<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 23, 1996
REGISTRATION NO. 333-09117
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3315 37-0364250
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
organization)
RALPH P. END
VICE PRESIDENT AND GENERAL COUNSEL
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
THREE LINCOLN CENTRE THREE LINCOLN CENTRE
5430 LBJ FREEWAY, SUITE 1740 5430 LBJ FREEWAY, SUITE 1740
DALLAS, TEXAS 75240-2697 DALLAS, TEXAS 75240-2697
(214) 458-0028 (214) 458-0028
(Address, including zip code, and telephone (Name, address, including zip code, and
number, telephone number,
including area code, of registrant's principal including area code, of agent for service)
executive offices)
</TABLE>
---------------------
Copies to:
<TABLE>
<S> <C>
JAMES G. VETTER, JR. PETER GOLDEN
GODWIN & CARLTON, P.C. FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
901 MAIN STREET, SUITE 2500 ONE NEW YORK PLAZA
DALLAS, TEXAS 75202-3714 NEW YORK, NEW YORK 10004
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As promptly as practicable after this Registration Statement becomes
effective and the effective time of the proposed merger of a wholly owned
subsidiary of Registrant with DeSoto, Inc. ("DeSoto"), as described in the
Agreement and Plan of Reorganization dated as of June 26, 1996 attached as
Appendix A to the Joint Proxy Statement/Prospectus forming a part of this
Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
==========================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OFFERING PRICE AGGREGATE
OF SECURITIES TO BE AMOUNT TO BE PER OFFERING AMOUNT OF
REGISTERED REGISTERED UNIT(1) PRICE REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock,
$1.00 par value............ 3,637,000 Shares(1) N.A.(2) $28,017,007(2) $9,661.04(3)
==========================================================================================================
</TABLE>
(1) Represents the maximum number of shares of common stock, $1.00 par value, of
Registrant issuable to stockholders of DeSoto upon consummation of the
merger of a wholly-owned subsidiary of Registrant with and into DeSoto (the
"Merger").
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Section 6(b) of the Securities Act of
1933, as amended, and Rule 457(f)(1) thereunder on the basis of $5.75, the
average of the high and low sale prices of common stock, $1.00 par value, of
DeSoto ("DeSoto Common Stock") as reported in the consolidated reporting
system for the New York Stock Exchange on August 16, 1996, and 4,872,523,
the maximum number of shares of DeSoto Common Stock that may be cancelled in
the Merger.
(3) Includes $9,599.35 paid previously by Registrant.
---------------------
THIS REGISTRATION STATEMENT SHALL HEREAFTER BECOME EFFECTIVE ON SUCH DATE
AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
THREE LINCOLN CENTRE
5430 LBJ FREEWAY, SUITE 1740
DALLAS, TEXAS 75240-2697
August 23, 1996
Dear Stockholder:
A special meeting of stockholders (the "Keystone Meeting") of Keystone
Consolidated Industries, Inc., a Delaware corporation ("Keystone"), will be held
on Friday, September 27, 1996, at 10:00 a.m., local time, at the offices of
Keystone at Three Lincoln Centre, 5430 LBJ Freeway, Suite 1740, Dallas, Texas
75240-2697.
