any.
The total net cash payments related to income taxes, which represent Federal
alternative minimum taxes and state taxes, were $0, $24,000 and $761,000 for
1996, 1995 and 1994, respectively.
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--OTHER CURRENT LIABILITIES
At December 31, 1996 and 1995, other current liabilities were as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Accrued wages and vacation pay.............................. $ 1,671 $ 1,994
Accrued interest............................................ 1,267 2,617
Accrued and withheld taxes.................................. 236 29
Accrued reserves associated with restructuring.............. 1,483 --
Other accrued expenses...................................... 965 473
--------- ---------
Total accrued expenses.................................. $ 5,622 $ 5,113
--------- ---------
--------- ---------
</TABLE>
NOTE 7--RETIREMENT BENEFITS
PENSIONS
The Company has a defined benefit pension plan (the "Retirement Income
Plan"), which covers substantially all employees. The Retirement Income Plan
generally provides benefits based on years of service and average final pay. The
Company's policy is to fund amounts sufficient to satisfy the funding
requirements of the Employee Retirement Income Security Act of 1974. During 1996
and 1995, the Company funded the Retirement Income Plan by $3,245,000 more than
the accrued pension expense related to the 1995 plan year. During 1995 and 1994,
the Company funded the Retirement Income Plan by $1,983,000 more than the
accrued pension expense related to the 1994 plan year.
During 1995, the Company contributed 250,000 shares of its Common Stock, at
a price of $7.56 per share, to the Retirement Income Plan. The contribution was
valued at $1,891,000 which was based upon the current market value of the stock
on the date of the contribution.
During 1995, the Company adopted a Pension Restoration Plan which is an
unfunded plan providing benefits to participants not payable by the Company's
Retirement Income Plan because of the limitations on benefits imposed by the
Internal Revenue Code of 1986, as amended. The aggregate annual accrued benefit
for each participant under the combination of the Retirement Income Plan and the
Pension Restoration Plan when expressed as a single-life annuity is limited to
$200,000.
Net pension expense related to continuing operations for the years ended
December 31, 1996, 1995 and 1994 included the following components:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost (benefit earned during period)...... $ 668 $ 468 $ 534
Interest cost on projected benefit obligation.... 7,380 7,364 7,018
Actual loss (return) on assets................... (6,474) (16,080) 597
Net amortization and deferral.................... 579 9,460 (6,552)
--------- --------- ---------
Net pension expense.......................... $ 2,153 $ 1,212 $ 1,597
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--RETIREMENT BENEFITS (CONTINUED)
The funded status of the defined benefit plans at December 31, 1996 and 1995
was as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligation
Vested benefit obligation............................. $ 95,731 $ 99,237
Nonvested benefit obligation.......................... 2,385 1,942
--------- ---------
Accumulated benefit obligation........................ 98,116 101,179
Effect of future salary increases..................... 2,610 2,812
--------- ---------
Projected benefit obligation.......................... 100,726 103,991
Plan assets at fair value (a)........................... 84,182 79,084
--------- ---------
Projected benefit obligation in excess of plan assets... 16,544 24,907
Unrecognized net transition obligation.................. (394) (474)
Unrecognized prior service costs........................ (826) (936)
Unrecognized net loss................................... (16,201) (19,660)
--------- ---------
Accrued pension (asset) liability before adjustment..... (877) 3,837
Adjustment required to recognize additional minimum
pension liability..................................... 14,812 18,258
--------- ---------
Accrued pension liability related to the defined
benefit plan........................................ $ 13,935 $ 22,095
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(a) Plan assets include 368,200 shares of Company Common Stock at a value of
$874,000 at December 31, 1996 and $3,682,000 at December 31, 1995.
In connection with recording the additional minimum pension liability
pursuant to the provisions of FASB No. 87, the Company recorded a reduction in
stockholders' equity of $8,245,000 at December 31, 1996, and $10,140,000 at
December 31, 1995, and an intangible pension asset of $1,152,000 at December 31,
1996, and $1,376,000 at December 31, 1995.
The majority of all pension plan assets are held by a master trust created
for the collective investment of the plan's funds, as well as in private
placement insurance contracts. At December 31, 1996, assets held by the master
trust consisted primarily of cash, U.S. government obligations, corporate bonds
and common stocks.
The defined benefit plan assumptions as of December 31, 1996, 1995 and 1994
were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Discount rate........................................................... 7.75% 7.25% 8.75%
Increase in compensation rate........................................... 5 % 5 % 5 %
Long-term rate of return on assets...................................... 9.5 % 9.5 % 9.5 %
</TABLE>
The Company retained the pension benefit obligations for service prior to
the date of the sale and the pension assets related to the Company's
discontinued Consumer Products Business. In connection with the sale of the
business, the Company's pension plan had a curtailment loss of $100,000 pursuant
to FASB Statement No. 88, Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits. Such curtailment
loss was included as component of the gain on the sale of the Consumer Products
Business.
F-17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--RETIREMENT BENEFITS (CONTINUED)
RETIREE HEALTH CARE AND LIFE INSURANCE
The Company provides certain health care and life insurance benefits for
retired employees and their spouses. The costs of such benefits are shared by
retirees through one or more of the following: a) deductibles, b) copayments and
c) retiree contributions. Salaried employees hired prior to September 1, 1992,
and certain hourly employees may become eligible for those benefits if they
reach retirement age while working for the Company. The Company will not provide
retiree health care and life insurance benefits for salaried employees hired
after September 1, 1992. Health care and life insurance benefits provided by the
Company are not funded in advance, but rather are paid by the Company as the
costs are actually incurred by the retirees.
Effective January 1, 1993, the Company adopted FASB No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions. The adoption of FASB
No. 106 at January 1, 1993, created a previously unrecognized accumulated
postretirement benefit obligation of $13,195,000. As permitted under FASB No.
106, the Company has elected to amortize the $13,195,000 accumulated
postretirement benefit obligation ratably over 20 years.
Retiree health care and life insurance expense related to continuing
operations for the years ended December 31, 1996, 1995 and 1994 included the
following components:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost (benefit earned during period)......... $ 51 $ 41 $ 54
Interest cost on accumulated benefit obligation..... 690 855 1,082
Actual return on assets............................. -- -- --
Net amortization and deferral....................... 509 478 525
--------- --------- ---------
Net retiree health care and life insurance
expense......................................... $ 1,250 $ 1,374 $ 1,661
--------- --------- ---------
--------- --------- ---------
</TABLE>
The funded status of the retiree health care and life insurance plans at
December 31, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of accumulated postretirement
benefit obligation:
Retirees................................................ $ 7,692 $ 9,210
Fully eligible active participants...................... 691 735
Other active participants............................... 955 1,055
--------- ---------
Accumulated benefit obligation.......................... 9,338 11,000
Plan assets at fair value................................. -- --
--------- ---------
Accumulated benefit obligation in excess of plan assets... 9,338 11,000
Unrecognized net transition obligation.................... (8,405) (10,612)
Unrecognized prior service costs.......................... -- --
Unrecognized net gain (loss).............................. 1,594 992
--------- ---------
Accrued postretirement benefit liability.................. $ 2,527 $ 1,380
--------- ---------
--------- ---------
</TABLE>
F-18
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--RETIREMENT BENEFITS (CONTINUED)
The retiree health care and life insurance plans assumptions are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------ ------------------------ ------------------------
<S> <C> <C> <C>
Discount rate....................... 7.75% 7.25% 8.75%
Health care cost trend rates--
Indemnity plans................... 8.75% trending down 8.75% trending down 8.75% trending down
to 6% to 6% to 6%
Managed care plans................ 6.75% trending down 6.75% trending down 6.75% trending down
to 4% to 4% to 4%
</TABLE>
The effect of a one percentage point annual increase in these assumed cost
trend rates at December 31, 1996, would increase the postretirement benefit
obligation by approximately $370,000 and would increase the service and interest
cost components of the annual expense by approximately $35,000.
NOTE 8--FINANCING
At December 31, 1996, the Company's debt consists of $50,900,000 of Senior
Notes and an unsecured Bank Note held by a group of investors. The Company is in
discussions with these investors regarding the possible exchange of such debt
for equity or possible repayment through the refinancing of the debt. This debt
consists of the following components as of December 31, 1996 and December 31,
1995 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Senior Notes--Series A, 10-year notes originally issued September 21,
1993, original principal amount of $41,000,000, bearing interest at
9.45%................................................................. $ 36,936 $ 41,000
Senior Notes--Series B, 6-year notes originally issued September 21,
1993, original principal amount of $9,000,000, bearing interest at
8.99%................................................................. 8,108 9,000
Bank Note, due date extended to March 7, 1997, bearing interest at the
Prime rate (8.25% at December 31, 1996)............................... 5,856 6,500
--------- ---------
$ 50,900 $ 56,500
--------- ---------
--------- ---------
</TABLE>
Sinking fund payments were scheduled to begin under the 10-year notes in
1998 and under the 6-year notes in 1997. The Senior Notes and Bank Note are
unsecured.
The Senior Notes and Bank Note contain various covenants including covenants
relating to coverage of fixed charges, minimum level of tangible net worth,
limitation on leverage and limitation on restricted payments, for which payments
are defined to include Common Stock dividends. Under the most restrictive
covenant related to the payment of dividends, the payment of Common Stock
dividends is not permitted at December 31, 1996. As of December 31, 1996, the
Company is not in compliance with certain of the financial covenants and has
obtained waivers of such covenants through March 7, 1997.
F-19
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--FINANCING (CONTINUED)
The Senior Notes contain a provision which requires the payment of a
prepayment penalty in the event the Senior Notes are repaid prior to their
scheduled maturity date. If the Senior Notes had been repaid on March 25, 1997,
the prepayment penalty would have equaled approximately $3,000,000.
As of December 31, 1996, the Company's $45,044,000 of outstanding Senior
Notes is classified as a current liability because the Company was in default of
certain financial covenants for which waivers have been received for a period of
less than one year (currently through March 7, 1997). See further discussion at
Note 2 of notes to financial statements.
As of December 31, 1996, the Company had an Accounts Receivable Agreement
(Receivable Agreement) which matured on March 7, 1997 that met the working
capital needs of the Company. The Receivable Agreement permitted the Company to
sell its trade accounts receivable on a nonrecourse basis. Under the Receivable
Agreement, the maximum amount that could be advanced to the Company pursuant to
the sale of trade accounts receivable at any time was $8,500,000. The Company
retained collection and service responsibility, as agent for the purchaser, over
any receivables sold. Advances under such Receivable Agreement were subject to
certain limitations. As of December 31, 1996, receivables as shown on the
accompanying Balance Sheet have been reduced by net proceeds of $3,861,000 from
advances pursuant to the sale of receivables under the Receivable Agreement. The
Receivable Agreement contained covenants identical to the Senior Notes. The
Company is not permitted to sell accounts receivable under the Receivable
Agreement as long as there exists a default under the Senior Notes.
The Bank Note was originally related to a $10,000,000 bank line of credit,
which effective October 24, 1995 was reduced by the lender to the then
outstanding balance of $6,500,000 due to a decline in the Company's financial
performance. During early 1995, the Company had an additional bank line of
credit which was replaced by the Receivable Agreement.
During 1996, the Company had maximum borrowings under the Senior Notes and
Bank Note of $60,000,000. During 1996, the weighted average interest rate under
the Senior Notes and Bank Note was 9.3% and the weighted average borrowings
outstanding was $53,199,000.
During 1995, the Company had maximum borrowings outstanding under the lines
of credit of $12,000,000. During 1995, the weighted average interest rate under
its lines of credit was 8.7% and the weighted average borrowings outstanding
under its lines of credit was $7,528,000.
Total cash payments of interest related to continuing operations during
1996, 1995 and 1994 were $5,618,000, $2,752,000, and $3,794,000, respectively.
See discussion of issues affecting liquidity at Note 2 of notes to
consolidated financial statements.
NOTE 9--FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash, accounts receivable and payable, and advances
pursuant to the sale of receivables under the Company's Receivable Agreement
approximate their carrying amount because of their short maturity.
The fair value of the Bank Note approximates its carrying amount because
such debt has a floating interest rate tied to the Prime rate.
The fair value of the Company's $45,044,000 principal amount of Senior Notes
would be expected to be higher than the carrying amount because market interest
rates have declined since such debt was
F-20
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
incurred. However, since it is unlikely the Company could obtain similar
unsecured financing at comparable rates today, determining a fair value of such
debt is not appropriate.
NOTE 10--PREFERRED STOCK
CLASS B PREFERRED STOCK
At December 31, 1996 and 1995, the Company was authorized to issue 1,302,300
shares of Class B Preferred Stock, par value $.50 per share, which may be issued
in series from time to time at the discretion of the Board of Directors. Holders
of all series of Class B Preferred Stock share ratably as to rights to payment
of dividends and to amounts payable in event of liquidation, dissolution or
winding up of the Company. No dividends or payments in liquidation may be made
with respect to Common Stock or any other stock ranking junior as to dividends
or assets to the Class B Preferred Stock unless all accumulated dividends and
sinking fund payments on the Class B Preferred Stock have been paid in full and,
in the event of liquidation, unless the accumulated dividends and the
liquidation preference of the Class B Preferred Stock have been paid.
SERIES D
At December 31, 1996 and 1995, the Company had 487,400 shares of Class B
Cumulative Convertible Preferred Stock, Series D (Preferred Stock), issued and
outstanding. Holders of the Preferred Stock are entitled to a cumulative
dividend, payable quarterly, at the annual rate of 8.5% ($1.70 per share). The
Preferred Stock is redeemable at the option of the Company at any time, in whole
or in part, at a price of $20.00 per share plus cumulative unpaid dividends. No
purchases or redemptions of or dividends on Common Stock may occur unless all
accumulated dividends have been paid on the Preferred Stock.
At December 31, 1996, each share of Preferred Stock had a liquidating value
of $21.28 per share and is convertible into Common Stock at the rate of 1.4545
shares of Common Stock for each share of Preferred Stock (equivalent to a
conversion price of $13.75 per common share), subject to adjustment under
certain conditions. At December 31, 1996, a total of 708,923 shares of Common
Stock was reserved for issuance upon conversion of the Preferred Stock.
If six quarterly dividends on the Preferred Stock are unpaid, the holders of
Preferred Stock shall have the right, voting as a class, to elect two additional
persons to the Board of Directors of the Company until all such dividends have
been paid.
The Company has not declared a dividend on its Class B, Series D Preferred
Stock since the first quarter of 1996. The cumulative amount of undeclared
dividends as of December 31, 1996 is $622,000. Under accounting rules, such
dividends are not accrued until declared, however, for financial reporting
purposes the amount of such dividends are shown on the face of the income
statement as a deduction to arrive at net earnings (loss) applicable to common
stockholders. The Company was not permitted to declare or pay any dividends on
its preferred stock at December 31, 1996.
NOTE 11--COMMON STOCK
EMPLOYEE STOCK OWNERSHIP PLANS
The Company has two employee stock ownership plans, the Kerr Group, Inc.
Employee Incentive Stock Ownership Plan Trust formed in 1985 (ESOP I) and the
Kerr Group, Inc. 1987 Employee Incentive Stock Ownership Plan Trust formed in
1987 (ESOP II). Both plans are for the benefit of employees of the
F-21
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMON STOCK (CONTINUED)
Company. The Company borrowed funds from a group of banks, which in turn were
loaned to the plans for the purpose of purchasing shares of the Company's Common
Stock. The bank loans were repaid on February 28, 1992. The related Company loan
to ESOP I was repaid during 1993 and the loan to ESOP II was repaid during 1994.
ESOP I and ESOP II obtained the funds to repay loans primarily through the
receipt of tax deductible contributions made by the Company. The Company funded
such contributions primarily through the reduction of compensation and benefits,
and deferral of salary increases which it would otherwise have provided to its
employees. Total contribution expense from continuing operations for these plans
was $396,000 in 1994. For financial statement purposes, the bank loans were
reflected as a liability and the Company's loans to ESOP I and ESOP II were
reflected as a reduction in stockholders' equity.
STOCK OPTIONS
Under the Company's Stock Option Plans for employees, options may be granted
at a price determined by the Stock Option Committee of the Board of Directors,
which may be less than market value. Options may be exercised during periods
established by such Committee; however, in no event may any option be exercised
more than ten years after the date of grant. Options granted in 1996 and 1995
were fully vested on the date of grant. All of the Company's currently
outstanding options issued prior to 1995 generally vest in cumulative
installments of 20% per year commencing on the date of grant. Such options
become exercisable in full upon the occurrence of certain enumerated events,
including certain changes in control of the Company.
The options granted beginning in 1992 provide that the Company's stock price
must equal or exceed a triggering price per Common Share, which is higher than
the exercise price of the option, for ten consecutive trading days for the
options to be exercisable. The options granted during 1996 had triggering prices
of $10.00 per common share. The options granted during 1995, 1994 and 1993 had
triggering prices of $12.50 per Common Share. The options granted during 1992
had triggering prices of $10.00 per Common Share, which requirement was met
during 1994, and the options issued during 1992 are now exercisable.
F-22
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMON STOCK (CONTINUED)
The following tabulation summarizes changes under the Company's Stock Option
Plans for employees during the years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
------------------------- ------------------------- ------------------------
NUMBER OF NUMBER OF NUMBER OF
OPTIONS PRICE RANGE OPTIONS PRICE RANGE OPTIONS PRICE RANGE
----------- ------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options Outstanding:
Beginning of year..................... 427,100 $5 3/8-10 3/8 252,100 $5 3/8-10 3/8 274,000 $5 3/8-8 5/16
Granted............................... 75,000 3 15/16 204,000 7 9/16 6,500 9 7/16-10 3/8
Exercised............................. -- (6,000) 5 3/8 (10,400) 5 3/8-7 1/8
Canceled.............................. (134,900) 5 3/8-8 5/16 (23,000) 5 3/8-8 5/16 (18,000) 5 3/8-8 5/16
Expired............................... (40,000) 7 1/8 -- --
----------- ----------- -----------
End of year........................... 327,200 3 15/16-10 3/8 427,100 5 3/8-10 3/8 252,100 5 3/8-10 3/8
Exercisable at end of year:
Currently exercisable................. 49,500 83,200 70,900
Exercisable if Common
Stock trades at triggering price of
$10.00............................ 75,000 -- --
Exercisable if Common
Stock trades at triggering price of
$12.50............................ 185,900 277,300 57,501
----------- ----------- -----------
Total............................. 310,400 360,500 128,401
Available for grant at end of year...... 81,397 21,497 22,497
</TABLE>
In addition, the 1988 Stock Option Plan for Non-Employee Directors (the 1988
Plan), consisting of 80,000 shares, and 1993 Stock Option Plan for Non-Employee
Directors (the 1993 Plan), consisting of 60,000 shares, provide for the grant of
options to purchase Common Stock to members of the Board of Directors of the
Company who are not employees of the Company or any of its subsidiaries or
affiliates. The option price of each option granted under these plans is the
fair market value of Common Stock on the date of grant. Options under the 1988
Plan are immediately exercisable upon grant and will expire five years from the
date of grant. Future grants of options under the 1988 Plan can only be made to
Directors other than the Company's current Directors. Options under the 1993
Plan are exercisable six months after date of grant, provided that the Company's
stock price equals or exceeds $12.50 per Common Share for ten consecutive
trading days. Options under the 1993 Plan expire ten years from the date of
grant.
F-23
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMON STOCK (CONTINUED)
The following tabulation summarizes changes under the Company's Stock Option
Plans for Non-Employee Directors during the years ended December 31, 1996, 1995
and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
------------------------- ------------------------ ------------------------
NUMBER OF NUMBER OF NUMBER OF
OPTIONS PRICE RANGE OPTIONS PRICE RANGE OPTIONS PRICE RANGE
----------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options Outstanding:
Beginning of year..................... 60,000 $8 3/16 60,000 $8 3/16 60,000 $8 3/16
Granted............................... 10,000 3 15/16 -- --
Exercised............................. -- -- --
Expired............................... -- -- --
----------- ----------- -----------
End of year........................... 70,000 3 15/16-8 3/16 60,000 8 3/16 60,000 8 3/16
Exercisable at end of year:
Currently exercisable................. -- -- --
Exercisable if Common
Stock trades at $10.00 per share or
above............................. 10,000 -- --
Exercisable if Common
Stock trades at $12.50 per share or
above............................. 60,000 60,000 60,000
----------- ----------- -----------
Total................................. 70,000 60,000 60,000
Available for grant at end of year...... 70,000 80,000 80,000
</TABLE>
The aggregate option price for all outstanding options at December 31, 1996,
1995 and 1994 was $2,696,000, $3,698,000, and $2,359,000, respectively. At the
time options are exercised, the common stock account is credited with the par
value of the shares issued and additional paid-in capital is credited with the
cash proceeds in excess of par value. The Company's Stock Option Plans permit
the grant of both incentive stock options and nonstatutory stock options.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123, "Accounting for Stock-Based Compensation." The Company
adopted the disclosure provisions of FASB Statement 123 in 1996, but opted to
remain under the expense recognition provisions of Accounting Principles Board
(APS) Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting
for stock option plans. Had compensation expense for stock options granted under
the Plan been determined based on fair value at the grant dates consistent with
the disclosure method required for 1996 in accordance with FASB Statement 123,
the Company's net loss for 1996 and 1995 would have been increased to the pro
forma amounts shown below:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Net loss:
As reported........................................................... $ 23,122 $ 6,136
Pro forma............................................................. 23,273 6,454
Net loss per share:
As reported........................................................... $ 5.88 $ 1.60
Pro forma............................................................. 5.92 1.68
</TABLE>
F-24
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMON STOCK (CONTINUED)
The weighted average fair value of options granted in 1996 and 1995 was
estimated as of the date of grant using the Black-Scholes stock option pricing
model, based on the he following weighted average assumptions:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Risk free interest rate.................................................. 6.71% 5.92%
Expected term............................................................ 5 years 5 years
Expected volatility...................................................... 40% 37%
</TABLE>
No dividend will be paid for the entire term of the option.
NOTE 12--RENTAL EXPENSE AND LEASE COMMITMENTS
The Company occupies certain manufacturing facilities, warehouse facilities
and office space and uses certain automobiles, machinery and equipment under
noncancelable lease arrangements. Rent expense related to continuing operations
under these agreements was $3,465,000, $2,842,000 and $2,381,000 in 1996, 1995
and 1994, respectively.
At December 31, 1996, the Company was obligated under various noncancelable
leases. Calendar year minimum rental commitments under the Company's leases are
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
TOTAL REAL PERSONAL
COMMITMENT PROPERTY PROPERTY
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
1997........................................... $ 1,708 $ 1,288 $ 420
1998........................................... 1,636 1,255 381
1999........................................... 1,462 1,224 238
2000........................................... 1,355 1,224 131
2001........................................... 1,321 1,224 97
2002 through 2014.............................. 8,546 8,542 4
</TABLE>
Future minimum rental commitments are lower than in prior years due to the
cancellation of the lease for the Santa Fe Springs facility as a result of the
plant closing and the relinquishing of possession of the Company's former
principal executive office.
The amounts above exclude rentals related to the Company's former principal
executive office of which the Company relinquished possession in early 1997. The
Company has provided a reserve for the estimated cost to settle potential claims
of the landlord of this location.
Real estate taxes, insurance and maintenance expenses are obligations of the
Company. Generally, in the normal course of business, leases that expire will be
renewed or replaced by leases on other properties.
NOTE 13--COMMITMENTS AND CONTINGENCIES
In connection with the Company's Workers' Compensation insurance programs,
the Company has pledged a certificate of deposit in the amount of $500,000 to
secure surety bonds. The Company's estimate of its ultimate liability relating
to these programs has been reflected on the Company's consolidated balance sheet
as a liability.
F-25
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has been designated by the Environmental Protection Agency as a
potentially responsible party to share in the remediation costs of several waste
disposal sites. Pursuant to the sale of the Metal Crown Business, the Company
has indemnified the buyer for certain environmental remediation costs. In
addition, pursuant to the sale of the Commercial Glass Container Business, the
Company has indemnified the buyer for certain environmental remediation costs
and has retained ownership of certain real property used in the Commercial Glass
Container Business which may require environmental remediation. The estimated
ultimate liability of the environmental indemnities related to these businesses
is not material to the consolidated results of operations or the consolidated
balance sheet of the Company. During 1996, the Company made cash payments
related to environmental remediation of $256,000. As of December 31, 1996, the
Company has accrued a reserve of approximately $212,000 for the expected
remaining costs associated with environmental remediation described above and in
connection with its current manufacturing plants. The amount of the reserve was
based in part on an environmental study performed by an independent
environmental engineering firm. The Company believes that this reserve is
adequate.