At the Keystone Meeting you will be asked to consider and vote upon a
proposal to approve the issuance of Keystone common stock, $1.00 par value per
share ("Keystone Common Stock") pursuant to the Agreement and Plan of
Reorganization dated as of June 26, 1996 (the "Reorganization Agreement"),
between Keystone and DeSoto, Inc., a Delaware corporation ("DeSoto"), which
provides for the merger of DeSoto with a newly formed, wholly owned subsidiary
of Keystone ("Sub"), with DeSoto surviving the merger as a wholly owned
subsidiary of Keystone (the "Merger"). Pursuant to the Merger, each outstanding
share of DeSoto common stock, $1.00 par value per share ("DeSoto Common Stock"),
and the associated rights issued pursuant to the Rights Agreement between DeSoto
and Harris Trust and Savings Bank (other than shares owned by DeSoto or its
subsidiaries) will be converted into the right to receive .7465 of a share (the
"Exchange Ratio") of Keystone Common Stock; each outstanding share of DeSoto
Series B Senior Preferred Stock, $1.00 par value per share, will be converted
into the right to receive the Exchange Ratio of a share of Keystone Series A
Senior Preferred Stock, no par value per share; and each outstanding option to
purchase DeSoto Common Stock will be assumed by Keystone, and at the effective
time of the Merger each such option will constitute an option to acquire for the
same aggregate exercise price such number of shares of Keystone Common Stock as
the holder would have been entitled to receive had such holder exercised such
option in full immediately prior to the effective time of the Merger. Pursuant
to a warrant conversion agreement, upon consummation of the Merger, one-half of
the warrants to purchase an aggregate of 1,200,000 shares of DeSoto Common Stock
("DeSoto Warrants") will be cancelled and the remaining one-half of the DeSoto
Warrants will be converted into warrants to purchase 447,900 shares of Keystone
Common Stock (representing the shares of DeSoto Common Stock subject to the
remaining DeSoto Warrants multiplied by the Exchange Ratio) at an exercise price
of approximately $9.38 per share (representing the exercise price of a DeSoto
Warrant divided by the Exchange Ratio). The Merger is structured to qualify as a
tax free reorganization pursuant to Section 368 of the Internal Revenue Code of
1986, as amended.
Upon consummation of the Merger, the Keystone Board of Directors will be
expanded to include William Spier and William P. Lyons, two current directors of
DeSoto, in addition to the current members of the Board of Directors of
Keystone.
Your Board of Directors has carefully considered the terms and conditions
of the proposed Merger and has determined that the issuance of Keystone Common
Stock pursuant to the Reorganization Agreement is fair to, and in the best
interests of, Keystone and its stockholders. In addition, the Board of Directors
has received a written opinion from its financial advisor, PaineWebber
Incorporated, that, as of the date hereof, the consideration to be paid by
Keystone in the Merger is fair to Keystone stockholders (except for Contran
Corporation and its affiliates as to whom PaineWebber Incorporated has expressed
no opinion) from a financial point of view.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE REORGANIZATION
AGREEMENT AND THE MERGER AND RECOMMENDS THAT THE STOCKHOLDERS OF KEYSTONE
APPROVE THE ISSUANCE OF KEYSTONE COMMON STOCK PURSUANT TO THE REORGANIZATION
AGREEMENT.
In the material accompanying this letter, you will find a Notice of Special
Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to the
actions to be taken by Keystone stockholders at the Keystone Meeting (as well as
the actions to be taken by the DeSoto stockholders at their special meeting) and
a proxy. The Joint Proxy Statement/Prospectus more fully describes the proposed
Merger and includes information about Keystone and DeSoto.
All stockholders are cordially invited to attend the Keystone Meeting in
person. However, whether or not you plan to attend the Keystone Meeting, please
complete, sign, date and return your proxy in the enclosed envelope. If you
attend the Keystone Meeting, you may vote in person if you wish, even though you
have previously returned your proxy. It is important that your shares be
represented and voted at the Keystone Meeting.
Sincerely,
Glenn R. Simmons
Chairman of the Board and Chief
Executive Officer
<PAGE> 3
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
THREE LINCOLN CENTRE
5430 LBJ FREEWAY, SUITE 1740
DALLAS, TEXAS 75240-2697
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON FRIDAY, SEPTEMBER 27, 1996
TO THE STOCKHOLDERS OF KEYSTONE CONSOLIDATED INDUSTRIES, INC.:
A special meeting of stockholders (the "Keystone Meeting") of Keystone
Consolidated Industries, Inc., a Delaware corporation ("Keystone"), will be held
on Friday, September 27, 1996, at 10:00 a.m., local time, at the offices of
Keystone at Three Lincoln Centre, 5430 LBJ Freeway, Suite 1740, Dallas, Texas
75240-2697, for the following purposes:
1. To consider and vote upon a proposal to approve the issuance of
Keystone common stock, $1.00 par value per share ("Keystone Common Stock"),
pursuant to the Agreement and Plan of Reorganization dated as of June 26,
1996 (the "Reorganization Agreement"), between Keystone and DeSoto, Inc., a
Delaware corporation ("DeSoto"), which provides for the merger of DeSoto
with a newly formed, wholly owned subsidiary of Keystone ("Sub"), with
DeSoto surviving the merger as a wholly owned subsidiary of Keystone (the
"Merger"). Pursuant to the Merger, each outstanding share of DeSoto common
stock, $1.00 par value per share ("DeSoto Common Stock"), and the
associated rights issued pursuant to the Rights Agreement between DeSoto
and Harris Trust and Savings Bank (other than shares owned by DeSoto or its
subsidiaries) will be converted into the right to receive .7465 of a share
(the "Exchange Ratio") of Keystone Common Stock; each outstanding share of
DeSoto Series B Senior Preferred Stock, $1.00 par value per share, will be
converted into the right to receive the Exchange Ratio of a share of
Keystone Series A Senior Preferred Stock, no par value per share; and each
outstanding option to purchase DeSoto Common Stock will be assumed by
Keystone, and at the effective time of the Merger each such option will
constitute an option to acquire for the same aggregate exercise price such
number of shares of Keystone Common Stock as the holder would have been
entitled to receive had such holder exercised such option in full
immediately prior to the effective time of the Merger. Pursuant to a
warrant conversion agreement, upon consummation of the Merger, one-half of
the warrants to purchase an aggregate of 1,200,000 shares of DeSoto Common
Stock ("DeSoto Warrants") will be cancelled and the remaining one-half of
the DeSoto Warrants will be converted into warrants to purchase 447,900
shares of Keystone Common Stock (representing the shares of DeSoto Common
Stock subject to the remaining DeSoto Warrants multiplied by the Exchange
Ratio) at an exercise price of approximately $9.38 per share (representing
the exercise price of a DeSoto Warrant divided by the Exchange Ratio). The
Merger is structured to qualify as a tax free reorganization pursuant to
Section 368 of the Internal Revenue Code of 1986, as amended.
2. To transact such other business as may properly come before the
Keystone Meeting or any adjournment thereof.
The foregoing items of business are fully described in the Joint Proxy
Statement/Prospectus accompanying this Notice.
Only stockholders of record of Keystone Common Stock at the close of
business on August 23, 1996 are entitled to notice of, and will be entitled to
vote at, the Keystone Meeting or any adjournment thereof. Approval of the
issuance of shares of Keystone Common Stock pursuant to the Reorganization
Agreement requires the affirmative vote of the holders of a majority of the
shares of Keystone Common Stock present in person or by proxy at the Keystone
Meeting and voting.
BY ORDER OF THE BOARD OF DIRECTORS
Glenn R. Simmons
Chairman of the Board and Chief
Executive Officer
Dallas, Texas
August 23, 1996
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE KEYSTONE MEETING, YOU ARE
URGED TO COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
POSTAGE PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE KEYSTONE
MEETING IN PERSON. YOUR PROXY CAN BE WITHDRAWN BY YOU AT ANY TIME BEFORE IT IS
VOTED.
<PAGE> 4
DESOTO, INC.
900 EAST WASHINGTON STREET
JOLIET, ILLINOIS 60433
AUGUST 23, 1996
Dear Stockholder:
A special meeting of stockholders (the "DeSoto Meeting") of DeSoto, Inc., a
Delaware corporation ("DeSoto"), will be held on Friday, September 27, 1996, at
10:00 a.m., local time, at the Bank of Montreal, 430 Park Avenue, 16th Floor,
New York, New York.