F-26
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--CONDENSED QUARTERLY DATA FOR 1996 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
----------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1996
Net sales.............................................. $ 25,096 $ 27,368 $ 28,024 $ 26,881
Gross profit........................................... 2,952 6,646 7,833 6,874
Net loss from continuing operations(a)(b).............. (7,666) (1,120) (4,498) (10,978)
Net earnings related to discontinued operations(c)..... 1,431 0 0 538
----------- --------- --------- ---------
Net loss............................................. (6,235) (1,120) (4,498) (10,440)
Preferred stock dividends(d)....................... 207 207 207 208
----------- --------- --------- ---------
Net loss applicable to common stockholders............. $ (6,442) $ (1,327) $ (4,705) $ (10,648)
----------- --------- --------- ---------
----------- --------- --------- ---------
Net loss per common share:
From continuing operations........................... $ (2.00) $ (0.34) $ (1.20) $ (2.84)
From discontinued operations......................... 0.36 -- -- 0.13
----------- --------- --------- ---------
Net loss........................................... $ (1.64) $ (0.34) $ (1.20) $ (2.71)
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
----------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1995
Net sales.............................................. $ 27,362 $ 26,189 $ 28,240 $ 27,396
Gross profit........................................... 6,895 6,180 6,339 5,168
Net loss from continuing operations(e)................. (375) (736) (786) (1,726)
Net earnings related to discontinued operations........ (12) 451 (313) (1,810)
----------- --------- --------- ---------
Net loss............................................. (387) (285) (1,099) (3,536)
Preferred stock dividends.......................... 207 207 207 208
----------- --------- --------- ---------
Net loss applicable to common stockholders............. $ (594) $ (492) $ (1,306) $ (3,744)
----------- --------- --------- ---------
----------- --------- --------- ---------
Net loss per common share:
From continuing operations........................... $ (0.16) $ (0.25) $ (0.25) $ (0.49)
From discontinued operations......................... -- 0.12 (0.08) (0.46)
----------- --------- --------- ---------
Net loss........................................... $ (0.16) $ (0.13) $ (0.33) $ (0.95)
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
- ------------------------
(a) Net loss from continuing operations includes after-tax costs associated with
restructuring and financing of $4,500,000 for the quarter ended March 31,
1996, $541,000 for the quarter ended June 30, 1996, $768,000 for the quarter
ended September 30, 1996 and $1,930,000 for the quarter ended December 31,
1996. See Note 3 of notes to financial statements for further discussion.
(b) Net loss from continuing operations includes charges to provide valuation
reserves against the Company's deferred income tax asset of $4,000,000 for
the quarter ended September 30, 1996 and $9,691,000 for the quarter ended
December 31, 1996. See Note 5 of notes to financial statements for further
discussion.
F-27
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--CONDENSED QUARTERLY DATA FOR 1996 AND 1995 (UNAUDITED) (CONTINUED)
(c) Net earnings from discontinued operations includes an after-tax gain of
$1,564,000 for the quarter ended March 31, 1996 and a subsequent adjustment
to increase such after-tax gain by $538,000 during the quarter ended
December 31, 1996. The increase in such gain was primarily related to a
reduction in the reserve previously provided related to pension accounting.
(d) The Company has not declared a dividend on its Class B, Series D Preferred
Stock since the first quarter of 1996. The cumulative amount of undeclared
dividends as of December 31, 1996 is $622,000. The Company was not permitted
to declare or pay any dividends on its preferred stock at December 31, 1996.
(e) Net loss from continuing operations for the quarter ended December 31, 1995
includes a pretax loss of $1,000,000 related to the write-down in the book
value of land formerly used by the Company as a glass container
manufacturing plant.
F-28
<PAGE>
KERR GROUP, INC.
CONDENSED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED) (AUDITED)
(IN THOUSANDS EXCEPT PER
SHARE DATA)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents......................................................... $ 438 $ 9,107
Restricted cash................................................................... 3,741 0
Receivables--primarily trade accounts, less allowance for doubtful accounts of
$314 at September 30, 1997 and $287 at December 31, 1996........................ 13,881 9,710
Inventories
Raw materials and work in process............................................... 5,037 6,702
Finished goods.................................................................. 6,386 8,034
------------- ------------
Total inventories............................................................. 11,423 14,736
Prepaid expenses and other current assets......................................... 464 31
------------- ------------
Total current assets.......................................................... 29,947 33,584
------------- ------------
Net property, plant and equipment................................................. 38,828 38,890
------------- ------------
Deferred income tax asset........................................................... 27,630 0
Goodwill and other intangibles, net of amortization of $120 at September 30, 1997
and $2,749 at December 31, 1996................................................... 47,522 5,682
Other assets........................................................................ 2,830 7,370
------------- ------------
Assets held for sale................................................................ 1,500 0
$ 148,257 $ 85,526
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current position of long-term debt................................................ $ 4,000 $ 50,900
Short-term debt................................................................... 6,822 0
Accounts payable.................................................................. 8,998 7,373
Accrued expenses.................................................................. 8,053 5,622
------------- ------------
Total current liabilities....................................................... 27,873 63,895
------------- ------------
Accrued pension liability........................................................... 21,799 13,935
Other long-term liabilities......................................................... 16,891 4,394
Long-term debt...................................................................... 27,667 0
Obligation to acquire 275,962 shares of common stock @ $5.40/share and 180,006
shares of preferred stock @ $12.50/share.......................................... 3,741 0
Stockholders' equity
Preferred Stock, 487 shares authorized and issued, liquidation value of $22.55 per
share at September 30, 1997 and $21.28 per share at December 31, 1996........... -- 9,748
Predecessor Common Stock, $.50 par value per share, 20,000 shares authorized,
4,266 shares issued............................................................. -- 2,113
Company Common Stock, $.01 par value per share, 50,000 authorized, 5,000 shares
issued and outstanding.......................................................... 50 --
Additional paid-in capital........................................................ 49,950 27,239
Retained earnings (accumulated deficit)........................................... 286 (20,640)
Treasury Stock, 0 shares at September 30, 1997 and
293 shares at December 31, 1996 at cost......................................... -- (6,913)
Excess of additional pension liability over unrecognized prior service cost,
net of tax benefits............................................................. -- (8,245)
------------- ------------
Total stockholders' equity...................................................... 50,286 3,302
------------- ------------
$ 148,257 $ 85,526
------------- ------------
------------- ------------
</TABLE>
F-29
<PAGE>
KERR GROUP, INC.
CONDENSED STATEMENTS OF EARNINGS (LOSS)
FOR THE ONE MONTH PERIOD ENDED SEPTEMBER 30, 1997, THE EIGHT MONTH PERIOD ENDED
AUGUST 26, 1997, AND THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 AND FOR THE
ONE MONTH PERIOD ENDED
SEPTEMBER 30, 1997, THE TWO MONTH PERIOD ENDED AUGUST 26, 1997 AND THE
THREE MONTH PERIOD ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PREDECESSOR
TWO MONTH PREDECESSOR PREDECESSOR PREDECESSOR
ONE MONTH PERIOD THREE MONTH ONE MONTH EIGHT MONTH NINE MONTH
PERIOD ENDED ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, AUGUST 26, SEPTEMBER 30, SEPTEMBER 30, AUGUST 26, SEPTEMBER 30,
1997 1997 1996 1997 1997 1996
--------------- ----------- --------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net sales...................... $ 9,819 $ 18,908 $ 28,024 $ 9,819 $ 76,488 $ 80,488
Cost of sales.................. 7,390 14,820 20,191 7,390 58,336 63,057
------ ----------- ------- ------ -------------- -------------
Gross Profit............. 2,429 4,088 7,833 2,429 18,152 17,431
Research and development
expenses..................... 117 287 460 117 1,214 1,429
Plant administrative
expenses..................... 302 1,117 1,274 302 3,999 4,114
Selling and warehouse
expenses..................... 669 1,304 1,946 669 5,629 5,983
General corporate expenses..... 633 1,431 2,540 633 6,124 8,153
Restructuring costs............ 0 175 1,280 0 175 9,436
Financing costs................ 0 777 0 0 2,396 245
Interest expense, net.......... 239 1,115 1,163 239 3,910 3,544
------ ----------- ------- ------ -------------- -------------
Loss from continuing
operation before income
taxes and extraordinary
item................... 469 (2,118) (830) 469 (5,295) (15,473)
Provision (benefit) for income
taxes........................ 183 0 3,668 183 0 (2,189)
------ ----------- ------- ------ -------------- -------------
Income (loss) from
continuing operations
before extraordinary
item..................... 286 (2,118) (4,498) 286 (5,295) (13,284)
Discontinued operations:
Gain on sale of discontinued
operations................. 0 0 0 0 0 1,564
Loss from discontinued
operations................. 0 0 0 0 0 (133)
------ ----------- ------- ------ -------------- -------------
Net earnings related to
discontinued
operations............... 0 0 0 0 0 1,431
------ ----------- ------- ------ -------------- -------------
Net income (loss) before
extraordinary item....... 286 (2,118) (4,498) 286 (5,295) (11,853)
Extraordinary loss on
financing.................. 0 (4,419) 0 0 (4,419) 0
------ ----------- ------- ------ -------------- -------------
Net income (loss).......... 286 (6,537) (4,498) 286 (9,714) (11,853)
Preferred stock dividends...... 0 138 207 0 552 621
------ ----------- ------- ------ -------------- -------------
Net income (loss)
applicable to common
stockholders............. $ 286 $ (6,675) $ (4,705) $ 286 $ (10,266) (12,474)
------ ----------- ------- ------ -------------- -------------
------ ----------- ------- ------ -------------- -------------
Net income (loss) per common
share, primary and fully
diluted:
From continuing
operations............... $ .06 $ (0.55) $ (1.20) $ .06 $ (1.47) $ (3.54)
From discontinued
operations............... 0 0 0 0 0 0.37
From extraordinary loss on
financing................ 0 (1.11) 0 0 (1.11) 0
------ ----------- ------- ------ -------------- -------------
Net income (loss)........ $ .06 $ (1.66) $ (1.20) $ .06 $ (2.58) $ (3.17)
------ ----------- ------- ------ -------------- -------------
------ ----------- ------- ------ -------------- -------------
</TABLE>
F-30
<PAGE>
KERR GROUP, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE ONE MONTH PERIOD ENDED SEPTEMBER 30, 1997, THE EIGHT MONTH PERIOD ENDED
AUGUST 26, 1997, AND THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
(NOTE 1) PREDECESSOR (NOTE 1)
------------------ --------------------------------------
ONE MONTH PERIOD EIGHT MONTH PERIOD NINE MONTH PERIOD
ENDED ENDED ENDED
SEPTEMBER 30, 1997 AUGUST 26, 1997 SEPTEMBER 30, 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED (USED) BY OPERATIONS
Continuing operations:
Income (loss) from continuing operations............ $ 286 $ (9,714) $ (13,284)
Add (deduct) noncash items included in loss from
continuing operations:
Expenses associated with restructuring.......... 0 175 5,662
Payments associated with restructuring.......... (406) (1,129) (4,064)
Expenses associated with financing.............. 0 3,983 147
Depreciation and amortization................... 835 6,106 7,197
Change in deferred income taxes................. 183 0 1,666
Changes in total pension liability, net......... 0 512 (5,546)
Other, net...................................... (307) 351 (836)
Changes in operating working capital:
Receivables..................................... 71 (4,242) (4,041)
Inventories..................................... 504 1,843 1,620
Other current assets............................ (98) (637) 110
Accounts payable................................ 201 3,002 (2,240)
Accrued expenses................................ (289) (1,020) (1,074)
Cash flows provided (used) by discontinued
operations.......................................... 0 360 8,026
------- ------- --------
Cash flow provided (used) by operations........... 980 (410) (6,657)
------- ------- --------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES
Continuing operations:
Capital expenditures................................ (251) (7,710) (1,488)
Proceeds from sale of land.......................... 0 3,669 0
Other, net.......................................... 174 96 (271)
Discontinued operations:
Proceeds from sale of assets of Consumer Products
Business.......................................... 0 0 14,417
Other, net............................................ 0 0 (289)
Cash flow provided (used) by investing activities... (77) (3,945) 12,369
------- ------- --------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES
Repayment of debt................................... (5,233) 0 (5,600)
Borrowings under Secured Revolving Credit
Facility.......................................... 0 3,758 0
Payment associated with financing................... 0 (3,742) (245)
Dividends paid...................................... 0 0 (207)
------- ------- --------
Cash flow provided (used) by financing
activities...................................... (5,233) 16 (6,052)
CASH AND CASH EQUIVALENTS
Decrease during the period.......................... (4,330) (4,339) (340)
Balance at beginning of the period.................. 8,509 9,107 3,904
------- ------- --------
Balance at end of the period........................ $ 4,179 $ 4,768 $ 3,564
------- ------- --------
------- ------- --------
</TABLE>
F-31
<PAGE>
KERR GROUP, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1) ORGANIZATION AND BASIS OF PRESENTATION
On August 26, 1997, Parent and Purchaser completed the Offer, and Parent
acquired the Common Stock and Preferred Stock from shareholders who tendered
their shares pursuant to the Offer. Subject to the terms of the Merger
Agreement, shares of Common Stock and Preferred Stock not tendered will be
converted into the right to receive $5.40 net per share of Common Stock and
$12.50 net per share of Preferred Stock pursuant to the Merger.
As part of the Merger, all options outstanding were cancelled. No new
options have been granted.
The Merger was accounted for using push down purchase accounting as if
Purchaser and the Company had merged as of August 26, 1997, and hence the
preceding condensed financial statements are presented for both the predecessor
company (represents activities through August 26, 1997) and the post-merger
company (represents activities starting August 27, 1997). The shares outstanding
and earnings per share presentation represent shares outstanding for Purchaser.
The one month period ended September 30, 1997 represents the period from
August 27, 1997 through September 30, 1997.
The two month period ended August 26, 1997 represents the period from July
1, 1997 through August 26, 1997.
The eight month period ended August 26, 1997 represents the period from
January 1, 1997 through August 26, 1997.
2) GENERAL
The condensed financial statements represent the accounts of the Company. In
the opinion of management, the accompanying condensed financial statements
contain all adjustments (consisting of only normal recurring accruals and
certain non-recurring accruals for restructuring charges as described below)
necessary to present fairly the financial position of the Company as of
September 30, 1997, and the results of operations for the one month period ended
September 30, 1997, the two month and eight month periods ended August 26, 1997
and the three month and nine month periods ended September 30, 1996, and changes
in cash flows for the one month period ended September 30, 1997, the eight month
period ended August 26, 1997, and the nine month period ended September 30,
1996.
Fully diluted earnings per common share reflect when dilutive, 1) the
incremental common shares issuable upon the assumed exercise of outstanding
stock options, and 2) the assumed conversion of the Class B, Series D Preferred
Stock and the elimination of the related dividends. The calculation of fully
diluted net earnings (loss) per common share for the one month period ended
September 30, 1997, the two month and eight month periods ended August 26, 1997,
and the three month and the nine month periods ended September 30, 1996 was not
dilutive.
The Company has not declared a dividend on its Class B, Series D Preferred
Stock since the first quarter of 1996. The cumulative amount of undeclared
dividends as of August 26, 1997 was $1,174,000. Under accounting rules, such
dividends are not accrued until declared, however, for financial reporting
purposes the amount of such dividends are shown on the face of the income
statement as a deduction to arrive at net earnings (loss) applicable to common
stockholders.
F-32
<PAGE>
KERR GROUP, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3) ACQUISITION
The acquisition has been accounted for using the purchase method of
accounting, and, accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based upon the estimated fair
values at the date of acquisition. Management is presently obtaining appraisals
and conducting various studies related to the acquisition. The estimated fair
values of the assets acquired and liabilities assumed are expected to change as
these appraisals are obtained and these studies are completed. The excess of the
purchase price over the fair values of the net assets acquired was $47.6 million
and has been recorded as goodwill, which is being amortized on a straight-line
basis over 35 years. The amount of goodwill amortization for the one month
period ended September 30, 1997 was $.1 million.
The net purchase price was allocated as follows:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
-----------
<S> <C>
Working capital, other than cash................................................. $ 26,245
Property, plant and equipment.................................................... $ 38,895
Other assets..................................................................... $ 41,318
Goodwill......................................................................... $ 47,642
Other liabilities................................................................ $ (104,100)
-----------
Purchase price, net of cash received............................................. $ 50,000
-----------
-----------
</TABLE>
4) FINANCING
In connection with the Merger and the consummation of the Offer, the Company
entered into a Loan and Security Agreement, dated as of August 26, 1997 (the
"Loan and Security Agreement"), for an aggregate amount of $62 million. The
credit facilities were used, among other things, (i) to refinance the
outstanding principal balance of funded indebtedness (including premium, and
accrued and unpaid interest) of the Company at the time of the consummation of
the Tender Offer, (ii) to pay a portion of the fees and expenses incurred in
connection with the Offer and (iii) to provide for working capital and general
corporate purposes of the Company after the consummation of the Offer. The
credit facilities are guaranteed by the tangible and intangible assets of the
Company.
Pursuant to the Loan and Security Agreement the credit facilities consisted
of a $20 million revolving credit facility (which includes a sublimit for the
issuance of standby and commercial letters of credit) (the "Revolving Credit
Facility"), a $32 million term loan facility (the"Term Loan Facility") and a $10
million equipment acquisition facility (the "CAPEX Facility" and together with
the Revolving Credit Facility and the Term Loan Facility, the "Senior Credit
Facilities").
The Revolving Credit Facility bears interest at a rate equal to LIBOR plus
225 basis points or the Base Rate (defined as the higher of (i) the bank's prime
rate and (ii) the Federal Funds rate), at all times subject to applicable
maximum legal interest rates. The Term Loan Facility and the CAPEX Facility bear
interest at a rate equal to LIBOR plus 275 basis points or the Base Rate plus 50
basis points, in each case at all times subject to applicable maximum legal
interest rates. The Company may select interest periods of 1, 2, 3 or 6 months
for LIBOR loans, subject to availability. A default rate of interest applies on
all loans in the event of default at a rate per annum of 2% above the applicable
interest rate.
The Revolving Credit Facility terminates and all amounts outstanding
thereunder will be due and payable in full five years from the closing of the
Offer (the "Closing"). The Term Loan Facility is subject to repayment according
to scheduled amortization, with the final payment of all amounts outstanding,
plus
F-33
<PAGE>
KERR GROUP, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4) FINANCING (CONTINUED)
accrued interest, due five years from the Closing or upon termination of the
Revolving Credit Facility, whichever is earlier. The CAPEX Facility also is
subject to amortization, with the final payment of all amounts outstanding, plus
accrued interest, due five years from the Closing or upon termination of the
Revolving Credit Facility, whichever is earlier. The Loan and Security Agreement
provides for prepayment of the Senior Credit Facilities provided that the
Company pays liquidated damages.
On August 26, 1997, the Company refinanced all of its existing indebtedness,
including its 9.45% Senior Series A and 8.99% Series B Notes and its credit
facility with Madeleine L.C.C., through a secured credit facility with
NationsBank.
5) PENSION BENEFIT GUARANTY CORPORATION
On August 24, 1997, the Company and the Pension Benefit Guaranty Corporation
(the "PBGC") entered into a definitive agreement pursuant to which the PBGC
agreed to dismiss its lawsuit now pending before the United States District
Court for the Eastern District of Pennsylvania seeking to terminate the
Company's pension plan, withdraw its Notice of Determination and forbear from
instituting new proceedings with respect to the acquisition. Pursuant to the
terms of the definitive agreement, the Company agreed to (i) future enhanced
pension plan contributions, (ii) grant to the PBGC a second lien in the amount
of $40.7 million secured by substantially all of the assets of the Company,
(iii) various restrictions on future secured indebtedness and (iv) provisions
regarding notice of certain events. The definitive agreement became effective
upon the consummation of the Offer.
6) RECEIVABLES
Receivables as of December 31, 1996, as shown on the accompanying Condensed
Balance Sheets, have been reduced by net proceeds of $3,861,000, from advances
pursuant to the sale of receivables under the Company's 1996 Accounts Receivable
Agreement.
7) INCOME TAXES
During the two month and eight month periods ended August 26, 1997, the
Company recorded charges of $826,000 and $2,065,000 respectively, to provide a
valuation reserve against its deferred income tax asset. The increase in the
valuation reserve eliminated the tax benefit the Company would have generated
during the first eight months of 1997, and was required because of the
continuing unwaived covenant defaults under loan agreements governing the
Company's $50,900,000 principal amount of unsecured debt. Due to the acquisition
and refinancing of the debt, the Company will no longer record a valuation
allowance.
During the third and fourth quarters of 1996, a valuation reserve was
provided to eliminate the tax benefit recorded during the first and second
quarters of 1996.
8) RESTRUCTURING
During the first quarter of 1996, the Company recorded a pretax loss of
$7,500,000 for certain costs associated with the restructuring of the Company,
which included moving the corporate headquarters from Los Angeles, California to
Lancaster, Pennsylvania and relocating the wide-mouth jar operations from Santa
Fe Springs, California to Bowling Green, Kentucky. The pretax loss consisted of
reserves for i) severance, workers' compensation and insurance continuation
costs of $3,000,000, ii) costs associated
F-34
<PAGE>
KERR GROUP, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8) RESTRUCTURING (CONTINUED)
with subleasing the two facilities of $2,300,000, iii) asset retirements of
$1,600,000 and iv) other costs of $600,000.
During the eight month period ended August 26, 1997 and the one month period
ended September 30, 1997, the Company made cash payments related to such
reserves for i) costs associated with terminating the leases of facilities of
$618,000 and $0, respectively, ii) severance pay and related costs of $454,000
and $34,000, respectively, and iii) other costs of $58,000 and $0, respectively.
During the nine month period ended September 30, 1996, the Company made cash
payments related to such reserves for i) severance pay and related costs of
$1,431,000 and ii) other costs of $8,000.
In addition, during the three months and nine months ended September 30,
1996, the Company incurred an unusual pre-tax loss of $1,280,000 and $1,936,000,
respectively, for restructuring costs primarily related to relocation of
personnel and equipment.
The relocation of the corporate headquarters and the wide-mouth jar
manufacturing operation have been completed. Cash expenditures related to the
relocation are expected to be completed in early 1998. The ultimate required
amount of the reserves related to the restructuring is expected to approximate
the original estimate.
9) DISCONTINUED OPERATIONS
During the first quarter of 1996, the Company sold the manufacturing assets
of the Consumer Products Business for a purchase price of $14,417,000. The
Company recorded a pretax gain of $2,607,000 ($1,564,000 after-tax) in
connection with this sale. This pretax gain has been reduced by $5,800,000 of
reserves for i) retiree health care and pension expenses of $3,800,000, ii)
severance pay, workers' compensation claims and insurance continuation costs of
$1,000,000, iii) professional fees of $500,000, iv) asset retirements of
$300,000, and v) other costs of $200,000.
The ultimate required amount of the reserves related to the disposal of the
Consumer Products Business is expected to approximate the original estimate.
The gain on the sale and the results of the Consumer Products Business have
been reported separately as a component of discontinued operations in the
Condensed Statements of Earnings (Loss).
10) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In the first quarter of 1997, the Financial Accounting Standards Board
adopted Statement No. 128, Earnings per Share (FASB No. 128) and Statement No.
129, Disclosure of Information about Capital Structure (FASB No. 129). FASB No.
128 simplifies the computation of earnings per common share by replacing primary
and fully diluted presentations with the new basic and diluted disclosures. FASB
No. 129 establishes standards for disclosing information about an entity's
capital structure. These statements will be adopted by the Company effective
December 31, 1997.
11) ADJUSTMENTS
The unaudited financial statements furnished herein reflect all adjustments
which are, in the opinion of management, necessary to a fair presentation of the
financial position, the results of operations and cash flow for the periods
presented. All of such adjustments are of a normal recurring nature.
F-35
<PAGE>
ANNEX I
KERR GROUP, INC.,
FREMONT ACQUISITION COMPANY, LLC
AND
KERR ACQUISITION CORPORATION
AGREEMENT AND PLAN OF MERGER
DATED AS OF JULY 1, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
ARTICLE I. THE TENDER OFFER
SECTION 1.1. THE OFFER.............................................................................. 1
SECTION 1.2. COMPANY ACTION......................................................................... 3
SECTION 1.3. DIRECTORS.............................................................................. 4
ARTICLE II. THE MERGER
SECTION 2.1. THE MERGER............................................................................. 5
SECTION 2.2. EFFECTIVE TIME......................................................................... 5
SECTION 2.3. CLOSING................................................................................ 5
SECTION 2.4. EFFECT OF THE MERGER................................................................... 5
SECTION 2.5. SUBSEQUENT ACTIONS..................................................................... 5
SECTION 2.6. CERTIFICATE OF INCORPORATION; BY-LAWS; DIRECTORS AND OFFICERS.......................... 5
SECTION 2.7. STOCKHOLDERS' MEETING.................................................................. 6
SECTION 2.8. MERGER WITHOUT MEETING OF STOCKHOLDERS................................................. 6
SECTION 2.9. CONVERSION OF SECURITIES............................................................... 6
SECTION 2.10. DISSENTING SHARES...................................................................... 7
SECTION 2.11. SURRENDER OF SHARES; STOCK TRANSFER BOOKS.............................................. 7
SECTION 2.12. STOCK PLANS............................................................................ 8
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF PARENT AND THE PURCHASER
SECTION 3.1. CORPORATE ORGANIZATION................................................................. 9
SECTION 3.2. AUTHORITY RELATIVE TO THIS AGREEMENT................................................... 9
SECTION 3.3. NO CONFLICT; REQUIRED FILINGS AND CONSENTS............................................. 10
SECTION 3.4. FINANCING ARRANGEMENTS................................................................. 10
SECTION 3.5. NO PRIOR ACTIVITIES.................................................................... 10
SECTION 3.6. BROKERS................................................................................ 10
SECTION 3.7. PROXY STATEMENT........................................................................ 10
SECTION 3.8. EMPLOYEE BENEFIT PLANS................................................................. 11
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 4.1. ORGANIZATION AND QUALIFICATION; SUBSIDIARIES........................................... 11
SECTION 4.2. CAPITALIZATION......................................................................... 11
SECTION 4.3. AUTHORITY RELATIVE TO THIS AGREEMENT................................................... 12
SECTION 4.4. NO CONFLICT; REQUIRED FILINGS AND CONSENTS............................................. 12
SECTION 4.5. SEC FILINGS; FINANCIAL STATEMENTS...................................................... 13
SECTION 4.6. UNDISCLOSED LIABILITIES................................................................ 13
SECTION 4.7. ABSENCE OF CERTAIN CHANGES OR EVENTS................................................... 13
SECTION 4.8. LITIGATION............................................................................. 13
SECTION 4.9. EMPLOYEE BENEFIT PLANS................................................................. 14
SECTION 4.10. PROXY STATEMENT........................................................................ 15
SECTION 4.11. BROKERS................................................................................ 15
SECTION 4.12. CONTROL SHARE ACQUISITION.............................................................. 15
SECTION 4.13. CONDUCT OF BUSINESS.................................................................... 15
SECTION 4.14. TAXES.................................................................................. 15
SECTION 4.15. INTELLECTUAL PROPERTY.................................................................. 16
SECTION 4.16. EMPLOYMENT MATTERS..................................................................... 18
SECTION 4.17. VOTE REQUIRED.......................................................................... 18
SECTION 4.18. ENVIRONMENTAL MATTERS.................................................................. 18
SECTION 4.19. REAL PROPERTY.......................................................................... 19
SECTION 4.20. TITLE AND CONDITION OF PROPERTIES...................................................... 19
SECTION 4.21. CONTRACTS.............................................................................. 19
</TABLE>
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SECTION 4.22. POTENTIAL CONFLICTS OF INTEREST........................................................ 20
SECTION 4.23. SUPPLIERS AND CUSTOMERS................................................................ 20
SECTION 4.24. INSURANCE.............................................................................. 20
SECTION 4.25. ACCOUNTS RECEIVABLE; INVENTORY......................................................... 20
SECTION 4.26. OPINION OF FINANCIAL ADVISOR........................................................... 20
ARTICLE V. CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 5.1. ACQUISITION PROPOSALS.................................................................. 20
SECTION 5.2. CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER.................................. 21
SECTION 5.3. NO SHOPPING............................................................................ 22
ARTICLE VI. ADDITIONAL AGREEMENTS
SECTION 6.1. PROXY STATEMENT........................................................................ 23
SECTION 6.2. MEETING OF STOCKHOLDERS OF THE COMPANY................................................. 23
SECTION 6.3. ADDITIONAL AGREEMENTS.................................................................. 24
SECTION 6.4. NOTIFICATION OF CERTAIN MATTERS........................................................ 24
SECTION 6.5. ACCESS TO INFORMATION.................................................................. 24
SECTION 6.6. PUBLIC ANNOUNCEMENTS................................................................... 25
SECTION 6.7. BEST EFFORTS; COOPERATION.............................................................. 25
SECTION 6.8. AGREEMENT TO DEFEND AND INDEMNIFY...................................................... 25
SECTION 6.9. EMPLOYEE BENEFITS...................................................................... 26
SECTION 6.10. PENDING LITIGATION..................................................................... 26
ARTICLE VII. CONDITIONS OF MERGER
SECTION 7.1. OFFER.................................................................................. 26
SECTION 7.2. STOCKHOLDER APPROVAL................................................................... 26
SECTION 7.3. NO CHALLENGE........................................................................... 27
ARTICLE VIII. TERMINATION, AMENDMENT AND WAIVER
SECTION 8.1. TERMINATION............................................................................ 27
SECTION 8.2. EFFECT OF TERMINATION.................................................................. 28
ARTICLE IX. GENERAL PROVISIONS
SECTION 9.1. NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS............................. 28
SECTION 9.2. NOTICES................................................................................ 28
SECTION 9.3. EXPENSES............................................................................... 29
SECTION 9.4. CERTAIN DEFINITIONS.................................................................... 29
SECTION 9.5. HEADINGS............................................................................... 30
SECTION 9.6. SEVERABILITY........................................................................... 30
SECTION 9.7. ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES......................................... 30
SECTION 9.8. ASSIGNMENT............................................................................. 30
SECTION 9.9. GOVERNING LAW.......................................................................... 30
SECTION 9.10. AMENDMENT.............................................................................. 30
SECTION 9.11. WAIVER................................................................................. 30
SECTION 9.12. COUNTERPARTS........................................................................... 30
ANNEX I Conditions to the Offer
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of July 1, 1997 (the "Agreement"),
among Kerr Group, Inc., a Delaware corporation (the "Company"), Fremont
Acquisition Company, LLC, a Delaware limited liability company (the "Parent"),
and Kerr Acquisition Corporation, a Delaware corporation and a wholly owned
subsidiary of the Parent ("Purchaser").
WITNESSETH
WHEREAS, the Boards of Directors of each of the Company, Parent and the
Purchaser have determined that it is in the best interests of their respective
stockholders for the Parent to acquire the Company upon the terms and subject to
the conditions set forth herein; and
WHEREAS, in furtherance thereof, it is proposed that the Purchaser will make
a cash tender offer (the "Offer") to acquire all shares of the issued and
outstanding common stock, $.50 par value, of the Company (the "Company Common
Stock"), including the associated Preferred Stock Purchase Rights (the "Rights")
issued pursuant to the Rights Agreement dated as of July 25, 1995, between the
Company and The First National Bank of Boston (the "Rights Agreement"), and all
shares of the issued and outstanding $1.70 Class B Cumulative Convertible
Preferred Stock, Series D, par value $.50 per share (the "Series D Shares"; the
Company Common Stock and the Series D Shares being collectively referred to
herein as the "Shares"), for $5.40 per share of Company Common Stock (the
"Common Per Share Amount") and $12.50 per Series D Shares (the "Series D Per
Share Amount"), or such higher price as may be paid in the Offer, in each case
net to the seller in cash; and
WHEREAS, also in furtherance of such acquisition, the Boards of Directors of
the Company, Parent and the Purchaser have each approved the merger (the
"Merger") of the Purchaser with and into the Company following the Offer in
accordance with the General Corporation Law of the State of Delaware ("Delaware
Law") and upon the terms and subject to the conditions set forth herein;
WHEREAS, the Board of Directors of the Company (the "Board of Directors")
has resolved to recommend acceptance of the Offer and the Merger to the holders
of Shares and has determined that the consideration to be paid for each share of
Company Common Stock and each of the Series D Preferred Shares in the Offer and
the Merger is fair to the holders of such Shares and to recommend that the
holders of such Shares accept the Offer and approve this Agreement and each of
the transactions contemplated hereby upon the terms and subject to the
conditions set forth herein; and
WHEREAS, as a condition and inducement to Parent's and the Purchaser's
entering into this Agreement and incurring the obligations set forth herein,
concurrently with the execution and delivery of this Agreement, Purchaser and
the Company are entering into an Option Agreement in the form of Exhibit A
hereto (the "Option Agreement"), pursuant to which, among other things, the
Company has granted the Purchaser an option to purchase certain newly-issued
shares of Company Common Stock, subject to certain conditions;
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants and agreements herein contained, and
intending to be legally bound hereby, the Company, Parent and the Purchaser
hereby agree as follows:
ARTICLE I.
THE TENDER OFFER
SECTION 1.1. THE OFFER.
(a) Provided that this Agreement shall not have been terminated in
accordance with Section 8.1 hereof and none of the events set forth in Annex I
hereto shall have occurred and be existing, the Purchaser or a direct or
indirect subsidiary thereof shall commence (within the meaning of Rule 14d-2
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under the Securities Exchange Act of 1934, as amended (the "Exchange Act") the
Offer as promptly as practicable, but in no event later than five business days
following the execution of this Agreement, and shall use all reasonable efforts
to consummate the Offer. The obligation of the Purchaser to accept for payment
any Shares tendered shall be subject to the satisfaction of only those
conditions set forth in Annex I. The Purchaser expressly reserves the right to
waive any such condition or to increase the Common Per Share Amount and the
Series D Per Share Amount. The Common Per Share Amount and the Series D Per
Share Amount shall be net to the seller in cash. The Company agrees that no
Shares held by the Company will be tendered pursuant to the Offer.
(b) Without the prior written consent of the Company, the Purchaser shall
not (i) decrease the Common Per Share Amount or the Series D Per Share Amount or
change the form of consideration payable in the Offer, (ii) decrease the number
of Shares sought, (iii) amend or waive satisfaction of the Minimum Condition (as
defined in Annex I) or (iv) impose additional conditions to the Offer or amend
any other term of the Offer in any manner adverse to the holders of Shares;
PROVIDED HOWEVER, that if on the initial scheduled expiration date of the Offer
which shall be twenty (20) business days after the date the Offer is commenced,
all conditions to the Offer shall not have been satisfied or waived, the
Purchaser may, from time to time, in its sole discretion, extend the expiration
date. The Purchaser shall, on the terms and subject to the prior satisfaction or
waiver of the conditions of the Offer, accept for payment and purchase, as soon
as permitted under the terms of the Offer, all Shares validly tendered and not
withdrawn prior to the expiration of the Offer; PROVIDED, HOWEVER, that if,
immediately prior to the initial expiration date of the Offer (as it may be
extended), the Shares tendered and not withdrawn pursuant to the Offer equal
less than 90% of the outstanding Company Common Stock or the outstanding Series
D Shares, the Purchaser may extend the Offer for a period not to exceed five (5)
business days, notwithstanding that all conditions to the Offer are satisfied as
of such expiration date of the Offer, so long as the Purchaser expressly
irrevocably waives any condition (other than the Minimum Condition (as defined
in Annex I hereto)) that subsequently may not be satisfied during such extension
of the Offer.
(c) The Offer shall be made by means of an offer to purchase (the "Offer to
Purchase") having only the conditions set forth in Annex I hereto. As soon as
practicable on the date the Offer is commenced, the Purchaser shall file with
the Securities and Exchange Commission (the "SEC") a Tender Offer Statement on
Schedule 14D-1 (together with all amendments and supplements thereto, and
including the exhibits thereto, the "Schedule 14D-1"). The Schedule 14D-1 will
contain (including as an exhibit) or incorporate by reference the Offer to
Purchase and forms of the related letter of transmittal and summary
advertisement (which documents, together with any supplements or amendments
thereto, and any other SEC schedule or form which is filed in connection with
the Offer and related transactions, are referred to collectively herein as the
"Offer Documents"). The Offer Documents will comply in all material respects
with the provisions of applicable Federal securities laws and, on the date filed
with the SEC and on the date first published, mailed or given to the Company's
stockholders, shall not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
make the statements therein, in light of the circumstances under which they were
made, not misleading, except that no representation is made by the Purchaser
with respect to information furnished by the Company to the Purchaser, in
writing, expressly for inclusion in the Offer Documents. The information
supplied by the Company to the Purchaser, in writing, expressly for inclusion in
the Schedule 14D-1 will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
(d) The Purchaser agrees to take all steps necessary to cause the Schedule
14D-1 to be filed with the SEC and the Offer Documents to be disseminated to
holders of Shares, in each case as and to the extent required by applicable
Federal securities laws. The Company and its counsel shall be given a reasonable
opportunity to review and comment on any Offer Documents before they are filed
with the SEC. Each of Parent, the Purchaser and the Company agrees promptly (i)
to correct any information provided by it for
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use in the Schedule 14D-1 or the Offer Documents if and to the extent that such
information shall have become false or misleading in any material respect and
(ii) to supplement the information provided by it specifically for use in the
Schedule 14D-1 or the Offer Documents to include any information that shall
become necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Purchaser further
agrees to take all steps necessary to cause the Schedule 14D-1 as so corrected
to be filed with the SEC and to be disseminated to the Company's stockholders in
each case and as to the extent required by applicable Federal securities laws.
SECTION 1.2. COMPANY ACTION.
(a) The Company hereby approves of and consents to the Offer and represents
and warrants that the Board of Directors, at a meeting duly called and held on
June 30, 1997, at which a majority of the Directors were present: (i) duly
approved and adopted this Agreement, the Option Agreement and the transactions
contemplated hereby and thereby, including the Offer and the Merger, recommended
that the stockholders of the Company accept the Offer, tender their Shares
pursuant to the Offer and approve this Agreement and the transactions
contemplated hereby, including the Merger, and determined that this Agreement
and the transactions contemplated hereby, including the Offer and the Merger,
are fair to and in the best interests of the holders of both the Company Common
Stock and the Series D Shares; and (ii) with respect to the Rights Agreement,
duly amended the Rights Agreement to provide that (1) neither this Agreement nor
any of the transactions contemplated hereby, including the Offer and the Merger,
will result in the occurrence of a "Distribution Date" (as such term is defined
in the Rights Agreement) or otherwise cause the Rights to become exercisable by
the holders thereof and (2) the Rights shall automatically on and as of the
Effective Time (as hereinafter defined) be void and of no further force or
effect.
(b) The Company shall file with the SEC, as promptly as practicable after
the filing by the Purchaser of the Schedule 14D-1 with respect to the Offer, a
Tender Offer Solicitation/Recommendation Statement on Schedule 14D-9 (together
with any and all amendments or supplements thereto, and including the exhibits
thereto, the "Schedule 14D-9"). The Schedule 14D-9 will comply in all material
respects with the provisions of all applicable Federal securities law and, on
the date filed with the SEC and on the date first published, sent or given to
the Company's stockholders, shall not contain any untrue statement of 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, except that no representation is
made by the Company with respect to information furnished by Parent or the
Purchaser for inclusion in the Schedule 14D-9. The Company further agrees to
take all steps necessary to cause the Schedule 14D-9 to be filed with the SEC
and to be disseminated to holders of the Shares, in each case and as and to the
extent required by applicable Federal securities laws. The Company shall mail,
or cause to be mailed, such Schedule 14D-9 to the stockholders of the Company at
the same time the Offer Documents are first mailed to the Stockholders of the
Company together with such Offer Documents. The Schedule 14D-9 and the Offer
Documents shall contain the recommendations of the Board of Directors described
in Section 1.2(a) hereof. The Company agrees promptly to correct the Schedule
14D-9 if and to the extent that it shall have become false or misleading in any
material respect (and each of the Parent and the Purchaser, with respect to
written information supplied by it specifically for use in the Schedule 14D-9,
shall promptly notify the Company of any required corrections of such
information and cooperate with the Company with respect to correcting such
information) and to supplement the information contained in the Schedule 14D-9
to include any information that shall become necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The Company further agrees to take all steps necessary to cause
the Schedule 14D-9 as so corrected to be filed with the SEC and to be
disseminated to the Company's stockholders in each case as and to the extent
required by applicable Federal securities laws. The Purchaser and its counsel
shall be given a reasonable opportunity to review and comment on the Schedule
14D-9 before it is filed with the SEC. In addition, the Company agrees to
provide the Purchaser and its counsel with any comments, whether written or
oral, that the Company or its
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counsel may receive from time to time from the SEC or its staff with respect to
the Schedule 14D-9 promptly after the receipt of such comments or
communications.
(c) In connection with the Offer, the Company, promptly upon execution of
this Agreement, shall furnish or cause to be furnished to the Purchaser mailing
labels containing the names and addresses of all record holders of Shares and
security position listings of Shares held in stock depositories, each as of a
recent date, and shall promptly furnish the Purchaser with such additional
information (including, but not limited to, updated lists of stockholders and
their addresses, mailing labels and security position listings) and such other
information and assistance as the Purchaser or its agents may reasonably request
for the purpose of communicating the Offer to the record and beneficial holders
of Shares.
SECTION 1.3. DIRECTORS.
(a) Promptly upon the purchase by the Purchaser of any Shares pursuant to
the Offer, and from time to time thereafter as Shares are acquired by the
Purchaser, Parent shall be entitled to designate such number of directors,
rounded up to the next whole number, on the Board of Directors as will give
Parent, subject to compliance with Section 14(f) of the Exchange Act,
representation on the Board of Directors equal to at least that number of
directors which equals the product of the total number of directors on the Board
of Directors (giving effect to the directors appointed or elected pursuant to
this sentence and including current directors serving as officers of the
Company) multiplied by the percentage that the aggregate number of Shares
beneficially owned by the Purchaser or any affiliate of the Purchaser (including
for purposes of this Section 1.3 such Shares as are accepted for payment
pursuant to the Offer, but excluding Shares held by the Company) bears to the
number of Shares outstanding. At such times, the Company will also cause (i)
each committee of the Board of Directors and (ii) if requested by the Purchaser,
each committee of such board to include persons designated by the Purchaser
constituting the same percentage of each such committee or board as Parent's
designees are of the Board of Directors. The Company shall, upon request by the
Purchaser, promptly increase the size of the Board of Directors or exercise its
best efforts to secure the resignations of such number of incumbent directors as
is necessary to enable Parent's designees to be elected to the Board of
Directors in accordance with the terms of this Section 1.3 and shall cause
Parent's designees to be so elected; PROVIDED, HOWEVER, that, in the event that
Parent's designees are appointed or elected to the Board of Directors, until the
Effective Time (as defined in Section 2.2 hereof) the Board of Directors shall
have at least one director who is a director on the date hereof and who is
neither an officer of the Company nor a designee, stockholder, affiliate or
associate (within the meaning of the Federal securities laws) of Parent (one or
more of such directors, the "Independent Directors"); PROVIDED FURTHER, that if
no Independent Directors remain, the other directors shall designate one person
to fill one of the vacancies who shall not be either an officer of the Company
or a designee, shareholder, affiliate or associate of the Purchaser, and such
person shall be deemed to be an Independent Director for purposes of this
Agreement.
(b) Subject to applicable law, the Company shall promptly take all action
necessary pursuant to Section 14(f) of the Exchange Act and Rule 14f-1
promulgated thereunder in order to fulfill its obligations under this Section
1.3 hereof and shall include in the Schedule 14D-9 mailed to stockholders
promptly after the commencement of the Offer (or an amendment thereof or an
information statement pursuant to Rule 14f-1 if the Purchaser has not
theretofore designated directors) such information with respect to the Company
and its officers and directors as is required under Section 14(f) and Rule 14f-1
in order to fulfill its obligations under this Section 1.3. Parent will supply
the Company and be solely responsible for any information with respect to itself
and its nominees, officers, directors and affiliates required by Section 14(f)
and Rule 14f-1. Notwithstanding anything in this Agreement to the contrary, in
the event that Parent's designees are elected to the Company's Board of
Directors, after the acceptance of payment of Shares pursuant to the Offer and
prior to the Effective Time, the affirmative vote of a majority of the
Independent Directors shall be required to (i) amend or terminate this Agreement
on behalf of the Company, (ii) exercise or waive any of the Company's rights or
remedies hereunder, (iii) extend the time
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for performance of the Purchaser's obligations hereunder or (iv) take any other
action by the Company in connection with this Agreement required to be taken by
the Board of Directors.
ARTICLE II.
THE MERGER
SECTION 2.1. THE MERGER. At the Effective Time (as defined in Section 2.2,
hereof) and subject to and upon the terms and conditions of this Agreement and
Delaware Law, the Purchaser shall be merged with and into the Company the
separate corporate existence of the Purchaser shall cease, (b) and the Company
shall continue as the surviving corporation. The Company as the surviving
corporation after the Merger hereinafter sometimes is referred to as the
"Surviving Corporation."
SECTION 2.2. EFFECTIVE TIME. The parties hereto shall cause a Certificate
of Merger to be executed and filed on the Closing Date (as defined in Section
2.3) (or on such other date as the Purchaser and the Company may agree) with the
Secretary of State of the State of Delaware, in such form as required by, and
executed in accordance with the relevant provisions of, the Delaware Law. The
Merger shall become effective on the date on which the Certificate of Merger is
duly filed with the Secretary of State of the State of Delaware or such time as
is agreed upon by the parties and specified in the Certificate of Merger, and
such time is hereinafter referred to as the "Effective Time."
SECTION 2.3. CLOSING. The closing of the Merger (the "Closing") shall take
place at 10:00 a.m. on a date to be specified by the parties, which shall be no
later than the third business day after satisfaction or waiver of all of the
conditions set forth in Article VII hereof (the "Closing Date"), at the offices
of Skadden, Arps, Slate, Meagher & Flom LLP, Four Embarcadero Center, Suite
3800, San Francisco, California, unless another date or place is agreed to in
writing by the parties hereto.
SECTION 2.4. EFFECT OF THE MERGER. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of Delaware Law.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time all the property, rights, privileges, powers and franchises of
the Company and the Purchaser shall vest in the Surviving Corporation, and all
debts, liabilities and duties of the Company and the Purchaser shall become the
debts, liabilities and duties of the Surviving Corporation.
SECTION 2.5. SUBSEQUENT ACTIONS. If, at any time after the Effective Time,
the Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of either of the Company or the Purchaser acquired or to be
acquired by the Surviving Corporation as a result of, or in connection with, the
Merger or otherwise to carry out this Agreement, the officers and directors of
the Surviving Corporation shall be authorized to execute and deliver, in the
name and on behalf of either the Company or the Purchaser, all such deeds, bills
of sale, assignments and assurances and to take and do, in the name and on
behalf of each of such corporations or otherwise, all such other actions and
things as may be necessary or desirable to vest, perfect or confirm any and all
right, title and interest in, to and under such rights, properties or assets in
the Surviving Corporation or otherwise to carry out this Agreement.
SECTION 2.6. CERTIFICATE OF INCORPORATION; BY-LAWS; DIRECTORS AND OFFICERS.
(a) Unless otherwise determined by the Purchaser before the Effective Time,
at the Effective Time the Certificate of Incorporation of the Company, as in
effect immediately before the Effective Time, shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter amended as provided
by law and such Certificate of Incorporation.
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(b) The By-Laws of the Purchaser, as in effect immediately before the
Effective Time, shall be the By-Laws of the Surviving Corporation until
thereafter amended as provided by law, the Certificate of Incorporation of the
Surviving Corporation and such By-Laws.