At the DeSoto Meeting you will be asked to consider and vote upon a
proposal to approve and adopt the Agreement and Plan of Reorganization dated as
of June 26, 1996 (the "Reorganization Agreement"), between Keystone Consolidated
Industries, Inc., a Delaware corporation ("Keystone"), and DeSoto, which
provides for the merger of DeSoto with a newly formed, wholly owned subsidiary
of Keystone ("Sub"), with DeSoto surviving the merger as a wholly owned
subsidiary of Keystone (the "Merger"). Pursuant to the Merger, each outstanding
share of DeSoto common stock, $1.00 par value per share ("DeSoto Common Stock"),
and the associated rights issued pursuant to the Rights Agreement between DeSoto
and Harris Trust and Savings Bank (other than shares owned by DeSoto or its
subsidiaries) will be converted into the right to receive .7465 of a share (the
"Exchange Ratio") of Keystone common stock, $1.00 par value per share ("Keystone
Common Stock"); each outstanding share of DeSoto Series B Senior Preferred
Stock, $1.00 par value per share, will be converted into the right to receive
the Exchange Ratio of a share of Keystone Series A Senior Preferred Stock, no
par value per share; and each outstanding option to purchase DeSoto Common Stock
will be assumed by Keystone, and at the effective time of the Merger each such
option will constitute an option to acquire for the same aggregate exercise
price such number of shares of Keystone Common Stock as the holder would have
been entitled to receive had such holder exercised such option in full
immediately prior to the effective time of the Merger. Pursuant to a warrant
conversion agreement, upon consummation of the Merger, one-half of the warrants
to purchase an aggregate of 1,200,000 shares of DeSoto Common Stock ("DeSoto
Warrants") will be cancelled and the remaining one-half of the DeSoto Warrants
will be converted into warrants to purchase 447,900 shares of Keystone Common
Stock (representing the shares of DeSoto Common Stock subject to the remaining
DeSoto Warrants multiplied by the Exchange Ratio) at an exercise price of
approximately $9.38 per share (representing the exercise price of a DeSoto
Warrant divided by the Exchange Ratio). The Merger is structured to qualify as a
tax free reorganization pursuant to Section 368 of the Internal Revenue Code of
1986, as amended.
Upon consummation of the Merger, the Keystone Board of Directors will be
expanded to include William Spier, the Chairman of the Board and Chief Executive
Officer of DeSoto, and William P. Lyons, another current director of DeSoto, in
addition to all of the current members of the Board of Directors of Keystone.
Your Board of Directors has carefully considered the terms and conditions
of the proposed Merger and has determined that the Merger is fair to, and in the
best interests of, DeSoto and its stockholders. In addition, the Board of
Directors has received a written opinion from its financial advisor, Salomon
Brothers Inc, that, as of the date hereof, the Exchange Ratio in the Merger is
fair, from a financial point of view, to the holders of DeSoto Common Stock.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE REORGANIZATION
AGREEMENT AND THE MERGER AND UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF
DESOTO APPROVE AND ADOPT THE REORGANIZATION AGREEMENT.
In the material accompanying this letter, you will find a Notice of Special
Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to the
actions to be taken by DeSoto stockholders at the DeSoto Meeting (as well as the
actions to be taken by the Keystone stockholders at their special meeting) and a
proxy. The Joint Proxy Statement/Prospectus more fully describes the proposed
Merger and includes information about Keystone and DeSoto.
All stockholders are cordially invited to attend the DeSoto Meeting in
person. However, whether or not you plan to attend the DeSoto Meeting, please
complete, sign, date and return your proxy in the enclosed envelope. If you
attend the DeSoto Meeting, you may vote in person if you wish, even though you
have previously returned your proxy. It is important that your shares be
represented and voted at the DeSoto Meeting.
Sincerely,
William Spier
Chairman of the Board and Chief
Executive Officer
<PAGE> 5
DESOTO, INC.