(c) The directors of the Purchaser immediately before the Effective Time
will be the initial directors of the Surviving Corporation, and the officers of
the Company immediately before the Effective Time will be the initial officers
of the Surviving Corporation, in each case until their successors are elected or
appointed and qualified. If, at the Effective Time, a vacancy shall exist on the
Board of Directors or in any office of the Surviving Corporation, such vacancy
may thereafter be filled in the manner provided by law.
SECTION 2.7. STOCKHOLDERS' MEETING.
(a) If required by applicable law in order to consummate the Merger, the
Company, acting through its Board of Directors, shall, in accordance with
applicable law:
(i) duly call, give notice of, convene and hold a special meeting of its
stockholders (the "Special Meeting") as promptly as practicable following
the acceptance for payment and purchase of Shares by the Purchaser pursuant
to the Offer for the purpose of considering and taking action upon the
approval of the Merger and the adoption of this Agreement;
(ii) prepare and file with the SEC a preliminary proxy or information
statement relating to the Merger and this Agreement and use its best efforts
(x) to obtain and furnish the information required to be included by the SEC
in the Proxy Statement (as hereinafter defined) and, after consultation with
Parent, to respond promptly to any comments made by the SEC with respect to
the preliminary proxy or information statement and cause a definitive proxy
or information statement, including any amendment or supplement thereto (the
"Proxy Statement") to be mailed to its stockholders, provided that no
amendment or supplement to the Proxy Statement will be made by the Company
without consultation with Parent and its counsel and (y) to obtain the
necessary approvals of the Merger and this Agreement by its stockholders;
and
(iii) include in the Proxy Statement the recommendation of the Board
that stockholders of the Company vote in favor of the approval of the Merger
and the adoption of this Agreement.
(b) Parent shall vote, or cause to be voted, all of the Shares then owned by
it, the Purchaser or any of its other subsidiaries and affiliates in favor of
the approval of the Merger and the adoption of this Agreement.
SECTION 2.8. MERGER WITHOUT MEETING OF STOCKHOLDERS. Notwithstanding
Section 2.7 hereof, in the event that Parent, the Purchaser or any other
subsidiary of Parent shall acquire at least 90% of the outstanding shares of
each class of capital stock of the Company, pursuant to the Offer or otherwise,
the parties hereto shall, at the request of Parent and subject to Article VII
hereof, take all necessary and appropriate action to cause the Merger to become
effective as soon as practicable after such acquisition, without a meeting of
stockholders of the Company, in accordance with Section 253 of Delaware Law.
SECTION 2.9. CONVERSION OF SECURITIES. At the Effective Time, by virtue of
the Merger and without any action on the part of Parent, the Purchaser, the
Company or the holder of any of the following securities:
(a) Each share of Company Common Stock issued and outstanding immediately
before the Effective Time (other than any Shares to be cancelled pursuant to
Section 2.9(b) and any Dissenting Shares (as defined in Section 2.10(a)) shall
be cancelled and extinguished and be converted into the right to receive the
Common Per Share Amount in cash payable to the holder thereof, without interest
(the "Common Stock Merger Consideration"), upon surrender of the certificate
formerly representing such Share in the manner provided in Section 2.11 hereof.
All such Shares, when so converted, shall no longer be outstanding and shall
automatically be cancelled and retired and shall cease to exist, and each holder
of a certificate representing any such Shares shall cease to have any rights
with respect thereto, except the right
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to receive the Common Stock Merger Consideration therefor upon the surrender of
such certificate in accordance with Section 2.11 hereof, without interest.
(b) Each share of Company Common Stock held in the treasury of the Company
and each Share owned by the Purchaser or any direct or indirect wholly owned
subsidiary of the Purchaser immediately before the Effective Time shall be
cancelled and extinguished and no payment or other consideration shall be made
with respect thereto.
(c) Each Series D Share issued and outstanding immediately before the
Effective Time (other than any Dissenting Shares) shall be cancelled and
extinguished and be converted into the right to receive the Series D Per Share
Amount in cash payable to the holder thereof, without interest (the "Series D
Merger Consideration and together with the Common Stock Merger Consideration,
the "Merger Consideration"), upon surrender of the certificate formerly
representing such Share in the manner provided in Section 2.11 hereof. All such
Shares, when so converted, shall no longer be outstanding and shall
automatically be cancelled and retired and shall cease to exist, and each holder
of a certificate representing any such Shares shall cease to have any rights
with respect thereto, except the right to receive the Series D Merger
Consideration therefor upon the surrender of such certificate in accordance with
Section 2.11 hereof, without interest.
(d) Each share of common stock, par value $.01 per share, of the Purchaser
issued and outstanding immediately before the Effective Time shall thereafter
represent one validly issued, fully paid and nonassessable share of common
stock, par value $.01 per share, of the Surviving Corporation.
SECTION 2.10. DISSENTING SHARES.
(a) Notwithstanding any provision of this Agreement to the contrary, any
Shares held by a holder who has demanded and perfected his demand for appraisal
of his Shares in accordance with Delaware Law (including but not limited to
Section 262 thereof) and as of the Effective Time has neither effectively
withdrawn nor lost his right to such appraisal ("Dissenting Shares"), shall not
be converted into or represent a right to receive cash pursuant to Section 2.9,
but the holder thereof shall be entitled to only such rights as are granted by
Delaware Law.
(b) Notwithstanding the provisions of Section 2.7(a), if any holder of
Shares who demands appraisal of his Shares under Delaware Law shall effectively
withdraw or lose (through failure to perfect or otherwise) his right to
appraisal, then as of the Effective Time or the occurrence of such event,
whichever later occurs, such holder's Shares shall automatically be converted
into and represent only the right to receive the Common Stock Merger
Consideration or the Series D Merger Consideration as provided in Section 2.9(a)
or (c), as the case may be, without interest thereon, upon surrender of the
certificate or certificates representing such Shares pursuant to Section 2.11
hereof.
(c) The Company shall give the Purchaser (i) prompt notice of any written
demands for appraisal or payment of the fair value of any Shares, withdrawals of
such demands, and any other instruments served pursuant to Delaware Law received
by the Company and (ii) the opportunity to direct all negotiations and
proceedings with respect to demands for appraisal under Delaware Law. The
Company shall not voluntarily make any payment with respect to any demands for
appraisal and shall not, except with the prior written consent of the Purchaser,
settle or offer to settle any such demands.
SECTION 2.11. SURRENDER OF SHARES; STOCK TRANSFER BOOKS.
(a) Before the Effective Time, the Purchaser shall designate a bank or trust
company reasonably acceptable to the Company to act as agent for the holders of
Shares in connection with the Merger(the "Exchange Agent") to receive the funds
necessary to make the payments contemplated by Section 2.9. At the Effective
Time, the Purchaser shall deposit, or cause to be deposited, in trust with the
Exchange Agent
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for the benefit of holders of Shares the aggregate consideration to which such
holders shall be entitled at the Effective Time pursuant to Section 2.9.
(b) Each holder representing any Shares cancelled upon the Merger, which
immediately prior to the Effective Time represented outstanding Shares (the
"Certificates") whose Shares were converted pursuant to Section 2.9(a) or (c)
may thereafter surrender such Certificate or Certificates to the Exchange Agent,
as agent for such holder, to effect the surrender of such Certificate or
Certificates on such holder's behalf for a period ending six months after the
Effective Time. The Purchaser agrees that promptly after the Effective Time it
shall cause the distribution to holders of record of Shares as of the Effective
Time of appropriate materials to facilitate such surrender. Upon the surrender
of Certificates, the Purchaser shall cause the Exchange Agent to pay the holder
of such certificates in exchange therefor cash in an amount equal to the Common
Stock Merger Consideration or Series D Merger Consideration, as the case may be,
multiplied by the number of Shares represented by such Certificate. Until so
surrendered, each Certificate (other than Certificates representing Dissenting
Shares and Certificates representing Shares held by the Purchaser or in the
treasury of the Company) shall represent solely the right to receive the
aggregate Common Stock Merger Consideration or Series D Merger Consideration, as
the case may be, relating thereto.
(c) If payment of the Merger Consideration in respect of cancelled Shares is
to be made to a Person other than the Person in whose name a surrendered
Certificate or instrument is registered, it shall be a condition to such payment
that the Certificate or instrument so surrendered shall be properly endorsed or
shall be otherwise in proper form for transfer and that the Person requesting
such payment shall have paid any transfer and other taxes required by reason of
such payment in a name other than that of the registered holder of the
Certificate or instrument surrendered or shall have established to the
satisfaction of the Purchaser or the Exchange Agent that such tax either has
been paid or is not applicable.
(d) At the Effective Time, the stock transfer books of the Company shall be
closed and there shall not be any further registration of transfers of shares of
any shares of capital stock thereafter on the records of the Company. From and
after the Effective Time, the holders of certificates evidencing ownership of
the Shares outstanding immediately prior to the Effective Time shall cease to
have any rights with respect to such Shares, except as otherwise provided for
herein or by applicable law. If, after the Effective Time, Certificates are
presented to the Surviving Corporation, they shall be cancelled and exchanged
for cash as provided in this Article II. No interest shall accrue or be paid on
any cash payable upon the surrender of a Certificate or Certificates which
immediately before the Effective Time represented outstanding Shares.
(e) Promptly following the date which is six months after the Effective
Time, the Surviving Corporation shall be entitled to require the Exchange Agent
to deliver to it any cash (including any interest received with respect
thereto), Certificates and other documents in its possession relating to the
transactions contemplated hereby, which had been made available to the Exchange
Agent and which have not been disbursed to holders of Certificates, and
thereafter such holders shall be entitled to look to the Surviving Corporation
(subject to abandoned property, escheat or similar laws) only as general
creditors thereof with respect to the Merger Consideration payable upon due
surrender of their Certificates, without any interest thereon. Notwithstanding
the foregoing neither the Surviving Corporation nor the Exchange Agent shall be
liable to any holder of a Certificate for Merger Consideration delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law.
(f) The Merger Consideration paid in the Merger shall be net to the holder
of Shares in cash, subject to reduction only for any applicable Federal backup
withholding or, as set forth in Section 2.8(c), stock transfer taxes payable by
such holder.
SECTION 2.12. STOCK PLANS.
(a) The Company shall use reasonable efforts (without incurring any
liability in connection therewith) to provide that, at the Effective Time, (i)
each then outstanding option to purchase shares of
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Company Common Stock (the "Options") granted under any of the Company's stock
option plans referred to in Section 4.2 hereof, each as amended (collectively,
the "Option Plans"), whether or not then exercisable or vested, shall be
cancelled and (ii) in consideration of such cancellation, such holders of
Options shall receive for each Share subject to such Option an amount (subject
to any applicable withholding tax) in cash equal to the product of (A) the
excess, if any, of the Common Per Share Amount over the per share exercise price
of such Option and (B) the number of Shares subject to such Option (such amount
being herein referred to as, the "Option Price"); PROVIDED that the Company
shall obtain all necessary consents or releases from holders of Options to
effect the foregoing. Upon receipt of the Option Price, the Option shall be
cancelled. The surrender of an Option to the Company shall be deemed a release
of any and all rights the holder had or may have had in respect of such Option.
As promptly as practicable following the consummation of the Merger, the
Purchaser shall provide the Company with the funds necessary to satisfy its
obligations under this Section 2.12(a).
(b) Except as provided herein or as otherwise agreed to by the parties and
to the extent permitted by the Option Plans, (i) the Company shall cause the
Option Plans to terminate as of the Effective Time and provide for the payment
of the Option Price pursuant to Section 2.12(a) hereof, and (ii) the Company
shall take all action necessary to ensure that following the Effective Time no
holder of Options or any participant in the Option Plans shall have any right
thereunder to acquire any equity securities of the Company, the Surviving
Corporation or any subsidiary thereof.
(c) None of the parties to this Agreement shall take any action to deprive
any employee or director of the Company of the benefits of (i) the consideration
payable with respect to Options in accordance with Section 2.12(a) or (ii) the
consideration that would have been payable with respect to any other equity-
based compensation in accordance with the terms and conditions of the applicable
Other Stock Plan, but for the amendment set forth in Section 2.12(b) above, such
consideration to be determined by valuing any right to equity-based compensation
by reference to the Common Per Share Amount. Without limiting the generality of
the foregoing, if any of the transactions contemplated hereby would cause any
individual subject to Section 16 of the Exchange Act to become subject to the
profit recovery provisions thereof, to the extent permitted by applicable law
neither the Surviving Corporation nor the Purchaser (nor any affiliate of the
Purchaser) shall assert any claims against any such individual arising out of
the foregoing or relating thereto, based directly or indirectly, on Section 16.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF PARENT AND THE PURCHASER
Parent and the Purchaser represent and warrant to the Company as follows:
SECTION 3.1. CORPORATE ORGANIZATION. Each of Parent and the Purchaser is,
respectively, a limited liability company and a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has the requisite corporate power and authority and any necessary
governmental approvals to own, operate or lease the properties that it purports
to own, operate or lease and to carry on its business as it is now being
conducted, except where the failure to be so organized, existing and in good
standing or to have such power, authority, and governmental approvals would not
have, individually or in the aggregate, a material adverse effect on the Parent
or on the ability of Parent or the Purchaser to consummate any transactions
contemplated by this Agreement or to perform either of their respective
obligations under this Agreement.
SECTION 3.2. AUTHORITY RELATIVE TO THIS AGREEMENT. The execution and
delivery of this Agreement by Parent and the Purchaser and the consummation by
Parent and the Purchaser of the Merger and the transactions hereby and thereby
have been duly authorized by all necessary corporate action on the part of each
of Parent and the Purchaser and no other corporate proceeding is necessary for
the execution and delivery of this Agreement by Parent and the Purchaser, the
performance by Parent or the Purchaser or of their respective obligations
hereunder and the consummation by each of Parent or the Purchaser or of the
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transactions contemplated hereby. This Agreement has been duly executed and
delivered by each of Parent and the Purchaser and, assuming due and valid
authorization, execution and delivery hereof by the Company, constitutes a
legal, valid and binding obligation of each such corporation, enforceable
against each of them in accordance with its terms.
SECTION 3.3. NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) The execution and delivery of this Agreement by Parent and the Purchaser
do not, and the performance of this Agreement by Parent and the Purchaser will
not, (i) conflict with or violate any law, regulation, court order, judgment or
decree applicable to Parent or the Purchaser or by which any of their respective
property is bound or affected, (ii) violate or conflict with either the
Certificate of Formation of Parent or the Certificate of Incorporation or
By-Laws of the Purchaser, or (iii) result in a violation or breach of or
constitute a default under (with or without due notice or lapse of time, or
both), or give to others any rights of termination or cancellation of, or result
in the creation of a lien or encumbrance on any of the property or assets of
Parent or the Purchaser pursuant to, any contract, instrument, permit, license
or franchise to which Parent or the Purchaser is a party or by which Parent or
the Purchaser or any of their respective property is bound or affected.
(b) Except for applicable requirements, if any, of the Exchange Act, the
pre-merger notification requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), filing and recordation of
appropriate merger documents as required by Delaware Law, neither Parent nor the
Purchaser is required to submit any notice, report or other filing with any
court, arbitrable tribunal, administrative agency or commission or other
governmental or other regulatory authority or agency, domestic or foreign (a
"Governmental Authority"), in connection with the execution, delivery or
performance of this Agreement or the consummation of the transactions
contemplated hereby. No waiver, consent, approval or authorization of any
Governmental Authority is required to be obtained or made by either Parent or
the Purchaser in connection with its execution, delivery or performance of this
Agreement.
SECTION 3.4. FINANCING ARRANGEMENTS. The Purchaser has funds available to
it sufficient to purchase the Shares in accordance with the terms of this
Agreement and to pay all amounts due (or which will, as a result of the
transactions contemplated hereby, become due) in respect of any indebtedness of
the Company for money borrowed outstanding as of the date of the consummation of
the Offer, a schedule of which is attached hereto as Schedule 3.4 of the
Disclosure Schedule.
SECTION 3.5. NO PRIOR ACTIVITIES. Except for obligations or liabilities
incurred in connection with its incorporation or organization or the negotiation
and consummation of this Agreement and the transactions contemplated hereby
(including any financing), the Purchaser has not incurred any obligations or
liabilities, and has not engaged in any business or activities of any type or
kind whatsoever or entered into any agreements or arrangements with any Person
or entity.
SECTION 3.6. BROKERS. No broker, finder or investment banker is entitled to
any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by and
on behalf of Parent or the Purchaser.
SECTION 3.7. PROXY STATEMENT. None of the information supplied by the
Purchaser, its officers, directors, representatives, agents or employees (the
"Purchaser Information"), for inclusion in the Proxy Statement, or in any
amendments thereof or supplements thereto, will, on the date the Proxy Statement
is mailed to stockholders and at the time of the meeting of stockholders to be
held in connection with the Merger, contain any untrue statement of material
fact or contain or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. Notwithstanding the
foregoing, Parent and the Purchaser do not make any representation or warranty
with respect to any information that has been supplied by the Company or its
accountants, counsel or other authorized representatives for use in any of the
foregoing documents.
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SECTION 3.8. EMPLOYEE BENEFIT PLANS. Except as set forth in Schedule 3.8 of
the Disclosure Schedule, (i) neither the Purchaser nor any person or entity
which is treated as part of Purchaser's "controlled group" for purposes of
Section 4001(a)(14) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") (each an "ERISA Affiliate), maintains or contributes to any
employee benefit plan which is subject to the requirements of Title IV of ERISA
(other than a multiemployer plan within the meaning of Section 3(37) of ERISA),
and (ii) if any plans are listed on such Schedule, the unfunded accrued
liability for each such plan, determined on the basis of the latest actuarial
valuation for such plan and on the actuarial methods and assumptions employed
for that valuation, is also set forth on such schedule for each such plan and
copies of such valuations have been provided to the Company. No such employee
benefit plan has incurred any "accumulated funding deficiency" (as defined in
ERISA), whether or not waived. Neither the Purchaser nor any of its ERISA
Affiliates contributes, or has within the six-year period ending on the date
hereof contributed or been obligated to contribute, to any pension or retirement
plan which is a "multiemployer plan" (as defined in Section 3(37) of ERISA).
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth on the Disclosure Schedule delivered to Parent prior to
the execution of this Agreement (the "Disclosure Schedule"), the Company hereby
represents and warrants to Parent and the Purchaser as follows:
SECTION 4.1. ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has the requisite corporate power and authority and
any necessary governmental approvals to own, operate or lease the properties
that it purports to own, operate or lease and to carry on its business as it is
now being conducted, and is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction where the character of
its properties owned, operated or leased or the nature of its activities makes
such qualification necessary, except for such failure which, when taken together
with all other such failures, would not have a Material Adverse Effect (as
defined below in this Section 4.1). The Company does not own any Subsidiaries.
The Company does not have an equity interest in any other Person. The term
"Subsidiary" means any corporation or other legal entity of which the Company
(either alone or through or together with any other Subsidiary) owns, directly
or indirectly, more than 50% of the capital stock or other equity interests the
holders of which are generally entitled to vote for the election of the board of
directors or other governing body of such corporation or other legal entity. The
term "Material Adverse Effect" means any change in or effect on the business of
the Company that is or could reasonably be expected to be materially adverse to
the business, operations, properties (including intangible properties),
condition (financial or otherwise), results of operations, assets, liabilities,
regulatory status or prospects of the Company or (y) the ability of the Company
to consummate any transactions contemplated by this Agreement or the Option
Agreement or to perform its obligations under this Agreement.
SECTION 4.2. CAPITALIZATION. The authorized capital stock of the Company
consists of 20,000,000 shares of Company Common Stock and 1,302,300 shares of
Class B Preferred Stock, par value $.50 per share ("Company Preferred Stock").
As of June 23, 1997, (i) 3,933,095 shares of Company Common Stock were issued
and outstanding, (ii) 293,450 shares of Company Common Stock were held in the
treasury of the Company, (iii) 487,400 Series D Shares were issued and
outstanding, (iv) 708,923 shares of Company Common Stock were reserved for
issuance upon conversion of the Series D Shares, (v) 70,000 shares of Company
Common Stock were reserved for issuance upon exercise of outstanding options
under the Company's 1988 and 1993 Stock Option Plans for Non-Employee Directors,
(vi) 284,500 shares of Company Common Stock were reserved for issuance under the
Company's employee stock option plans listed on Schedule 4.2(a) of the
Disclosure Schedule in the amounts stated in such schedule and (vii) 94,735
shares of Company Common Stock were reserved for issuance upon the exercise of
currently outstanding warrants. All of the issued and outstanding shares of the
Company's capital stock are, and all
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Shares which may be issued pursuant to the exercise of outstanding Options will
be, when issued in accordance with the respective terms thereof, duly
authorized, validly issued, fully paid and nonassessable. There are no bonds,
debentures, notes or other indebtedness having general voting rights (or
convertible into securities having such rights) ("Voting Debt") of the Company
issued and outstanding. There are no voting trusts in other agreements or
understandings to which the Company is a party with respect to the voting of the
capital stock of the Company. Except as disclosed on Schedule 4.2 of the
Disclosure Schedule, there are no other options, warrants, calls, preemptive
rights, subscriptions or other rights, agreements, arrangements or commitments
of any character relating to the issued or unissued capital stock of the Company
obligating the Company to issue or sell any shares of capital stock or Voting
Debt of, or other equity interests, in the Company.
SECTION 4.3. AUTHORITY RELATIVE TO THIS AGREEMENT.
(a) The Company has the necessary corporate power and authority to enter
into this Agreement and the Option Agreement and, subject to obtaining any
necessary stockholder approval of the Merger, to carry out its obligations
hereunder. The execution and delivery of this Agreement by the Company and the
consummation by the Company of the transactions contemplated hereby by the
Agreement and the Option Agreement have been duly authorized by all necessary
corporate action on the part of the Company, subject to the approval of the
Merger by the Company's stockholders in accordance with Delaware Law. Each of
this Agreement and the Option Agreement has been duly executed and delivered by
the Company and, assuming due and valid authorization, execution and delivery
hereof by the other parties hereto and thereto, constitutes a legal, valid and
binding obligation of the Company, enforceable against it in accordance with its
terms.
(b) The Company has taken all action which may be necessary under the Rights
Agreement, so that (x) the execution of this Agreement and the Option Agreement
and any amendments thereto by the parties hereto and thereto and the
consummation of the transactions contemplated hereby and thereby shall not cause
(i) the Parent and/or the Purchaser to become an Acquiring Person (as defined in
the Rights Agreement) or (ii) a Distribution Date, a Stock Acquisition Date or a
Trigger Event (as such terms are defined in the Rights Agreement) to occur,
irrespective of the number of Shares acquired pursuant to the Offer or exercise
of the option granted under the Option Agreement, and (y) the Rights (as defined
in the Rights Agreement) shall expire upon the acceptance of Shares for payment
pursuant to the Offer.
SECTION 4.4. NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) The execution and delivery of this Agreement by the Company do not, and
the performance of this Agreement by the Company will not, (i) conflict with or
violate any law, order, writ, injunction, decree, statute, rule or regulation,
court order or judgment applicable to the Company or by which its property is
bound or affected, (ii) violate or conflict with the Certificate of
Incorporation or By-Laws of the Company, or (iii) result in a violation or
breach of or constitute a default under (with or without due notice or lapse of
time or both) or give to others any rights of termination or cancellation of, or
result in the creation of a lien or encumbrance on any of the properties or
assets of the Company pursuant to, any contract, instrument, permit, license or
franchise to which the Company is a party or by which the Company or its
property is bound or affected, excluding from the foregoing clauses (i) and
(iii) such violations, breaches or defaults which, in the aggregate, would not
have a Material Adverse Effect.
(b) Except for applicable requirements of the Exchange Act, the pre-merger
notification requirements of the HSR Act, and the filing and recordation of
appropriate merger or other documents as required by Delaware Law, or "blue sky"
laws of various states, the Company is not required to submit any notice,
report, permit, authorization or other filing with any Governmental Authority,
in connection with the execution, delivery or performance of this Agreement. No
waiver, consent, approval or authorization of any Governmental Authority, is
required to be obtained or made by the Company in connection with its execution,
delivery or performance of this Agreement.
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SECTION 4.5. SEC FILINGS; FINANCIAL STATEMENTS.
(a) The Company has filed all forms, reports and documents required to be
filed with the SEC since January 1, 1994, and has heretofore delivered to the
Purchaser, in the form filed with the SEC, its (i) Annual Reports on Form 10-K
for the fiscal years ended December 31, 1995 and 1996 (including all amendments
prior to the date hereof), (ii) Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997, (iii) all proxy statements relating to the Company's
meetings of stockholders (whether annual or special) held since January 1, 1994
and (iv) all other forms, reports, registrations, schedules, statements and
other documents required to be (other than Reports on Form 10-Q not referred to
in clause (ii) above) filed by the Company since January 1, 1994 with the SEC
pursuant to the Exchange Act or the Securities Act of 1933, as amended (the
"Securities Act") (as such documents referred to herein have been amended since
the time of their filing, collectively, the "SEC Reports"). As of their
respective dates, or, if amended, as of the date of the last such amendment, the
SEC Reports, including without limitation, any financial statements or schedules
included therein (i) complied in all material respects with the applicable
requirements of the Exchange Act and the Securities Act, as the case may be, and
the applicable rules and regulations of the SEC promulgated thereunder, and (ii)
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(b) The consolidated financial statements of the Company contained in the
SEC Reports (the "Financial Statements") have been prepared from, and are in
accordance with the books and records of the Company, comply 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 United States generally accepted accounting principles ("GAAP")
applied on a consistent basis throughout the periods involved (except as may be
indicated in the notes thereto) and fairly presented the consolidated financial
position of the Company and the consolidated results of operation, cash flows
and changes in financial position of the Company as of and for the periods
indicated, except that the unaudited interim financial statements were or are
subject to normal and recurring yearend adjustments.
SECTION 4.6. UNDISCLOSED LIABILITIES.
(a) Except (a) as disclosed in the Financial Statements and (b) for
liabilities and obligations (i) incurred in the ordinary course of business and
consistent with past practice since March 31, 1997, (ii) pursuant to the terms
of this Agreement, or (iii) as set forth in Schedule 4.6 of the Disclosure
Schedule, the Company has no liabilities or obligations of any nature, whether
or not accrued, contingent or otherwise, that would be required by GAAP to be
reflected in, reserved against or otherwise described in the balance sheet of
the Company (including the notes thereto) or which would have a Material Adverse
Effect.
SECTION 4.7. ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1996,
except as disclosed in Schedule 4.7 of the Disclosure Schedule or in the SEC
Reports filed prior to the date hereof, the Company has conducted its business
only in the ordinary and usual course, and:
(a) there have not occurred any events or changes (including the incurrence
of any liabilities of any nature, whether or not accrued, contingent or
otherwise) having, individually or in the aggregate, a Material Adverse Effect;
and
(b) the Company has not taken any action which would have been prohibited
under Section 5.2 hereof.
SECTION 4.8. LITIGATION. Except as disclosed in the SEC Reports filed prior
to the date hereof, there are no claims, actions, suits, proceedings,
(including, without limitation, arbitration proceedings) or other alternative
dispute resolution proceedings, or investigations pending or, to the knowledge
of the Company, threatened against the Company, or any properties or rights of
the Company, before any Governmental
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Authority that, either individually or in the aggregate would be reasonably
likely to have a Material Adverse Effect. As of the date hereof, the Company is
not subject to any outstanding order, judgment, injunction or decree.
SECTION 4.9. EMPLOYEE BENEFIT PLANS.
(a) Schedule 4.9(a) of the Disclosure Schedule sets forth a list of all
material employee welfare benefit plans (as defined in Section 3(1) of ERISA,
employee pension benefit plans (as defined in Section 3(2) of ERISA), employment
agreements and all other bonus, stock option, stock purchase, benefit, profit
sharing, savings, retirement, disability, insurance, incentive, deferred
compensation and other similar fringe or employee benefit plans, programs or
arrangements for the benefit of, or relating to, any employee of, or independent
contractor or consultant to, the Company (together, the "Employee Plans"). The
Company has delivered to the Purchaser true and complete copies of all Employee
Plans, as in effect, and will make available all other employee plans, together
with all amendments thereto which will become effective at a later date, as well
as the latest Internal Revenue Service determination letters obtained with
respect to any Employee Plan intended to be qualified under Section 401(a) or
501(a) of the Internal Revenue Code of 1986, as amended (the "Code"). True and
complete copies of the (i) three (3) most recent annual actuarial valuation
report, if any, (ii) last filed Form 5500 together with Schedule A and/or B
thereto, if any, (iii) summary plan description (as defined in ERISA), if any,
and all modifications thereto communicated to employees, and (iv) most recent
annual and periodic accounting of related plan assets, if any, in each case,
relating to the Employee Plans, have been, or will be, delivered to the
Purchaser and are, or will be, correct in all material respects. Neither the
Company nor any of its directors, officers, employees or agents has, with
respect to any Employee Plan, engaged in or been a party to any "prohibited
transaction", as such term is defined in Section 4975 of the Code or Section 406
of ERISA, which could result in the imposition of either a material penalty
assessed pursuant to Section 502(i) of ERISA or a material tax imposed by
Section 4975 of the Code, in each case applicable to the Company or any Employee
Plan. All Employee Plans are in compliance in all material respects with the
currently applicable requirements prescribed by all statutes, orders, or
governmental rules or regulations currently in effect with respect to such
Employee Plans, including, but not limited to, ERISA and the Code (except for
such requirements that are not required to be adopted as of the effective date
of the applicable requirement) and, to the knowledge of the Company, there are
no pending or threatened claims, lawsuits or arbitrations (other than routine
claims for benefits), relating to any of the Employee Plans, which have been
asserted or instituted against the Company, any Employee Plan or the assets of
any trust for any Employee Plan. Each Employee Plan intended to qualify under
Section 401(a) of the Code, and the trusts created thereunder intended to be
exempt from tax under the provisions of Section 501(a) of the Code, either (i)
has received a favorable determination letter from the Internal Revenue Service
to such effect or (ii) is still within the "remedial amendment period," as
described in Section 401(b) of the Code and the regulations thereunder. Each
Employee Plan that has been terminated by the Company which was intended to
qualify under Section 401(a) of the Code has received a determination from the
Internal Revenue Service that such termination did not adversely affect its
qualified status. No Employee Plan subject to Section 412 of the Code has
incurred any "accumulated funding deficiency" (as defined in ERISA), whether or
not waived. The Company does not contribute and has not within the six-year
period ending on the date hereof contributed or been obligated to contribute, to
any pension or retirement plan which is a "multiemployer plan" (as defined in
Section 3(37) of ERISA).
(b) Except as set forth on Schedule 4.9 of the Disclosure Schedule, and as
provided in Sections 2.12 and 6.9(i) no amounts payable under the Employee Plans
will fail to be deductible for Federal income tax purposes by virtue of section
280G of the Code (ii)(b)(i) the consummation of the transactions contemplated by
this Agreement will not either alone or in combination with another event (A)
entitle any current or former employee or officer of the Company or any ERISA
affiliate to severance pay, unemployment compensation or any other payment, (B)
accelerate the time of payment or vesting, or increase the amount of
compensation due any such employee or officer or (C) result in any liability
under Title IV of ERISA
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and (ii) no unfunded liability exists with respect to the Employee Plans, as of
the date of and determined in the manner set forth in the consolidated financial
statements contained in the SEC Reports, which is not set forth on such
statements.
SECTION 4.10. PROXY STATEMENT. The Proxy Statement, if any (or any
amendment thereof or supplement thereto, to be sent to the stockholders of the
Company in connection with the Special Meeting or the information statement, if
any, to be sent to such stockholders, as appropriate, will comply in all
material respects with the applicable requirements of the Exchange Act and the
rules and regulations thereunder. The Proxy Statement will not, at the time the
Proxy Statement at the date mailed to stockholders and at the time of the
Special 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, except that no representation or warranty is being made by
the Company with respect to any information supplied to the Company by Parent or
the Purchaser specifically for inclusion in the Proxy Statement.
SECTION 4.11. BROKERS. Except as disclosed on Schedule 4.11 of the
Disclosure Schedule, no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by and
on behalf of the Company. The Company has heretofore furnished to the Purchaser
true and complete information concerning the financial arrangements between the
Company and the financial advisors set forth on such schedule pursuant to which
such firms may be entitled to any payment as a result of the transactions
contemplated hereunder.
SECTION 4.12. CONTROL SHARE ACQUISITION. The provisions of Section 203 of
Delaware Law are not applicable to any of the transactions contemplated by this
Agreement or the Option Agreement, including the Merger and the purchase of
Shares in the Offer or pursuant to the exercise of the option granted under the
Option Agreement.
SECTION 4.13. CONDUCT OF BUSINESS. Except as disclosed in the SEC Reports
filed prior to the date hereof, the business of the Company is not being
conducted in default or violation of (with or without due notice and lapse of
time or both) any term, condition or provision of (i) its Certificate of
Incorporation or By-Laws, or (ii) any note, bond, mortgage, indenture, contract,
agreement, lease or other instrument or agreement of any kind to which the
Company is a party or by which the Company or any of its properties or assets
may be bound (each, a "Company Agreement"), or (iii) any Federal, state, local
or foreign statute, law, ordinance, rule, regulation, judgment, decree, order,
concession, grant, franchise, permit or license or other governmental
authorization or approval applicable to the Company, and no notice, charge,
claim, action or assertion has been received by the Company or has been filed
commenced or, to the Company's knowledge, threatened against the Company
alleging any such violation except, with respect to the foregoing clauses (ii)
and (iii), defaults or violations that would not, individually or in the
aggregate, have a Material Adverse Effect. All licenses, permits and approvals
required under such laws, rules and regulations are in full force and effect
except where the failure to be in full force and effect would not, individually
or in the aggregate, have a Material Adverse Effect.
SECTION 4.14. TAXES.
(a) Except as would not, either individually or in the aggregate, have a
Material Adverse Effect, (i) the Company has timely filed with the appropriate
Tax Authority (as hereinafter defined) all Tax Returns (as hereinafter defined)
required to be filed by or with respect to the Company, and such Tax Returns are
true, correct and complete in all material respects, (ii) all Taxes (as
hereinafter defined) due and payable by the Company, with respect to the taxable
years or other taxable periods ending on or prior to the Effective Time have
been or on or prior to the Effective Time will be, paid or adequately disclosed
and fully provided for, (iii) no Audits (as hereinafter defined) are pending or
threatened with regard to any Taxes or Tax Returns of the Company and there are
no outstanding deficiencies or assessments asserted or
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proposed, (iv) no issue has been raised by any Taxing Authority in any Audit of
the Company that if raised with respect to any other period not so audited could
be expected to result in a proposed deficiency of any period not so audited, (v)
there are no outstanding agreements, consents or waivers extending the statutory
period of limitations applicable to the assessment of any Taxes or deficiencies
against the Company, and the Company is not a party to any agreement providing
for the allocation or sharing of Taxes and (vi) no powers of attorney with
respect to Taxes of the Company have been executed that will be outstanding as
of the Effective Time.
(b) The Company has not filed a consent to the application of Section 341(f)
of the Code.
(c) The Company is not and has not been a United States real property
holding company (as defined in Section 897(c)(2) of the Code) during the
applicable period specified in Section 897(c)(1)(ii) of the Code.
(d) No indebtedness of the Company is "corporate acquisition indebtedness"
within the meaning of Section 279(b) of the Code.
(e) Except as would not, either individually or in the aggregate, have a
Material Adverse Effect, the Company has not entered into any agreements that
would result in the disallowance of any tax deductions pursuant to section 280G
of the Code.
(f) Except as would not, either individually or in the aggregate, have a
Material Adverse Effect, there are no Liens (as hereinafter defined) for Taxes
upon any of the assets of the Company, except for Liens for Taxes not yet due
and payable for which adequate reserves have been established on the Company's
balance sheet at March 31, 1997 included in the Company's Quarterly Report on
Form 10-Q filed with the SEC prior to the date hereof (the "Balance Sheet") in
accordance with GAAP.
(g) The Company has disclosed all material Tax elections to the Purchaser.
(h) For purposes of this Agreement, "Taxes" means any Federal, state, local
and foreign taxes, and other assessments of a similar nature (whether imposed
directly or through withholding), including any interest, additions to tax, or
penalties applicable thereto, imposed by any Tax Authority (as hereinafter
defined); "Tax Authority" means the Internal Revenue Service and any other
domestic or foreign governmental authority responsible for the administration of
any Taxes; and "Audit" means any audit, assessment or other examination relating
to Taxes by any Tax Authority or any judicial or administrative proceedings
relating to Taxes.
(i) For purposes of this Agreement, "Tax Return" means any return, report,
information return or other document (including any related or supporting
information and, where applicable, profit and loss accounts and balance sheets)
with respect to Taxes.
SECTION 4.15. INTELLECTUAL PROPERTY.
(a) Schedule 4.15 of the Disclosure Schedule contains a true and complete
list of all material (i) patents and patent applications, (ii) trademark
registrations and applications, (iii) service mark registrations and
applications, (iv) Computer Software (as hereinafter defined)(excluding Computer
Software generally available for purchase by the public), (v) copyright
registrations and applications, (vi) unregistered trademarks, service marks, and
copyrights, and (vii) Internet domain names used or held for use in connection
with the business of the Company, together with all licenses related to the
foregoing.
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(b) The term "Computer Software" shall mean (i) any and all computer
programs and applications consisting of sets of statements and instructions to
be used directly or indirectly in computer software or firmware whether in
source code or object code form, (ii) databases and compilations, including
without limitation any and all data and collections of data, whether machine
readable or otherwise, (iii) all versions of the foregoing including, without
limitation, all screen displays and designs thereof, and all component modules
of source code or object code or natural language code therefor, and whether
recorded on papers, magnetic media or other electronic or non-electronic device,
(iv) all descriptions, flowcharts and other work product used to design, plan,
organize and develop any of the foregoing, (v) all documentation, including
without limitation all technical and user manuals and training materials,
relating to the foregoing, and all Internet domain names and content contained
on all World Wide Web sites of the Company or any Subsidiary.
(c) The Company owns or has the valid right to use all of the material
Intellectual Property used by it or held for use by it in connection with its
business. The Company is the sole and exclusive owners of all patents, patent
applications, patent rights, copyrights, trademarks, trademark rights, trade
names, trade name rights, and service marks, and all goodwill of the business
associated therewith, trade secrets, registrations for and applications for
registration of trademarks, service marks and copyrights, technology and
know-how, Computer Software other than off-the-shelf applications and other
confidential or proprietary rights and information and all technical and user
manuals and documentation made or used in connection with any of the foregoing,
used or held for use anywhere in the world in connection with the businesses of
the Company as currently conducted (collectively, the "Intellectual Property"),
free and clear of all material Liens, except where the failure to own such
Intellectual Property would not have a Material Adverse Effect.
(d) All grants, registrations and applications for Intellectual Property
that are used in and are material to the conduct of the businesses of the
Company as currently conducted (i) are valid, subsisting, in proper form and
enforceable, and have been duly maintained, including the submission of all
necessary filings and fees in accordance with the legal and administrative
requirements of the appropriate jurisdictions and (ii) have not lapsed, expired
or been abandoned, and no application or registration therefor is the subject of
any legal or governmental proceeding before any governmental, registration or
other authority in any jurisdiction, except to the extent where the absence of
such Intellectual Property would not have a Material Adverse Effect.
(e) To the knowledge of the Company, there are no conflicts with or
infringements of any Intellectual Property by any third party, except for
conflicts or infringements which would not have a Material Adverse Effect. The
conduct of the businesses of the Company as currently conducted does not
conflict with or infringe in any way on any proprietary right of any third
party, which conflict or infringement would have a Material Adverse Effect.
There is no claim, suit, action or proceeding pending or, to the knowledge of
the Company, threatened against the Company (i) alleging any such conflict or
infringement with any third party's proprietary rights, or (ii) challenging the
ownership, use, validity or enforceability of the Intellectual Property, except
for claims, suits, actions or proceedings which would not have a Material
Adverse Effect.
(f) All consents, filings and authorizations by or with governmental
authorities or third parties necessary with respect to the consummation of the
transactions contemplated hereby as they may affect the Intellectual Property
have been obtained, except where the failure to have obtained such consents,
filings or authorizations would not have a Material Adverse Effect.
(g) The Company is not, nor will it be as a result of the execution and
delivery of this Agreement or the performance of its obligations under this
Agreement, in breach of any license, sublicense or other agreement relating to
the Intellectual Property, except for breaches which would not have a Material
Adverse Effect.
(h) No former or present employees, officers or directors of the Company
hold any right, title or interest directly or indirectly, in whole or in part,
in or to any Intellectual Property.
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SECTION 4.16. EMPLOYMENT MATTERS. The Company has not experienced any
strikes, collective labor grievances, other collective bargaining disputes or
claims of unfair labor practices in the last five years, except for such
strikes, grievances, disputes or claims which have not and would not have a
Material Adverse Effect. To the Company's knowledge, there is no organizational
effort presently being made or threatened by or on behalf of any labor union
with respect to employees of the Company.
SECTION 4.17. VOTE REQUIRED. The affirmative vote of the holders of a
majority of the outstanding shares of Company Common Stock is the only vote of
the holders of any class or series of the Company's capital stock which is
necessary to approve this Agreement and the transactions contemplated hereby,
including the Merger.
SECTION 4.18. ENVIRONMENTAL MATTERS.
(a) Except for matters disclosed in the SEC Reports or matters that would
not, individually or in the aggregate, be reasonably expected to result in a
Material Adverse Effect, to the Company's knowledge: (i) the Company is in
compliance with all applicable laws, rules, regulations, ordinances, decrees,
orders or other legal or regulatory requirements relating to pollution of the
environment or the impact of the environment on human health or preservation of
the environment (including without limitation the treatment, storage and
disposal of wastes and the remediation of releases and threatened releases of
hazardous or toxic substances, wastes, pollutants, contaminants or similar
materials) (collectively "Environmental Laws"), and the Company has not received
written notice of any outstanding allegations by any person or entity that the
Company is not or has not been in compliance (unless such non-compliance has
been cured) with any Environmental Laws, and (ii) the Company currently holds
all permits, licenses, registrations and other governmental authorizations and
financial assurance required under any Environmental Laws for the Company to
operate its business.
(b) Except for matters disclosed in the SEC Reports or matters that would
not individually or in the aggregate, be reasonably expected to result in a
Material Adverse Effect, (i) there is no asbestos or asbestos-containing
materials in or on any real property, buildings, structures or components
thereof currently owned, leased or operated by the Company, and (ii) there are
and have been no underground or aboveground storage tanks (whether or not
required to be registered under any applicable law), dumps, landfills, lagoons,
surface impoundments, sumps, injection wells or other disposal or storage sites
or locations in or on any property currently owned, leased or operated by the
Company.
(c) Except for matters disclosed in the SEC Reports or matters that would
not, individually or in the aggregate, be reasonably expected to result in a
Material Adverse Effect, (i) the Company has not received (x) any communication
from any person stating or alleging that it is or may be a potentially
responsible party under any Environmental Law (including without limitation the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, and any state analog thereto) with respect to any actual or alleged
environmental contamination or (y) any request for information under any
Environmental Law from any governmental agency or authority or any other person
or entity with respect to any active or alleged environmental contamination or
violation, (ii) the Company is not party to any pending judicial or
administrative proceedings alleging that it is a potentially responsible party
under the Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended, and any state analog thereto) or otherwise liable or
responsible with respect to any actual or alleged environmental contamination,
or (iii) the Company, any governmental agency or authority, or any other person
or entity is not conducting and has not conducted (nor is proposing or
threatening to conduct) any environmental remediation or investigation.
(d) This Section 4.18 contains the sole and exclusive representations of the
Company with respect to Environmental Laws.
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SECTION 4.19. REAL PROPERTY.
(a) Schedule 4.19 of the Disclosure Schedule sets forth a complete list of
all real property owned by the Company (the "Real Property"). Copies of (i) all
deeds, title insurance policies and surveys of the Real Property and (ii) all
documents evidencing all Liens upon the Real Property have been furnished to
Parent. Except for matters disclosed in the SEC Reports or matters that would
not, individually or in the aggregate, be reasonably expected to result in a
Material Adverse Effect, there are no proceedings, claims, disputes or
conditions affecting any Real Property that might curtail or interfere with the
use of such property, nor is an action of eminent domain pending or to the
knowledge of the Company, threatened for all or any portion of the Real
Property. Except as disclosed in Schedule 4.20 hereto, the Company is not a
party to any lease, assignment or similar arrangement under which the Company is
a lessor, assignor or otherwise makes available for use by any third party any
portion of the Real Property.
(b) As of the date hereof, to the knowledge of the Company, the Company has
not, within the past two years, received any written notice of or other writing
referring to any requirements or recommendations by any insurance company that
has issued a policy covering any part of the Real Property or by any board of
fire underwriters or other body exercising similar functions, requiring or
recommending any repairs or work to be done on any part of the Real Property
except for any requirements or recommendations that would not individually or in
the aggregate have a Material Adverse Effect. The plumbing, electrical, heating,
air conditioning, ventilating and all other structural or material mechanical
systems in the buildings upon the Real Property are in good working order and
working condition, so as to be adequate for the operation of the business of the
Company as heretofore conducted, and the roof, basement and foundation walls of
all buildings on the Real Property are free of leaks and other material defects,
except for any matter otherwise covered by this sentence which does not have,
individually or in the aggregate, a Material Adverse Effect.
(c) The Company has obtained all appropriate licenses, permits, easements
and rights of way, including proofs of dedication, required to use and operate
the Real Property in the manner in which the Real Property is currently being
used and operated, except for such licenses, permits or rights of way the
failure of which to have obtained does not have, individually or in the
aggregate, a Material Adverse Effect.
SECTION 4.20. TITLE AND CONDITION OF PROPERTIES. The Company owns good and
marketable title, free and clear of all Liens, to all of the personal property
and assets shown on Balance Sheet or acquired after March 31, 1997, except for
(A) assets which have been disposed of to nonaffiliated third parties since
March 31, 1997 in the ordinary course of business, (B) Liens reflected in the
Balance Sheet, (C) Liens or imperfections of title which are not, individually
or in the aggregate, material in character, amount or extent and which do not
materially detract from the value or materially interfere with the present or
presently contemplated use of the assets subject thereto or affected thereby,
and (D) Liens for current Taxes not yet due and payable. All of the machinery,
equipment and other tangible personal property and assets owned or used by the
Company are in good condition and repair, except for ordinary wear and tear not
caused by neglect, and are usable in the ordinary course of business, except for
any matter otherwise covered by this sentence which does not have, individually
or in the aggregate, a Material Adverse Effect.
SECTION 4.21. CONTRACTS. Each Company Agreement is legally valid and
binding and in full force and effect, except where failure to be legally valid
and binding and in full force and effect would not have a Material Adverse
Effect. Schedule 4.21 of the Disclosure Schedule sets forth a true and complete
list of (i) all material Company Agreements entered into by the Company since
December 31, 1996 and all amendments to any Company Agreements included as an
exhibit to the Company's Annual Report on Form 10-K for the year ended December
31, 1996 and (ii) all non-competition agreements imposing restrictions on the
ability of the Company to conduct business in any jurisdiction or territory.
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SECTION 4.22. POTENTIAL CONFLICTS OF INTEREST. Except as set forth in
Schedule 4.22 of the Disclosure Schedule or in the SEC Reports filed prior to
the date hereof, since December 31, 1996, there have been no transactions,
agreements, arrangements or understandings between the Company and its
affiliates that would be required to be disclosed under Item 404 of Regulation
S-K under the Securities Act.
SECTION 4.23. SUPPLIERS AND CUSTOMERS. Since December 31, 1996, no material
licensor, vendor, supplier, licensee or customer of the Company has cancelled or
otherwise modified its relationship with the Company and, to the knowledge of
the Company (i) no such person has given the Company notice of any intention to
do so and (ii) the consummation of the transactions contemplated hereby will not
adversely affect the Company's relationship with any such person.
SECTION 4.24. INSURANCE. There is no material claim pending under any of
the Company's policies or bonds as to which coverage has been questioned, denied
or disputed by the underwriters of such policies or bonds. All premiums due and
payable under all such policies and bonds have been paid and the Company is
otherwise in compliance in all material respects with the terms of such policies
and bonds. The Company has no knowledge of any threatened termination of, or
material premium increase with respect to, any of such policies.
SECTION 4.25. ACCOUNTS RECEIVABLE; INVENTORY. Subject to any reserves set
forth in the Balance Sheet, the accounts receivable shown in the Balance Sheet
arose in the ordinary course of business; were not, as of the date of the
Balance Sheet, subject to any material discount, contingency, claim of offset or
recoupment or counterclaim; and represented, as of the date of the Balance
Sheet, bona fide claims against debtors for sales, leases, licenses and other
charges. All accounts receivable of the Company arising after the date of the
Balance Sheet through the date of this Agreement arose in the ordinary course of
business and, as of the date of this Agreement, are not subject to any material
discount, contingency, claim of offset or recoupment or counterclaim, except for
normal reserves consistent with past practice, The amount carried for doubtful
accounts and allowances disclosed in the Balance Sheet is believed by the
Company as of the date of this Agreement to be sufficient to provide for any
losses which may be sustained or realization of the accounts receivable shown in
the Balance Sheet. As of the date of the Balance Sheet, the inventories shown on
the Balance Sheet consisted in all material respects of items of a quantity and
quality usable or saleable in the ordinary course of business. All of such
inventories were acquired in the ordinary course of business and, as of the date
of this Agreement, have been replenished in all material respects in the
ordinary course of business consistent with past practices. All such inventories
are valued on the Balance Sheet in accordance with GAAP applied on a basis
consistent with the Company's past practices, and provision has been made or
reserves have been established on the Balance Sheet, in each case in an amount
believed by the Company as of the date of this Agreement to be adequate, for all
slow-moving, obsolete or unusable inventories.
SECTION 4.26. OPINION OF FINANCIAL ADVISOR. The Company has received an
opinion from CIBC Wood Gundy Securities Corp. ("CIBC"), financial advisor to the
Company, to the effect that the consideration to be received in the Offer and
the Merger by the holders of the Company Common Stock and the Series D Shares is
fair to both the holders of the Company Common Stock and the holders of the
Series D Shares from a financial point of view, a draft copy of which opinion
has been delivered to Parent (the "Draft Opinion").
ARTICLE V.
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 5.1. ACQUISITION PROPOSALS. The Company will notify the Purchaser
immediately if any proposals are received by, any information is requested from,
or any negotiations or discussions are sought to be initiated or continued with
the Company or its representatives, in each case in connection with any Takeover
Proposal (as defined below) or the possibility or consideration of making a
Takeover Proposal
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("Takeover Proposal Interest") indicating, in connection with such notice, the
name of the Person indicating such Takeover Proposal Interest and the terms and
conditions of any proposals or offers. The Company agrees that it will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any Takeover Proposal Interest. The Company agrees that it shall keep Parent
informed, on a current basis, of the status and terms of any Takeover Proposal
Interest. As used in this Agreement, "Takeover Proposal" shall mean any tender
or exchange offer involving the Company, any proposal for a merger,
consolidation or other business combination involving the Company, any proposal
or offer to acquire in any manner a substantial equity interest in, or a
substantial portion of the business or assets of, the Company (other than
immaterial or insubstantial assets or inventory in the ordinary course of
business or assets held for sale), any proposal or offer with respect to any
recapitalization or restructuring with respect to the Company or any proposal or
offer with respect to any other transaction similar to any of the foregoing with
respect to the Company other than pursuant to the transactions to be effected
pursuant to this Agreement.
SECTION 5.2. CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER. The
Company covenants and agrees that, (i) except as expressly contemplated by this
Agreement or the Option Agreement, or (ii) as set forth in Schedule 5.2 of the
Disclosure Schedule, or (iii) agreed in writing by Parent, after the date
hereof, and prior to the time the directors of the Purchaser have been elected
to, and shall constitute a majority of the Board of Directors of the Company
pursuant to Section 1.3 (the "Appointment Date"):
(a) the business of the Company shall be conducted only in the ordinary and
usual course and, to the extent consistent therewith, the Company shall use its
best reasonable efforts to preserve its business organization intact and
maintain its existing relations with customers, suppliers, employees, creditors
and business partners;
(b) the Company will not, directly or indirectly, (i) except upon exercise
of stock options or other rights to purchase shares of Company Common Stock
pursuant to the Option Plans outstanding on the date hereof or upon exercise of
outstanding warrants or conversion of outstanding Series D Shares, issue, sell,
transfer or pledge or agree to sell, transfer or pledge any treasury stock of
the Company beneficially owned by it, (ii) amend its Certificate of
Incorporation or By-Laws or similar organizational documents; or (iii) split,
combine or reclassify the outstanding Shares;
(c) the Company shall not: (i) declare, set aside or pay any dividend or
other distribution payable in cash, stock or property with respect to its
capital stock; (ii) issue, sell, pledge, dispose of or encumber any additional
shares of, or securities convertible into or exchangeable for, or options,
warrants, calls, commitments or rights of any kind to acquire, any shares of
capital stock of any class of the Company, other than Shares reserved for
issuance on the date hereof pursuant to the exercise of Options or warrants
outstanding on the date hereof or upon the conversion of the Series D Shares;
(iii) transfer, lease, license, sell, mortgage, pledge, dispose of, or encumber
any assets other than in the ordinary and usual course of business and
consistent with past practice, or incur or modify any indebtedness or other
liability, other than in the ordinary and usual course of business and
consistent with past practice; or (iv) redeem, purchase or otherwise acquire
directly or indirectly any of its capital stock;
(d) the Company shall not: (i) grant any increase in the compensation
payable or to become payable by the Company to any of its executive officers or
(ii)(A) adopt any new, or (B) amend or otherwise increase, or accelerate the
payment or vesting of the amounts payable or to become payable under any
existing bonus, incentive compensation, deferred compensation, severance, profit
sharing, stock option, stock purchase, insurance, pension, retirement or other
employee benefit plan, agreement or arrangement; or (iii) enter into any
employment or severance agreement with or, except in accordance with the
existing written policies of the Company, grant any severance or termination pay
to any officer, director or employee of the Company;
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(e) the Company shall not modify, amend or terminate any of its material
contracts or waive, release or assign any material rights or claims, except in
the ordinary course of business and consistent with past practice;
(f) the Company shall (i) not permit any insurance policy naming it as a
beneficiary or a loss payable payee to be cancelled or terminated without notice
to Parent, except in the ordinary course of business and consistent with past
practice unless the Company shall have obtained a comparable replacement policy;
the Company shall not incur or assume any long-term debt, or except in the
ordinary course of business, incur or assume any short-term indebtedness in
amounts not consistent with past practice except for borrowings under the
Company's existing credit facility with Madeleine LLC in the ordinary course of
business and consistent with past practice; (ii) assume, guarantee, endorse or
otherwise become liable or responsible (whether directly, contingently or
otherwise) for the obligations of any other person, except in the ordinary
course of business and consistent with past practice; (iii) make any loans,
advances (other than travel and expense advances to employees in the ordinary
course of business and consistent with past practice) or capital contributions
to, or investments in, any other person; or (iv) enter into any material
commitment or transaction (including, but not limited to, any borrowing, or
purchase, sale or lease of assets or real estate);
(g) the Company shall not (i) change any of the accounting methods used by
it unless required by GAAP or (ii) make any material Tax election change any
material Tax election already made, adopt any material Tax accounting method,
change any material Tax accounting method unless required by GAAP, enter into
any closing agreement, settle any Tax claim or assessment or consent to any Tax
claim or assessment or any waiver of the statute of limitations for any such
claim or assessment; and
(h) the Company shall not pay, discharge or satisfy any claims, liabilities
or obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction of any such
claims, liabilities or obligations, in the ordinary course of business and
consistent with past practice, of claims, liabilities or obligations reflected
or reserved against in, or contemplated by, the consolidated financial
statements (or the notes thereto) of the Company;
(i) the Company shall not adopt a plan of complete or partial liquidation,
dissolution, merger, consolidation, restructuring, recapitalization or other
reorganization of the Company (other than the Merger);
(j) the Company shall not take, or agree to commit to take, any action that
would or is reasonably likely to result in any of the conditions to the Merger
set forth in Article VII not being satisfied, or would make many representation
or warranty of the Company contained herein inaccurate in any respect at, or as
of any time prior to, the Effective Time, or that would materially impair the
ability of the Company to consummate the Merger in accordance with the terms
hereof or materially delay such consummation;
(k) the Company shall not redeem the Rights or terminate, amend or otherwise
modify the Rights Plan prior to the consummation of the Offer unless required to
do so by order of a court of competent jurisdiction; and
(l) except as expressly provided herein, the Company shall not enter into an
agreement, contract, commitment or arrangement to do any of the foregoing, or to
authorize, recommend, propose or announce an intention to do any of the
foregoing.
SECTION 5.3. NO SHOPPING.
(a) The Company will not, and will use its reasonable best efforts to ensure
that its officers, directors, employees, investment bankers, attorneys,
accountants and other agents do not, directly or indirectly: (i) initiate,
solicit or encourage, or take any action to facilitate the making of, any offer
or proposal which constitutes or is reasonably likely to lead to any Takeover
Proposal, (ii) enter into any agreement with respect to any Takeover Proposal,
or (iii) in the event of an unsolicited written Takeover Proposal for the
Company engage in negotiations or discussions with, or provide any information
or data to, any Person
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(other than Parent, any of its affiliates or representatives and except for
information which has been previously publicly disseminated by the Company)
relating to any Takeover Proposal; PROVIDED HOWEVER, that nothing contained in
this Section 5.3 or any other provision hereof shall prohibit the Company or the
Company's Board from (i) taking and disclosing to the Company's stockholders or
position with respect to tender or exchange offer by a third party pursuant to
Rules 14D-9 and 14e2 promulgated under the Exchange Act or (ii) making such
disclosure to the Company's stockholders as, in the good faith judgment of the
Board after receiving advice from outside counsel, is required under applicable
law.
(b) Notwithstanding the foregoing, prior to the acceptance of Shares
pursuant to the Offer, the Company may furnish information concerning its
business, properties or assets to any Person pursuant to appropriate
confidentiality agreements, and may negotiate and participate in discussions and
negotiations with such Person concerning a Takeover Proposal if (x) such entity
or group has on an unsolicited basis submitted a bona fide written proposal to
the Company relating to any such transaction which the Board determines in good
faith, after receiving advice from a nationally recognized investment banking
firm, represents a superior transaction to the Offer and the Merger and which is
not conditioned upon obtaining additional financing and (y) in the opinion of
the Board of Directors of the Company, only after receipt of advice from outside
legal counsel to the Company, the failure to provide such information or access
or to engage in such discussions or negotiations would create a reasonable
possibility of a breach of the fiduciary duties of the Board of Directors to the
Company's shareholders under applicable law (a Takeover Proposal which satisfies
clauses (x) and (y) being referred to herein as a "Superior Proposal"). The
Company shall within two business days following receipt of a Superior Proposal
notify Parent of the receipt of the same. The Company shall promptly provide to
Parent any material nonpublic information regarding the Company provided to any
other party which was not previously provided to Parent. At any time after two
business days following notification to Parent of the Company's intent to do so
(which notification shall include the identity of the bidder and the material
terms and conditions of the proposal) and if the Company has otherwise complied
with the terms of this Section 5.3(b), the Board of Directors may terminate this
Agreement pursuant to clause (ii) of Section 8.1(f) and enter into an agreement
with respect to a Superior Proposal, PROVIDED that the Company shall,
concurrently with entering into such agreement, pay or cause to be paid to
Parent the Termination Fee (as defined in Section 8.2(b) hereof), plus any
amount payable at the time for reimbursement of expenses pursuant to Section
8.2(b) hereof.
(c) Except as set forth in Section 5.3(b), 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 the Purchaser, the
approval or recommendation by such Board of Directors or any such committee of
the Offer, this Agreement or the Merger, (ii) approve or recommend or propose to
approve or recommend, any Acquisition Proposal or (iii) enter into any agreement
with respect to any Takeover Proposal.
ARTICLE VI.
ADDITIONAL AGREEMENTS
SECTION 6.1. PROXY STATEMENT. As promptly as practicable after the
consummation of the Offer and if required by the Exchange Act, the Company shall
prepare and file with the SEC, and shall use all reasonable efforts to have
cleared by the SEC, and promptly thereafter shall mail to stockholders, the
Proxy Statement. The Proxy Statement shall contain the recommendation of the
Board of Directors in favor of the Merger.
SECTION 6.2. MEETING OF STOCKHOLDERS OF THE COMPANY. At the Special
Meeting, if any, the Company shall use its best efforts to solicit from
stockholders of the Company proxies in favor of the Merger and shall take all
other action necessary or, in the reasonable opinion of the Purchaser, advisable
to secure any vote or consent of stockholders required by Delaware Law to effect
the Merger. The Purchaser agrees that
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it shall vote, or cause to be voted, in favor of the Merger all Shares directly
or indirectly beneficially owned by it.
SECTION 6.3. ADDITIONAL AGREEMENTS. Subject to the terms and condition is
herein provided, the Company, Parent and Purchaser will each comply in all
material respects with all applicable laws and with all applicable rules and
regulations of any governmental authority to achieve the satisfaction of the
Minimum Condition and all conditions set forth in Annex I attached hereto and
Article VII hereof, and to consummate and make effective the Merger and the
other transactions contemplated hereby. Each of the parties hereto agrees to use
all reasonable efforts to obtain in a timely manner all necessary waivers,
consents and approvals and to effect all necessary registrations and filings,
and to use all reasonable efforts to take, or cause to be taken, all other
actions and to do, or cause to be done, all other things necessary, proper or
advisable to consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement. In case at any time after the
Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement, the proper officers and directors of the Company,
Parent and the Purchaser shall use all reasonable efforts to take, or cause to
be taken, all such necessary actions.
SECTION 6.4. NOTIFICATION OF CERTAIN MATTERS. The Company shall give prompt
notice to the Purchaser and the Purchaser shall give prompt notice to the
Company, of (i) the occurrence, or nonoccurrence of any event whose occurrence,
or nonoccurrence would be likely to cause either (A) any representation or
warranty contained in this Agreement to be untrue or inaccurate in any material
respect at any time from the date hereof to the Effective Time or (B) any
condition set forth in Annex I to be unsatisfied in any material respect at any
time from the date hereof to the date the Purchaser purchases Shares pursuant to
the Offer and (ii) any material failure of the Company, the Purchaser, or
Parent, as the case may be, or any officer, director, employee or agent thereof,
to comply with or satisfy any covenant, condition or agreement to be complied
with or satisfied by it hereunder; PROVIDED, HOWEVER, that the delivery of any
notice pursuant to this Section 6.4 shall not limit or otherwise affect the
remedies available hereunder to the party receiving such notice.
SECTION 6.5. ACCESS TO INFORMATION.
(a) From the date hereof to the Effective Time, the Company shall, and shall
cause its officers, directors, employees, auditors and agents to, afford the
officers, employees and agents of Parent and the Purchaser reasonable access at
all reasonable times to its officers, employees, agents, properties, offices and
other facilities and to all books and records, and shall furnish Parent and the
Purchaser with all financial, operating and other data and information as Parent
and the Purchaser, through its officers, employees or agents, may reasonably
request.
(b) Unless otherwise required by law and until the Appointment Date, the
Purchaser agrees that it shall, and shall cause its affiliates and each of their
respective officers, directors, employees, financial advisors and agents (the
"Purchaser Representatives"), to hold in strict confidence all data and
information obtained by them from the Company (unless such information is or
becomes publicly available without the fault of any of the Purchaser
Representatives or public disclosure of such information is required by law in
the opinion of counsel to the Purchaser) and shall insure that the Purchaser
Representatives do not disclose such information to others without the prior
written consent of the Company. Notwithstanding anything herein to the contrary,
the terms of the Confidentiality Agreement, dated November 6, 1995 (the
"Confidentiality Agreement"), executed by the Purchaser shall remain in full
force and effect.
(c) In the event of the termination of this Agreement, the Purchaser shall,
and shall cause its affiliates to, return promptly every document furnished to
them by the Company or any of its representatives in connection with the
transactions contemplated hereby and any copies thereof which may have been
made, and shall cause the Purchaser Representatives to whom such documents were
furnished promptly to
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return such documents and any copies thereof any of them may have made, other
than documents filed with the SEC or otherwise publicly available.
SECTION 6.6. PUBLIC ANNOUNCEMENTS. The Purchaser and the Company shall
consult with each other before issuing any press release or otherwise making any
public statements with respect to the Offer or the Merger and shall not issue
any such press release or make any such public statement before such
consultation, except as may be required by law.
SECTION 6.7. BEST EFFORTS; COOPERATION. Upon the terms and subject to the
conditions hereof, each of the parties hereto agrees to use its reasonable best
efforts to take or cause to be taken all actions and to do or cause to be done
all things necessary, proper or advisable to consummate the transactions
contemplated by this Agreement and shall use its reasonable best efforts to
obtain all necessary waivers, consents and approvals, and to effect all
necessary filings under the Exchange Act and the HSR Act. The parties shall
cooperate in responding to inquiries from, and making presentations to,
regulatory authorities.
SECTION 6.8. AGREEMENT TO DEFEND AND INDEMNIFY.
(a) The Certificate of Incorporation and By-Laws of the Surviving
Corporation shall not be amended, repealed or otherwise modified for a period of
five years after the Effective Time in any manner that would adversely affect
the rights thereunder of individuals who as of the date hereof were directors,
officers, employees, fiduciary, agents or otherwise entitled to indemnification
under the Certificate of Incorporation, By-Laws or indemnification agreements
(the "Indemnified Parties"). It is understood and agreed that the Company shall,
to the fullest extent permitted under Delaware Law and regardless of whether the
Merger becomes effective, indemnify, defend and hold harmless, and after the
Effective Time, the Parent, Purchaser and the Surviving Corporation shall
jointly and severally, to the fullest extent permitted under Delaware Law,
indemnify, defend and hold harmless, each Indemnified Party against any costs or
expenses (including reasonable attorneys' fees), judgments, fines, losses,
claims, damages, liabilities and amounts paid in settlement in connection with
any claim, action, suit, proceeding or investigation, including without
limitation liabilities arising out of this transaction, under the Exchange Act
in connection with the Offer or the Merger, and in the event of any such claim,
action, suit, proceeding or investigation (whether arising before or after the
Effective Time), (i) the Company or the Surviving Corporation shall pay the
reasonable fees and expenses of counsel selected by the Indemnified Parties,
which counsel shall be reasonably satisfactory to the Company or the Surviving
Corporation, promptly as statements therefor are received, and (ii) the Company
and the Surviving Corporation will cooperate in the defense of any such matter;
PROVIDED, HOWEVER, that neither the Company nor the Surviving Corporation shall
be liable for any settlement effected without its written consent (which consent
shall not be unreasonably withheld); and FURTHER, PROVIDED, that neither the
Company nor the Surviving Corporation shall be obliged pursuant to this Section
6.8 to pay the fees and disbursements of more than one counsel for all
Indemnified Parties in any single action except to the extent that, in the
opinion of counsel for the Indemnified Parties, two or more of such Indemnified
Parties have conflicting interests in the outcome of such action. For six years
after the Effective Time, the Surviving Corporation shall be required to
maintain or obtain officers' and directors' liability insurance covering the
Indemnified Parties who are currently covered by the Company's officers and
directors liability insurance policy with respect to matters existing or
occurring at or prior to the Effective Time on terms not less favorable than
those in effect on the date hereof in terms of coverage and amounts; PROVIDED,
HOWEVER, that if the aggregate annual premiums for such insurance at any time
during such period shall exceed 200% of the per annum rate of premium currently
paid by the Company for such insurance on the date of this Agreement, which
amount is set forth in Section 6.8 of the Disclosure Schedule, then Parent shall
cause the Company (or the Surviving Corporation if after the Effective Time) to,
and the Company (or the Surviving Corporation if after the Effective Time)
shall, provide the maximum coverage that shall then be available at an annual
premium equal to 200% of such rate. This Section 6.8 shall survive the
consummation of the Merger. Purchaser shall cause Surviving Corporation to
reimburse all expenses, including reasonable attorney's fees and expenses,
incurred by any person to
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enforce the obligations of the Purchaser and the Surviving Corporation under
this Section 6.8. Notwithstanding Section 9.7 hereof, this Section 6.8 is
intended to be for the benefit of and to grant third party rights to Indemnified
Parties whether or not parties to this Agreement, and each of the Indemnified
Parties shall be entitled to enforce the covenants contained herein.
(b) If the Surviving Corporation or any of its successors or assigns (i)
consolidates with or merges into any other Person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) transfers all or substantially all of its properties and assets to any
Person, then and in each such case, proper provision shall be made so that the
successors and assigns of the Surviving Corporation assume the obligations set
forth in this Section 6.8.
SECTION 6.9. EMPLOYEE BENEFITS.
(a) At the Effective Time, the Surviving Corporation shall continue as the
Plan Sponsor of each Employee Plan. Subject to Section 6.9(b) hereof, each of
the parties hereto agrees that participants' rights to the employer-provided
benefits for nonunion employees under the Employee Plans as in effect as of the
Effective Time shall be continued under the same or an equivalent plan and shall
not be reduced for at least one year following the Effective Time, except (i) to
the extent provided in Section 2.12 hereof, or (ii) as required by applicable
law (including as required to preserve any favorable tax treatment afforded such
benefits as of the Effective Time). Thereafter, such participants shall in any
event be credited with their service with the Company in determining their right
to participate and vesting under any successor Employee Plans.
(b) The Company's 1985 and 1987 Employee Stock Ownership Plans (the "ESOPs")
shall be terminated effective as of the Effective Time. As soon as practicable
following the receipt of favorable determination letters from the Internal
Revenue Service confirming that the termination of the ESOPs and elimination of
the right to receive distributions in the form of employer securities does not
adversely affect their prior qualified and tax-exempt status, the assets held in
the trusts related thereto (consisting of the proceeds of the sale of Company
Common Stock held therein in the Offer or the Merger) shall be either (i) to the
extent allowable under applicable law, distributed to participants in single
lump sums, or (ii) to the extent not allowable under applicable law
(particularly Treasury regulation 1.411(a)11(e)(1)), transferred to another
qualified defined contribution plan maintained by the Company, the Purchaser or
an affiliate of either of them.
SECTION 6.10. PENDING LITIGATION. Promptly following the consummation of
the Offer, the Purchaser shall join with the defendants in the action entitled
KUPFERBERG V. NORIAN, ET AL. (Del. Ch. Civ. Act. No. 12709) in a motion to
dismiss or withdraw such action with prejudice, and will not assert or permit
the Company to assert any claim against the defendants thereunder relating to
the subject matter thereof.
ARTICLE VII.
CONDITIONS OF MERGER
The respective obligations of each party to effect the Merger shall be
subject to the following conditions:
SECTION 7.1. OFFER. The Purchaser shall have made, or caused to be made,
the Offer and shall have purchased, or caused to be purchased, the Shares
pursuant to the Offer; PROVIDED, that this condition shall be deemed to have
been satisfied with respect to the obligation of Parent and the Purchaser to
effect the Merger if the Purchaser fails to accept for payment or pay for Shares
pursuant to the Offer in violation of the terms of the Offer or of this
Agreement.
SECTION 7.2. STOCKHOLDER APPROVAL. The Merger and this Agreement shall have
been approved and adopted by the requisite vote of the stockholders of the
Company, if required by Delaware Law.
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SECTION 7.3. NO CHALLENGE. No statute, rule, regulation, judgment, writ,
decree, order or injunction shall have been promulgated, enacted, entered or
enforced, and no other action shall have been taken, by any government or
governmental, administrative or regulatory authority or by any court of
competent jurisdiction, that in any of the foregoing cases has the effect of
making illegal or directly or indirectly restraining, prohibiting or restricting
the consummation of the Merger.
ARTICLE VIII.
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.1. TERMINATION. This Agreement may be terminated and the
transactions contemplated herein may be abandoned at any time before the
Effective Time, whether before or after stockholder approval:
(a) By mutual written consent of the Boards of Directors of Parent and the
Company; or
(b) By Parent (i) if the Offer shall have expired or been terminated without
any Shares being purchased thereunder by the Purchaser as a result of the
occurrence of any of the events set forth in Annex I or (ii) if the Company
shall have failed to deliver to Parent by July 3, 1997 an executed copy of the
fairness opinion of CIBC referred to in Section 4.26, substantially in the form
of the Draft Opinion; or
(c) By either Parent or the Company if a court of competent jurisdiction or
governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action (which order, decree
or ruling the parties hereto shall use their best efforts to lift), in each case
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement; or
(d) By Parent if, without any material breach by the Purchaser of its
obligations under this Agreement, the purchase of Shares pursuant to the Offer
shall not have occurred on or before 120 days from the date hereof; or
(e) By the Company if, without any material breach by the Company of its
obligations under this Agreement, the purchase of Shares pursuant to the Offer
shall not have occurred on or before 120 days from the date hereof; or
(f) By the Company (i) if there shall be a material breach of any of Parent
or the Purchaser's representations, warranties or covenants hereunder, which
breach cannot be or has not been cured within ten (10) days of the receipt of
written notice thereof or (ii) to allow the Company to enter into an agreement
in accordance with Section 5.3(b) with respect to a Superior Proposal which the
Board of Directors has determined is more favorable to the stockholders of the
Company than the transactions contemplated hereby; PROVIDED that it has complied
with all provisions thereof, including the notice provision therein, and that it
makes simultaneous payment of the Termination Fee, plus any amounts then due as
a reimbursement of expenses; or
(g) By Parent, if prior to the purchase of Shares pursuant to the Offer, the
Company shall have breached any representation, warranty or covenant or other
agreement contained in this Agreement, which breach (i) would give rise to the
failure of a condition set forth in paragraph (d) or (e) of Annex I hereto and
(ii) cannot be or has not been cured within ten (10) days of the receipt of
written notice thereof; or
(h) By Parent, at any time prior to the purchase of the Shares pursuant to
the Offer, if (i) the Board of Directors of the Company shall withdraw, modify,
or change its recommendation or approval in respect of this Agreement or the
Offer in a manner adverse to the Purchaser, (ii) the Board of Directors of the
Company shall have recommended any proposal other than by Parent or the
Purchaser in respect of a Takeover Proposal, (iii) the Company shall have
exercised a right with respect to Takeover Proposal referenced in Section 5.3(b)
and shall, directly or through its representatives, continue discussions with
any third party concerning a Takeover Proposal for more than twenty (20)
business days after the date of
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receipt of such Takeover Proposal, (iv) a Takeover Proposal that is publicly
disclosed shall have been commenced, publicly proposed or communicated to the
Company which contains a proposal as to price (without regard to whether such
proposal specifies a specific price or a range of potential prices) and the
Company shall not have rejected such proposal within twenty (20) business days
of its receipt or, if sooner, the date its existence first becomes publicly
disclosed, or (v) any Person or group (as defined in Section 13(d)(3) of the
Exchange Act) other than Parent or the Purchaser or any of their respective
subsidiaries or affiliates shall have become the beneficial owner of more than
15% (or in the case of the Gabelli Funds, Inc. and its affiliates and
associates, 32%) of the outstanding Shares (either on a primary or a fully
diluted basis); provided, however, that this provision shall not apply to any
Person that owns more than 15% of the outstanding Shares on the date hereof.
SECTION 8.2. EFFECT OF TERMINATION.
(a) In the event of termination of this Agreement as provided in Section 8.1
hereof, written notice thereof shall forthwith be given to the other party or
parties specifying the provision hereof pursuant to which such terminations is
made, and this Agreement shall forthwith become null and void and there shall be
no liability on the part of Parent, the Purchaser or the Company, except (i) as
set forth in Sections 6.5 and 9.3 hereof and (ii) nothing herein shall relieve
any party from liability for any breach of this Agreement.
(b) If (i) Parent shall have terminated this Agreement pursuant to Section
8.1(h)(i) or 8.1(h)(ii), (ii) (A) the Parent shall have terminated this
Agreement pursuant to Section 8.1(g) or pursuant to Section 8.1(h)(iii),
8.1(h)(iv) or 8.1(h)(v) and (B) within eighteen (18) months of any such
termination the Company shall have entered into a definitive agreement with
respect to a Takeover Proposal or a Takeover Proposal with respect to the
Company shall have been consummated with such Person, or (iii) the Company shall
have terminated this Agreement pursuant to Section 8.1(f)(ii), then in either
such case the Company shall pay simultaneously with such termination if pursuant
to Section 8.1(f)(ii) and promptly, but in no event later than two business days
after the date of such termination or event if pursuant to Section 8.1(h) or
8.1(g), to Parent a termination fee (the "Termination Fee") of $2,000,000 plus
an amount, not in excess of $1,500,000, equal to the Purchaser's actual and
reasonably documented reasonable out-of-pocket expenses incurred by Parent and
the Purchaser in connection with the Offer, the Merger, this Agreement and the
consummation of the transactions contemplated hereby, which amount shall be
payable by wire transfer to such account as the Purchaser may designate in
writing to the Company. No fee or expense reimbursement shall be paid pursuant
to this Section 8.2(b) if the Purchaser shall be in material breach of its
obligations hereunder.
ARTICLE IX.
GENERAL PROVISIONS
SECTION 9.1. NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS. The representations, warranties and agreements in this Agreement or
in any schedule, instrument or other document delivered pursuant to this
Agreement shall terminate at the Effective Time or the termination of this
Agreement pursuant to Section 8.1, as the case may be, except that the
agreements set forth in Article II and Section 6.8 shall survive the Effective
Time indefinitely and those set forth in Sections 6.4(b), 6.4(c), 8.2 and 9.3
shall survive termination indefinitely.
SECTION 9.2. NOTICES. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
or made (i) as of the date delivered or sent by facsimile if delivered
personally or by facsimile, and (ii) on the third business day after deposit in
the U.S. mail, if mailed by registered or certified mail (postage prepaid,
return receipt requested), in each case to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice, except that notices of changes of address shall be effective upon
receipt):
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(a) if to Parent or the Purchaser
Fremont Acquisition Company, LLC
c/o Fremont Partners, L.L.C.
50 Fremont Street, Suite 3700
San Francisco, California 94105
Attention: Robert Jaunich II
Facsimile: (415) 284-8191
With a copy to:
Fremont Partners, L.L.C.
50 Fremont Street, Suite 3700
San Francisco, California 94105
Attention: General Counsel
Facsimile: (415) 512-7121
And a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
Four Embarcadero Center, Suite 3800
San Francisco, California 94111
Attention: Kenton J. King, Esq.
Facsimile: (415) 984-2698
(b) if to the Company:
Kerr Group, Inc.
500 New Holland Avenue
Lancaster, PA 176022104
Attention: D. Gordon Strickland
Facsimile: (717) 394-6398
With a copy to:
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: Harvey L. Sperry, Esq.
Facsimile: (212) 821-8111
SECTION 9.3. EXPENSES. Except as expressly set forth in Section 8.2(b), all
fees, costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such fees,
costs and expenses.
SECTION 9.4. CERTAIN DEFINITIONS. For purposes of this Agreement, the term:
(a) "affiliate" of a Person means a Person that directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control with, the first mentioned Person;
(b) "control" (including the terms "controlled by" and "under common control
with") means the possession, direct or indirect, of the power to direct or cause
the direction of the management and policies of a Person, whether through the
ownership of stock, as trustee or executor, by contract or credit arrangement or
otherwise; and
(c) "Lien" means any mortgage, pledge, hypothecation, assignment for
security purposes, deposit arrangement, encumbrance, lien (statutory or other),
charge or other security interest or any preference, priority or other security
agreement or preferential arrangement of any kind or nature whatsoever
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(including without limitation any conditional sale or other title retention
agreement and any Financing Lease having substantially the same economic effect
as any of the foregoing); PROVIDED, HOWEVER, that liens for Taxes not yet due
and payable but for which adequate reserves have been established and other
statutory liens shall not be Liens for the purposes of this Agreement.
(d) "Person" means an individual, corporation, partnership, limited
liability company, association, trust or any unincorporated organization.
SECTION 9.5. HEADINGS. 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.
SECTION 9.6. SEVERABILITY. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other conditions and provisions of this Agreement shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction. Upon such determination that any term or
other provision is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in an acceptable
manner to the end that transactions contemplated hereby are fulfilled to the
maximum extent possible.
SECTION 9.7. ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES. This Agreement
and the Confidentiality Agreement constitute the entire agreement and supersede
any and all other prior agreements and undertakings, both written and oral,
among the parties, or any of them, with respect to the subject matter hereof
and, except as otherwise expressly provided herein, this Agreement is not
intended to confer upon any other Person any rights or remedies hereunder.
SECTION 9.8. ASSIGNMENT. This Agreement shall not be assigned by operation
of law or otherwise, except that Parent and the Purchaser may assign all or any
of their rights hereunder to any affiliate of Parent provided that no such
assignment shall relieve the assigning party of its obligations hereunder.
SECTION 9.9. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware applicable to
contracts executed in and to be performed entirely within that State.
SECTION 9.10. AMENDMENT. This Agreement may be amended by the parties
hereto by action taken by Parent and the Purchaser, and by action taken by or on
behalf of the Company's Board of Directors at any time before the Effective
Time; PROVIDED, HOWEVER, that, after approval of the Merger by the stockholders
of the Company, no amendment may be made which would reduce the amount or change
the type of consideration into which each Share or Series D Share will be
converted upon consummation of the Merger. This Agreement may not be amended
except by an instrument in writing signed by the parties hereto.
SECTION 9.11. WAIVER. At any time before the Effective Time, any party
hereto may (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) 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 as against such party and only if
set forth in an instrument in writing signed by such party.
SECTION 9.12. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which shall
constitute one and the same agreement.
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IN WITNESS WHEREOF, Parent, the Purchaser and the Company have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
Very truly yours,
KERR GROUP, INC.
By /s/ D. GORDON STRICKLAND
------------------------------------
Nane: D. Gordon Strickland
Title: PRESIDENT AND CEO
FREMONT ACQUISITION COMPANY, LLC
By /s/ GIL LAMPHERE
------------------------------------
Name: Gil Lamphere
Title: PRESIDENT
KERR ACQUISITION CORPORATION
By /s/ GREGORY P. SPIVY
------------------------------------
Name: Gregory P. Spivy
Title: VICE PRESIDENT
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ANNEX I
CONDITIONS TO THE OFFER. Notwithstanding any other provision of the Offer,
the Purchaser shall not be required to accept for payment or, subject to any
applicable rules and regulations of the SEC, including Rule 14e-1(c) promulgated
under the Exchange Act (relating to the Purchaser's obligation to pay for or
return tendered Shares promptly after termination or withdrawal of the Offer),
pay for, and (subject to any such rules or regulations) may delay the acceptance
for payment of any tendered Shares and (except as provided in this Agreement)
amend or terminate the Offer as to any Shares not then paid for if (i) the
condition that there shall be validly tendered and not withdrawn prior to the
expiration of the Offer a number of shares of Company Common Stock and Series D
Shares (assuming the conversion of all such Series D Shares into shares of the
Company Common Stock) which represents at least 51% of the number of shares of
Company Common Stock then outstanding on a fully diluted basis (after giving
effect to the conversion or exercise of all outstanding Series D Shares,
options, warrants and other rights and securities exercisable or convertible
into shares of Company Common Stock) shall not have been satisfied (the "Minimum
Condition") or (ii) any applicable waiting period under the HSR Act shall not
have expired or been terminated prior to the expiration of the Offer or (iii) at
any time after the date of this Merger Agreement and before the time of
acceptance of payment for any such Shares (whether or not any Shares have
theretofore been accepted for payment or paid for pursuant to the Offer,) any of
the following conditions exists:
(a) there shall be pending in effect an injunction or other order,
decree, judgment or ruling by a court of competent jurisdiction or by a
governmental, regulatory or administrative agency or commission of competent
jurisdiction or a statute, rule, regulation, executive order or other action
shall have been promulgated, enacted, taken or threatened by a governmental
authority or a governmental, regulatory or administrative agency or
commission of competent jurisdiction which in any such case (i) restrains or
prohibits the making or consummation of the Offer or the consummation of the
Merger, (ii) prohibits or restricts the ownership or operation by the
Purchaser (or any of its affiliates or subsidiaries) of any portion of its
or the Company's business or assets which is material to the business of all
such entities taken as a whole, or compels the Purchaser (or any of its
affiliates or subsidiaries) to dispose of or hold separate any portion of
its or the Company's business or assets which is material to the business of
all such entities taken as a whole, (iii) imposes material limitations on
the ability of the Purchaser effectively to acquire or to hold or to
exercise full rights of ownership of the Shares, including, without
limitation, the right to vote the Shares purchased by the Purchaser on all
matters properly presented to the stockholders of the Company, (iv) imposes
any material limitations on the ability of the Purchaser or any of their
respective affiliates or subsidiaries effectively to control in any material
respect the business and operations of the Company; or
(b) this Agreement shall have been terminated by the Company or the
Purchaser in accordance with its terms; or
(c) there shall have occurred (i) any general suspension of, or
limitation on prices for, trading in securities on any national securities
exchange or the over-the-counter market for a period in excess of 24 hours
(excluding suspensions or limitations resulting solely from physical damage
or interference with such exchanges not related to market conditions), (ii)
a declaration of a banking moratorium or any suspension of payments in
respect of banks in the United States (whether or not mandatory), (iii) a
commencement of a war, armed hostilities or other international or national
calamity directly or indirectly involving the United States, (iv) any
limitation (whether or not mandatory) by any United States governmental
authority on the extension of credit generally by banks or other financial
institutions, (v) a change in general financial, bank or capital market
conditions which materially and adversely affects the ability of financial
institutions in the United States to extend credit or syndicate loans or
(vi) in the case of any of the foregoing existing at the time of the
execution of this Agreement, a material acceleration or worsening thereof;
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(d) the representations and warranties of the Company set forth in this
Agreement shall not be true and correct in all material respects, in each
case (i) as of the date referred to in any representation or warranty which
addresses matters as of a particular date, or (ii) as to all other
representations and warranties as of the date of this Agreement and as of
the scheduled expiration of the Offer, (without giving effect to any
materiality qualification or standard contained in any such representations
and warranties); or
(e) the Company shall have failed to perform in all material respects
any obligation or to comply with any agreement or covenant to be performed
or complied with by it under this Agreement (without giving effect to any
materiality qualification or standard contained in any such agreements or
covenants); or
(f) the Purchaser shall have failed to receive a certificate executed by
the President or a Vice President of the Company, dated as of the scheduled
expiration of the Offer, to the effect that the conditions set forth in
paragraphs (d) and (e) of this Annex I have not occurred; or
(g) there shall have occurred any change (or any development that,
insofar as reasonably can be foreseen, reasonably likely to result in any
change) that constitutes a Material Adverse Effect; or
(h) person (other than the Gabelli Funds, Inc. and its affiliates and
associates) acquires beneficial ownership (as defined in Rule 13d-3
promulgated under the Exchange Act), of at least 15% of the outstanding
Company Common Stock.
The foregoing conditions are for the sole benefit of the Purchaser and may
be asserted by the Purchaser regardless of the circumstances (including any
action or inaction by the Purchaser) giving rise to any such conditions and may
be waived by the Purchaser in whole or in part at any time and from time to
time, in each case, in the exercise of the good faith judgment of the Purchaser
and subject to the terms of this Agreement. The failure by the Purchaser at any
time to exercise any of the foregoing rights shall not be deemed a waiver of any
such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
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<PAGE>
TABLE OF DEFINITIONS
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Affiliate........................................................................................... 9.4(a)
Agreement........................................................................................... Recitals
Appointment Date.................................................................................... 5.2
Audit............................................................................................... 4.14(h)
Balance Sheet....................................................................................... 4.14(b)
Blue Sky............................................................................................ 4.4(b)
Board of Directors.................................................................................. Recitals
Certificates........................................................................................ 2.11(b)
CIBC................................................................................................ 4.26
Closing............................................................................................. 2.3
Closing Date........................................................................................ 2.3
Code................................................................................................ 4.9(a)
Common Per Share Amount............................................................................. Recitals
Common Stock Merger Consideration................................................................... 2.9(a)
Company............................................................................................. Recitals
Company Agreement................................................................................... 4.13
Company Common Stock................................................................................ Recitals
Company Preferred Stock............................................................................. 4.2
Computer Software................................................................................... 4.15(a)
Confidentiality Agreement........................................................................... 6.5(b)
Control............................................................................................. 9.4(b)
Delaware Law........................................................................................ Recitals
Disclosure Schedule................................................................................. 3.7
Dissenting Shares................................................................................... 2.10(a)
Distribution Date................................................................................... 1.2(a)
Draft Opinion....................................................................................... 4.26
Effective Time...................................................................................... 2.2
Employee Plans...................................................................................... 4.9(a)
Environmental Laws.................................................................................. 4.19(a)
ERISA............................................................................................... 4.9(a)
ESOPs............................................................................................... 6.9(b)
Exchange Act........................................................................................ 1.1(a)
Exchange Agent...................................................................................... 2.11(a)
Financial Statements................................................................................ 4.5(b)
GAAP................................................................................................ 4.5(b)
Governmental Authority.............................................................................. 3.3(b)
HSR Act............................................................................................. 3.3(b)
Indemnified Parties................................................................................. 6.8(a)
Independent Directors............................................................................... 1.3(a)
Intellectual Property............................................................................... 4.15(b)
Lien................................................................................................ 9.4(c)
Material Adverse Effect............................................................................. 4.1
Merger.............................................................................................. Recitals
Merger Consideration................................................................................ 2.9(c)
Offer............................................................................................... Recitals
Offer Documents..................................................................................... 1.1(c)
Offer to Purchase................................................................................... 1.1(c)
Option Agreement.................................................................................... Recitals
Option Plans........................................................................................ 2.12(a)
Option Price........................................................................................ 2.12(a)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Options............................................................................................. 2.11(b)
Other Stock Plan.................................................................................... 2.12(a)
Person.............................................................................................. 9.4(d)
Proxy Statement..................................................................................... 2.7(a)(ii)
Proxy Statement..................................................................................... 4.10
Purchaser Information............................................................................... 3.3(b)
Purchaser Representatives........................................................................... 6.5(b)
Real Property....................................................................................... 4.20(a)
Rights.............................................................................................. Recitals
Rights Agreement.................................................................................... Recitals
Schedule 14D-1...................................................................................... 1.1(c)
Schedule 14D-9...................................................................................... 1.2(b)
SEC................................................................................................. 1.1(c)
SEC Reports......................................................................................... 4.5(a)
Securities Act...................................................................................... 4.5(a)
Series D Per Share Amount........................................................................... Recitals
Series D Shares..................................................................................... Recitals
Shares.............................................................................................. Recitals
Special Meeting..................................................................................... 2.7(a)(i)
Stockholders' Meeting............................................................................... 4.10
Subsidiary.......................................................................................... 4
Superior Proposal................................................................................... 5.3(b)
Surviving Corporation............................................................................... 2.1
Takeover Proposal................................................................................... 5.1
Takeover Proposal Interest.......................................................................... 5.1
Tax Authority....................................................................................... 4.14(h)
Tax Return.......................................................................................... 4.14(i)
Taxes............................................................................................... 4.14(h)
Termination Fee..................................................................................... 8.2(b)
Voting Debt......................................................................................... 4.4(b)
</TABLE>
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<PAGE>
EXHIBIT A
COMPANY OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated as of July 1, 1997 (this "Agreement"), between
Fremont Acquisition Company, LLC, a Delaware limited liability company
("Parent"), and Kerr Group, Inc., a Delaware corporation (the "Company").
WHEREAS, Parent, Kerr Acquisition Corporation, a Delaware corporation and a
wholly owned subsidiary of Parent ("Sub"), and the Company, concurrently with
the execution and delivery of this Agreement, will enter into an Agreement and
Plan of Merger, dated as of the date hereof (the "Merger Agreement"), providing
for, among other things, the merger of Sub with and into the Company (the
"Merger"); and
WHEREAS, as a condition to the willingness of Parent and Sub to enter into
the Merger Agreement, Parent and Sub have required that the Company agree, and
in order to induce Parent and Sub to enter into the Merger Agreement the Company
has agreed, to grant Parent the option (as hereinafter defined) upon the terms
and subject to the conditions of this Agreement.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, and intending to be legally bound hereby, the
parties hereto hereby agree as follows:
ARTICLE I
THE OPTION
SECTION 1.1 GRANT OF OPTION. The Company hereby grants to Parent an
irrevocable option (the "Option") to purchase up to 782,685 newly-issued shares
(the "Shares") of the Common Stock, par value $.50 per share ("Company Common
Stock"), of the Company at a purchase price per share of $5.40 (the "Exercise
Price"), in the manner set forth in Sections 1.2 and 1.3 of this Agreement;
PROVIDED, HOWEVER, that in no event shall the number of Shares for which the
Option is exercisable exceed 19.9% of the Company's issued and outstanding
shares of Company Common Stock. The number of Shares that may be received upon
the exercise of the Option and the Exercise Price are subject to adjustment as
herein set forth. This Agreement shall terminate, and the Option hereby granted
expire, on the earliest of (i) the Effective Time (as defined in the Merger
Agreement) and (ii) to the extent that no Option Notice (as defined below) has
theretofore been given by Parent, six (6) months after any termination of the
Merger Agreement pursuant to Article VIII thereof.
SECTION 1.2 EXERCISE OF OPTION. At any time or from time to time prior to
the termination of the option granted hereunder in accordance with the terms of
this Agreement, Parent (or its designee) may exercise the option, in whole or in
part, if on or after the date hereof:
(a) any corporation, partnership, individual, trust, unincorporated
association, or other entity or "person" (as defined in Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) other than
Parent or any of its "affiliates" (as defined in the Exchange Act) (a "Third
Party"), shall have:
(i) commenced a BONA FIDE tender offer or exchange offer for any shares
of Company Common Stock, the consummation of which would result in
"beneficial ownership" (as defined under the Exchange Act) by such Third
Party (together with all such Third Party's affiliates and "associates" (as
such term is defined in the Exchange Act)) of 15% or more of the then
outstanding voting equity of the Company (either on a primary or a fully
diluted basis);
(ii) acquired beneficial ownership of shares of Company Stock which,
when aggregated with any shares of Company Stock already owned by such Third
Party, its affiliates and associates, would result in the aggregate
beneficial ownership by such Third Party its affiliates and associates of
15% (or, in
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the case of The Gabelli Funds, Inc. and its affiliates and associates, 32%),
or more of the then outstanding voting equity of the Company (either on a
primary or a fully diluted basis), PROVIDED, HOWEVER, that "Third Party" for
purposes of this clause (ii) shall not include any corporation, partnership,
person, other entity or group which beneficially owns more than 15% of the
outstanding voting equity of the Company (either on a primary or a fully
diluted basis) as of the date hereof and that does not, after the date
hereof, increase such ownership percentage by more than an additional 1% of
the outstanding voting equity of the Company (either on a primary or a fully
diluted basis);
(iii) solicited "proxies" in a "solicitation" subject to the proxy rules
under the Exchange Act, executed any written consent or become a
"participant" in any "solicitation" (as such terms are defined in Regulation
14A under the Exchange Act), in each case with respect to the Company Stock;
(b) any of the events described in Section 8.1(g) or (h) of the Merger
Agreement that would allow Parent to terminate the Merger Agreement has occurred
(but without the necessity of Parent having terminated the Merger Agreement).
In the event that Parent wishes to exercise all or any part of the Option,
Parent shall give written notice (the "Option Notice," with the date of the
Option Notice being hereinafter called the "Notice Date") to the Company
specifying the number of Shares it will purchase and a place and date (not
earlier than three (3) nor later than twenty (20) business days from the Notice
Date) for closing such purchase (a "Closing"). Parent's obligation to purchase
Shares upon any exercise of the option is subject (at its election) to the
conditions that (i) no preliminary or permanent injunction or other order
against the purchase, issuance or delivery of the Shares issued by any federal,
state or foreign court of competent jurisdiction shall be in effect (and no
action or proceeding shall have been commenced or threatened for purposes of
obtaining such an injunction or order) and (ii) any applicable waiting period
under the HSR Act shall have expired and (iii) there shall have been no material
breach of the representations, warranties, covenants or agreements of the
Company contained in this Agreement or the Merger Agreement; PROVIDED, HOWEVER,
that any failure by Parent to purchase Shares upon exercise of the Option at any
Closing as a result of the nonsatisfaction of any of such conditions shall not
affect or prejudice Parent's right to purchase such Shares upon the subsequent
satisfaction of such conditions. Upon request by Parent, the Company will
promptly take all action required to effect all necessary filings by the Company
under the HSR Act.
SECTION 1.3 PURCHASE OF SHARES. At any Closing, (i) the Company will
deliver to Parent the certificate or certificates representing the number of
Shares being purchased in proper form for transfer upon exercise of the Option
in the denominations designated by Parent in the Option Notice, and, if the
Option has been exercised in part, a new Option evidencing the rights of Parent
to purchase the balance of the Shares subject thereto, and (ii) Parent shall pay
the aggregate purchase price for the Shares to be purchased by delivery to the
Company of a certified or bank cashier's check payable in New York Clearing
House funds to the order of the Company in the amount of the Exercise Price
times the number of shares to be purchased.
SECTION 1.4 ADJUSTMENTS UPON SHARE ISSUANCES, CHANGES IN CAPITALIZATION,
ETC. (a)In the event of any change in Company Common Stock or in the number of
outstanding shares of Company Common Stock by reason of a stock dividend,
split-up, recapitalization, combination, exchange of shares or similar
transaction or any other change in the corporate or capital structure of the
Company (including, without limitation, the declaration or payment of an
extraordinary dividend of cash, securities or other property), the type and
number of the Shares to be issued by the Company upon exercise of the Option
shall be adjusted appropriately, and proper provision shall be made in the
agreements governing such transaction, so that Parent shall receive upon
exercise of the Option the number and class of shares or other securities or
property that Parent would have received in respect to the Company Common Stock
if the Option had been exercised immediately prior to such event, or the record
date therefor, as applicable, and such
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Company Common Stock had elected to the fullest extent it would have been
permitted to elect, to receive such securities, cash or other property.
(b) In the event that the Company shall enter into an agreement (i) to
consolidate with or merge into any person, other than Parent or one of its
subsidiaries, and shall not be the continuing or surviving corporation of such
consolidation or merger, (ii) to permit any person, other than Parent or one of
its subsidiaries, to merge into the Company and the Company shall be the
continuing or surviving corporation, but, in connection with such merger, the
then outstanding shares of Company Common Stock shall be changed into or
exchanged for stock or other securities of the Company or any other person or
cash or any other property, or then outstanding shares of Company Common Stock
shall after such merger represent less than 50% of the outstanding shares and
share equivalents of the surviving corporation or (iii) to sell or otherwise
transfer all or substantially all of its assets to any person, other than Parent
or one of its subsidiaries, then, and in each such case, proper provision shall
be made in the agreements governing such transaction so that Parent shall
receive upon exercise of the Option the number and class of shares or other
securities or property that Parent would have received in respect of Company
Common Stock if the Option had been exercised immediately prior to such
transaction, or the record date therefor, as applicable, and such Company Common
Stock had elected to the fullest extent it would have been permitted to elect,
to receive such securities, cash or other property.
(c) The rights of Parent under this Section 1.4 shall be in addition to, and
shall in no way limit, its rights against the Company for any breach of the
Merger Agreement.
(d) The provisions of this Agreement shall apply with appropriate
adjustments to any securities for which the Option becomes exercisable pursuant
to this Section 1.4.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent as follows:
SECTION 2.1 AUTHORITY RELATIVE TO THIS AGREEMENT. The Company is a
corporation duly organized and validly existing under the laws of the State of
Delaware. The Company has all necessary power and authority (corporate and
otherwise) to execute and deliver this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation by the Company of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of the Company, and no other corporate proceeding on the part
of the Company is necessary to authorize this Agreement or for the Company to
consummate such transactions. This Agreement has been duly and validly executed
and delivered by the Company and, assuming this Agreement constitutes a valid
and binding obligation of Parent, constitutes a legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms.
SECTION 2.2 NO CONFLICT; REQUIRED FILINGS AND CONSENTS. The execution and
delivery of this Agreement by the Company do not, and the performance of this
Agreement by the Company will not, (i) conflict with or violate the certificate
of incorporation or by-laws of the Company, (ii) conflict with or violate any
law, rule, regulation, order, judgment or decree applicable to the Company or by
which the Company is bound or affected, (iii) result in any breach of or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, or result in the creation of a lien
or encumbrance of any kind on any of the Shares pursuant to, any agreement,
contract, indenture, notice or instrument to which the Company is a party or by
which the Company is bound or affected, or (iv) except for applicable
requirements, if any, of the HSR Act, the Exchange Act and the Securities Act of
1933, as amended (the "Securities Act"), require any filing by the Company with,
or any permit, authorization, consent or approval of, any governmental or
regulatory authority, domestic or foreign.
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SECTION 2.3 OPTION SHARES. The Company has taken all necessary corporate
action to authorize and reserve for issuance upon exercise of the Option a total
of 782,685 Shares, and the Shares, when issued and delivered by the Company to
Parent upon exercise of the Option, will be duly authorized, validly issued,
fully paid and nonassessable shares of Company Common Stock, and will be free
and clear of any security interests, liens, claims, pledges, charges or
encumbrances of any kind.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent hereby represents and warrants to the Company as follows:
SECTION 3.1 AUTHORITY RELATIVE TO THIS AGREEMENT. Parent is a limited
liability company duly organized and validly existing under the laws of the
State of Delaware. Parent has all necessary power and authority (corporate and
otherwise) to execute and deliver this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation by Parent of the
transactions contemplated hereby have been duly authorized by the Board of
Directors of Parent, and no other corporate proceeding on the part of Parent is
necessary to authorize this Agreement or for Parent to consummate such
transactions. This Agreement has been duly executed and delivered by Parent and,
assuming its due authorization, execution and delivery by the Company,
constitutes a legal, valid and binding obligation of Parent, enforceable against
Parent in accordance with its terms.
SECTION 3.2 NO CONFLICT, REQUIRED FILING AND CONSENTS. The execution and
delivery of this Agreement by Parent do not, and the performance of this
Agreement by Parent will not, (i) conflict with or violate the certificate of
formation of Parent, (ii) conflict with or violate any law, rule, regulation,
order, judgment or decree applicable to Parent or by which Parent is bound or
affected, (iii) result in any breach of or constitute a default (or an event
that with notice or lapse of time or both would become a default) under, or give
to others any rights of termination, amendment, acceleration or cancellation of,
any agreement, contract, indenture, note or instrument to which Parent is a
party or by which it is bound or affected or (iv) except for applicable
requirements, if any, of the HSR Act, the Exchange Act, and the Securities Act,
require any filing by Parent with, or any permit, authorization, consent or
approval of, any governmental or regulatory authority, domestic or foreign,
except in the case of each of the foregoing clauses (i) through (iv) for any
such conflicts, violations, breaches, defaults, failures to file or obtain the
consent or approval of, or other occurrences that would not cause or create a
material risk of non-performance or delayed performance by Parent of its
obligations under this Agreement.
SECTION 3.3 INVESTMENT INTENT. The purchase of Shares pursuant to this
Agreement is for the account of Parent for the purpose of investment and not
with a view to or for sale in connection with any distribution thereof within
the meaning of the Securities Act and the rules and regulations promulgated
thereunder.
ARTICLE IV
ADDITIONAL AGREEMENTS
SECTION 4.1 REGISTRATION RIGHTS; LISTING OF SHARES. (a) Upon the written
request of Parent, the Company agrees to effect up to two registrations under
the Securities Act and any applicable state securities laws covering any part or
all of the Option (provided that only Shares will be distributed to the public)
and any part or all of the Shares purchased under this Agreement, which
registration shall be continued in effect for 90 days, unless, in the written
opinion of counsel to the Company, addressed to Parent and reasonably
satisfactory in form and substance to counsel for Parent, such registration is
not required for the sale and distribution of such Shares in the manner
contemplated by Parent. The registration effected under this paragraph shall be
effected at the Company's expense except for any
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underwriting commissions. If Shares are offered in a firm commitment
underwriting, the Company will provide reasonable and customary indemnification
to the underwriters. In the event of any demand for registration pursuant to
this paragraph, the Company may delay the filing of the registration statement
for a period of up to 90 days if, in the good faith judgment of the Board of
Directors of the Company, such delay is necessary in order to avoid interference
with a planned material transaction involving the Company. In the event the
Company effects a registration of Company Common Stock for its own account or
for any other stockholder of the Company (other than on Form S-4 or Form S-8, or
any successor or similar form), it shall allow Parent to participate in such
registration; PROVIDED, HOWEVER,that if the managing underwriters in such
offering advise the Company in writing that in their opinion the number of
shares of Company Common Stock requested to be included in such registration
exceeds the number which can be sold in such offering, the Company will include
the securities requested to be included therein pro rata among the holders
requesting to be included.
(b) The Company shall, at its expense, use its best efforts to cause the
Shares to be approved for quotation on the New York Stock Exchange, Inc. (the
"NYSE") subject to notice of issuance, as promptly as practicable following the
date of this Agreement, and will provide prompt notice to the NYSE of the
issuance of each Share pursuant to any exercise of the Option.
SECTION 4.2 LIMITATION ON PROFIT. (a) Notwithstanding any other provision
of this Agreement, in no event shall Parent's Total Profit (as hereinafter
defined) exceed $1,000,000 and, if it otherwise would exceed such amount,
Parent, at its sole election, shall either (a) reduce the number of shares of
Company Common Stock subject to the Company Option, (b) deliver to Company for
cancellation Company Shares previously purchased by Parent, (c) pay cash to
Company, or (d) any combination thereof, so that Parent's actually realized
Total Profit shall not exceed $1,000,000 after taking into account the foregoing
actions.
(b) As used herein, the term "TOTAL PROFIT" shall mean the aggregate amount
(before taxes) of the following: (i) (x) the net cash amounts received by Parent
pursuant to the sale of Company Shares (or any other securities into which such
Company Shares are converted or exchanged) to any unaffiliated party, less (y)
Parent's purchase price of such Company Shares, and (ii) any Notional Total
Profit (as defined below).
(c) As used herein, the term "Notional Total Profit" with respect to any
number of shares as to which Parent may propose to exercise the Company Option
shall be the Total Profit determined as of the date of such proposal assuming
that the Company Option were exercised on such date for such number of shares
and assuming that such shares, together with all other Company Shares held by
Parent and its affiliates as of such date, were sold for cash at the closing
market price for the Company Common Stock as of the close of business on the
preceding trading day (less customary brokerage commissions).
SECTION 4.3 TRANSFER OF SHARES; RESTRICTIVE LEGEND. Parent agrees not to
transfer or otherwise dispose of the Shares, or any interest therein, without
first providing to the Company an opinion of counsel for Parent, reasonably
satisfactory in form and substance to counsel for the Company, to the effect
that such transfer or disposition will not violate the Securities Act or any
applicable state law governing the offer and sale of securities, and the rules
and regulations thereunder. Parent further agrees to the placement on the
certificate(s) representing the Shares of the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD
ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE."
provided that upon provision to the Company of any opinion of counsel for
Parent, reasonably satisfactory in form and substance to counsel for the
Company, to the effect that such legend is no longer required under the
provisions of the Securities Act or applicable state securities laws, the
Company shall promptly
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cause new unlegended certificates representing such Shares to be issued to
Parent against surrender of such legended certificates.
SECTION 4.4 BEST EFFORTS. Subject to the terms and conditions of this
Agreement, Parent and the Company shall each use its best efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement.
Each party shall promptly consult with the other and provide any necessary
information and material with respect to all filings made by such party with any
governmental or regulatory authority in connection with this Agreement or the
transactions contemplated hereby.
SECTION 4.5 FURTHER ASSURANCES. The Company shall perform such further acts
and execute such further documents and instruments as may reasonably be required
to vest in Parent the power to carry out the provisions of this Agreement. If
Parent shall exercise the Option, or any portion thereof, in accordance with the
terms of this Agreement, the Company shall, without additional consideration,
execute and deliver all such further documents and instruments and take all such
further action as Parent may reasonably request for the purpose of effectively
carrying out the transactions contemplated by this Agreement.
SECTION 4.6 SURVIVAL. All of the representations, warranties and covenants
contained herein shall survive a Closing and shall be deemed to have been made
as of the date hereof and as of the date of each Closing.
ARTICLE V
MISCELLANEOUS
SECTION 5.1 SPECIFIC PERFORMANCE. The parties hereto agree that if any of
the provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached, irreparable damage would occur, no
adequate remedy at law would exist and damages would be difficult to determine,
and that the parties shall be entitled to specific performance of the terms
hereof, without any requirement for securing or posting any bond, in addition to
any other remedy at law or equity.
SECTION 5.2 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement of the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings, both written and oral,
between the parties, or any of them, with respect to the subject matter hereof.
SECTION 5.3 AMENDMENT; ASSIGNMENT. This Agreement may not be amended except
by an instrument in writing signed by the parties hereto and specifically
referencing this Agreement. No party to this Agreement may assign any of its
rights or obligations under this Agreement without the prior written consent of
the other party hereto, except that the rights and obligations of Parent
hereunder may, upon written notice to the Company prior to or promptly following
such action, be assigned by Parent to any of its corporate affiliates, but no
such transfer shall relieve Parent of its obligations hereunder if such
transferee does not perform such obligations.
SECTION 5.4 SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provisions hereof or
thereof shall not affect the validity and enforceability of the other provisions
hereof. If any provision of this Agreement, or the application thereof to any
person or entity or any circumstances, is invalid or unenforceable, (i) a
suitable and equitable provision shall be substituted therefor in order to carry
out, so far as may be valid and enforceable, the intent and purpose of such
invalid and unenforceable provision and (ii) the remainder of this Agreement and
the application of such provision to other persons, entities or circumstances
shall not be affected by such invalidity or unenforceability, nor shall such
invalidity or unenforceability affect the validity or enforceability of such
provision, or the application thereof, in any other jurisdiction.
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<PAGE>
SECTION 5.5 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware without giving
effect to the provisions thereof relating to conflicts of law.
SECTION 5.6 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but each of which
together shall constitute one and the same document.
SECTION 5.7 NOTICES. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally or sent by overnight courier (providing proof of
delivery) to the parties at the addresses specified below (or at such other
address for a party as shall be specified by like notice): (i) if to Parent, to
its address set forth in Section 9.2(a) of the Merger Agreement; and (ii) if to
the Company, to the Company's address set forth in Section 9.2(b) of the Merger
Agreement.
SECTION 5.8 BINDING EFFECT. This Agreement shall be binding upon, inure to
the benefit of, and be enforceable by the successors and assigns of the parties
hereto. Nothing expressed or referred to in this Agreement is intended or shall
be construed to give any person other than the parties to this Agreement, or
their respective successors or assigns, any legal or equitable right, remedy or
claim under or in respect of this Agreement or any provision contained herein.
IN WITNESS WHEREOF, each of the Company and Parent have caused this
Agreement to be executed on its behalf by its officers thereunto duly
authorized, all as of the date first above written.
<TABLE>
<S> <C> <C>
KERR GROUP, INC.
By: -----------------------------------------
Name: D. Gordon Strickland
TITLE: PRESIDENT AND CEO
FREMONT ACQUISITION COMPANY, LLC
By: -----------------------------------------
Name: Gil Lamphere
TITLE: PRESIDENT
</TABLE>
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<PAGE>
ANNEX II
SECTION 262 OF THE
GENERAL CORPORATION LAW OF THE
STATE OF DELAWARE
<PAGE>
SECTION 262 OF THE
GENERAL CORPORATION LAW OF THE
STATE OF DELAWARE
262 APPRAISAL RIGHTS.--(a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to sec.228 of this title shall be entitled to an appraisal by the Court
of Chancery of the fair value of his shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec.251 (other than a merger effected pursuant to
subsection (g) of Section 251), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the holders of the surviving corporation as provided in
subsection (f) of sec.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to
sec.sec.251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec.253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
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<PAGE>
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are
available for any or all of the shares of the constituent corporations, and
shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation, a
written demand for appraisal of his shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of the stockholder
and that the stockholder intends thereby to demand the appraisal of his
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must do
so by a separate written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation
who has complied with this subsection and has not voted in favor of or
consented to the merger or consolidation of the date that the merger or
consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to sec.228 or
sec.253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval
of the merger or consolidation and that appraisal rights are available for
any or all shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this section;
provided that, if the notice is given on or after the effective date of the
merger or consolidation, such notice shall be given by the surviving or
resulting corporation to all such holders of any class or series of stock of
a constituent corporation that are entitled to appraisal rights. Such notice
may, and, if given on or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the effective date of
the merger or consolidation. Any stockholder entitled to appraisal rights
may, within twenty days after the date of mailing of such notice, demand in
writing from the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such
notice did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a
second notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of such
constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a second notice to all such holders on
or within 10 days after such effective date; provided, however, that if such
second notice is sent more than 20 days following the sending of the first
notice, such second notice need only be sent to each stockholder who is
entitled to appraisal rights and who has demanded appraisal of such holder's
shares in accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is
required to give either notice that such notice has been given shall, in the
absence of fraud, be prima facie evidence of the facts stated therein. For
purposes of determining the stockholders entitled to receive either notice,
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<PAGE>
each constituent corporation may fix, in advance, a record date that shall
be not more than 10 days prior to the date the notice is given; provided
that, if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the day
on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has
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<PAGE>
submitted his certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that he is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation. (Last amended by Ch. 349, L.
'96, eff. 7-1-96.)
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<PAGE>
ANNEX III
OPINION
OF
CIBC WOOD GUNDY
SECURITIES CORP
<PAGE>
June 30, 1997
The Board of Directors
Kerr Group, Inc.
500 New Holland Avenue
Lancaster, PA 17602-2104
Dear Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of shares of Common Stock, par value $0.50 per share
("Common Stock"), and to the holders of Class B Cumulative Convertible Preferred
Stock, Series D (the "Preferred Stock"), of Kerr Group, Inc. (the "Company") of
the consideration to be received by each class of such securities in a series of
transactions (collectively, the "Transactions") pursuant to the Agreement and
Plan of Merger among the Company, Fremont Acquisition Company, LLC ("Fremont")
and Kerr Acquisition Corporation ("Purchaser"), dated as of July 1, 1997
(collectively the "Merger Agreement"). Pursuant to the Merger Agreement,
Purchaser is required to commence a tender offer to purchase, subject to certain
conditions (the "Offer"), any and all of the outstanding shares of Common Stock
of the Company at a price of $5.40 per share, net to the seller in cash, and any
and all of the outstanding shares of Preferred Stock of the Company at a price
of $12.50 per share, net to the seller in cash (collectively, the "Offer
Consideration"). Following consummation of the Offer, subject to, among other
things, the favorable required vote of holders of shares of Common Stock (if
necessary), pursuant to the Merger (as defined in the Merger Agreement), each
remaining outstanding share (other than shares of Common Stock owned by the
Company as treasury stock or owned by Purchaser or any other subsidiary of
Fremont and other than shares of Common Stock held by holders who properly
exercise and perfect dissenter's rights, if any) will be converted into the
right to receive $5.40 per share, net to the seller in cash, and each remaining
outstanding share of Preferred Stock (other than shares of Preferred Stock owned
by the Company as treasury stock or owned by Purchaser or any other subsidiary
of Fremont and other than shares of Preferred Stock held by holders who properly
exercise and perfect dissenter's rights, if any) will be converted into the
right to receive $12.50 per share, net to the seller in cash (collectively, the
"Merger Consideration" and together with the Offer Consideration, the
"Consideration").
In connection with the rendering of this opinion, we have:
(i) Reviewed the terms and conditions of the Merger Agreement and the
financial terms of the Transactions, all as set forth in the Merger
Agreement, and the option agreement dated July 1, 1997 between the
Company and Fremont pursuant to which Fremont was granted the right to
purchase shares of Common Stock;
(ii) Analyzed certain historical business and financial information relating
to the Company;
(iii) Reviewed certain financial forecasts and other data provided to us by
the Company relating to the business of the Company, including the most
recent business plan for the Company prepared by the Company's senior
management, in the form furnished to us:
(iv) Conducted discussions with members of the senior management of the
Company with respect to the businesses and prospects of the Company,
the strategic objectives of the Company and possible benefits which
might be realized following the Merger;
(v) Reviewed public information with respect to certain other companies in
the lines of businesses we believe to be generally comparable in whole
or in part to businesses of the Company and reviewed the financial terms
of certain other business combinations involving companies in lines
III-1
<PAGE>
of businesses we believe to be generally comparable in whole or in part
to businesses of the Company that have recently been effected;
(vi) Reviewed the historical stock prices and trading volumes of the Common
Stock and Preferred Stock;
(vii) Reviewed the trading prices and yields of selected publicly traded
distressed securities which we deemed comparable to the Company's;
(viii) Conducted discussions with numerous third parties regarding their
potential interest in making an investment in the Company or acquiring
it as a whole; and
(ix) Conducted such other financial studies, analyses and investigations as
we deemed appropriate.
We have relied upon the accuracy and completeness of the foregoing financial
and other information and have not assumed any responsibility for independent
verification of such information or conducted any independent valuation or
appraisal of any of the assets of the Company, nor have we been furnished with
any such appraisals. With respect to financial forecasts, we have assumed that
they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of management of the Company as to the future
financial performance of the Company. We assume no responsibility for, and
express no view as to, such forecasts or the assumptions on which they are
based.
Our opinion necessarily is based upon market, economic and other conditions
as they exist on, and can be evaluated as of, the date of this letter. In
rendering our opinion, we have assumed that the Transactions will be consummated
substantially on the terms described in the Merger Agreement, without any waiver
of any material terms or conditions by any party thereto. It should be
understood that, although subsequent developments may affect this opinion, we do
not have any obligation to update, revise or reaffirm this opinion to reflect
such developments.
This opinion does not address the business decision of the Board of
Directors of the Company to engage in the Transactions. No opinion is expressed
herein nor should one be implied as to the fair market value of Common Stock or
Preferred Stock. We have advised the Board of Directors of the Company that,
based on the terms of our engagement by the Company, we do not believe that any
person (including any common or preferred stockholder of the Company), other
than the Company and the Board of Directors of the Company, has the legal right
to rely upon this letter to support any claim against us arising under
applicable state law and that, should any such claim be brought against us by
any such person, this assertion would be raised as a defense. In the absence of
applicable state law, the availability of such a defense would be resolved by a
court of competent jurisdiction. Resolution of the question of the availability
of such a defense, however, would have no effect on the rights and
responsibilities of the Board of Directors of the Company under applicable state
law. Furthermore, the availability of such a defense to us would have no effect
on the rights and responsibilities of either us or the Board of Directors of the
Company under the federal securities laws.
Our engagement and the opinion expressed herein are for the benefit of the
Company's Board of Directors, and our opinion is rendered in connection with its
consideration of the Transactions. This opinion is not intended to and does not
constitute a recommendation to any holder of Common Stock or Preferred Stock as
to whether such holder should tender shares pursuant to the Offer or vote to
approve the Merger Agreement and the transactions contemplated thereby. It is
understood that, except for inclusion of this letter in its entirety in a proxy
statement, information statement or tender offer recommendation statement of
Schedule 14D-9 from the Company to holders of Common Stock or Preferred Stock
relating to the Transactions, this letter may not be disclosed or otherwise
referred to or used for any other purpose without our prior written consent,
except as may otherwise be required by law or by a court of competent
jurisdiction.
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<PAGE>
In connection with the rendering of this opinion, we have assumed that under
applicable provisions of the General Corporation Law of the State of Delaware,
controlling legal precedent and the Certificate of Designations of the Preferred
Stock, the holders of such Preferred Stock are not entitled to receive amounts
at least equal to the liquidation preference of the Preferred Stock plus accrued
and unpaid dividends or any other amount in connection with the Transactions.
Based on and subject to the foregoing, we are of the opinion that, as of the
date hereof, the Consideration to be received by the holders of Common Stock, on
the one hand, and Preferred Stock, on the other, pursuant to the Offer and under
the terms of the Merger Agreement, is fair to such holders (other than Purchaser
or any other subsidiary of Fremont), from a financial point of view.
Very truly yours,
By: /s/ CIBC WOOD GUNDY SECURITIES CORP.
-----------------------------------------
CIBC Wood Gundy Securities Corp.
III-3