900 EAST WASHINGTON STREET
JOLIET, ILLINOIS 60433
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON FRIDAY, SEPTEMBER 27, 1996
TO THE STOCKHOLDERS OF DESOTO, INC.:
A special meeting of stockholders (the "DeSoto Meeting") of DeSoto, Inc., a
Delaware corporation ("DeSoto"), will be held on Friday, September 27, 1996, at
10:00 a.m., local time, at the offices of DeSoto at the Bank of Montreal, 430
Park Avenue, 16th Floor, New York, New York, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Reorganization dated as of June 26, 1996 (the
"Reorganization Agreement"), between Keystone Consolidated Industries,
Inc., a Delaware corporation ("Keystone"), and DeSoto, which provides for
the merger of DeSoto with a newly formed, wholly owned subsidiary of
Keystone ("Sub"), with DeSoto surviving the merger as a wholly owned
subsidiary of Keystone (the "Merger"). Pursuant to the Merger, each
outstanding share of DeSoto common stock, $1.00 par value per share
("DeSoto Common Stock"), and the associated rights issued pursuant to the
Rights Agreement between DeSoto and Harris Trust and Savings Bank (other
than shares owned by DeSoto or its subsidiaries) will be converted into the
right to receive .7465 of a share (the "Exchange Ratio") of Keystone common
stock, $1.00 par value per share ("Keystone Common Stock"); each
outstanding share of DeSoto Senior Preferred Stock, $1.00 par value per
share ("DeSoto Preferred Stock"), will be converted into the right to
receive the Exchange Ratio of a share of Keystone Series A Senior Preferred
Stock, no par value per share; and each outstanding option to purchase
DeSoto Common Stock will be assumed by Keystone, and at the effective time
of the Merger each such option will constitute an option to acquire for the
same aggregate exercise price such number of shares of Keystone Common
Stock as the holder would have been entitled to receive had such holder
exercised such option in full immediately prior to the effective time of
the Merger. Pursuant to a warrant conversion agreement, upon consummation
of the Merger, one-half of the warrants to purchase an aggregate of
1,200,000 shares of DeSoto Common Stock ("DeSoto Warrants") will be
cancelled and the remaining one-half of the DeSoto Warrants will be
converted into warrants to purchase 447,900 shares of Keystone Common Stock
(representing the shares of DeSoto Common Stock subject to the remaining
DeSoto Warrants multiplied by the Exchange Ratio) at an exercise price of
approximately $9.38 per share (representing the exercise price of a DeSoto
Warrant divided by the Exchange Ratio). The Merger is structured to qualify
as a tax free reorganization pursuant to Section 368 of the Internal
Revenue Code of 1986, as amended.
2. To transact such other business as may properly come before the
DeSoto Meeting or any adjournment thereof.
The foregoing items of business are fully described in the Joint Proxy
Statement/Prospectus accompanying this Notice.
Only stockholders of record of DeSoto Common Stock and DeSoto Preferred
Stock at the close of business on August 23, 1996 are entitled to notice of, and
will be entitled to vote at, the DeSoto Meeting. Approval of the Reorganization
Agreement will require the affirmative vote of the holders of a majority of the
outstanding shares of DeSoto Common Stock and DeSoto Preferred Stock entitled to
vote thereon, voting together as a single class.
BY ORDER OF THE BOARD OF DIRECTORS
William Spier
Chairman of the Board and Chief Executive
Officer
Joliet, Illinois
August 23, 1996
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE DESOTO MEETING, YOU ARE URGED
TO COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
POSTAGE PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE DESOTO
MEETING IN PERSON. YOUR PROXY CAN BE WITHDRAWN BY YOU AT ANY TIME BEFORE IT IS
VOTED.
THE PROXY SOLICITOR FOR DESOTO:
GEORGESON & COMPANY INC.
CALL TOLL-FREE (800) 223-2064
<PAGE> 6
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
DESOTO, INC.
JOINT PROXY STATEMENT
---------------------
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
PROSPECTUS
This Joint Proxy Statement of Keystone Consolidated Industries, Inc., a
Delaware corporation ("Keystone"), and DeSoto, Inc., a Delaware corporation
("DeSoto"), and this Prospectus of Keystone (the "Joint Proxy
Statement/Prospectus") is being furnished to the stockholders of Keystone, in
connection with the solicitation of proxies by the Keystone Board of Directors
for use at the special meeting of Keystone stockholders (the "Keystone Meeting")
to be held at 10:00 a.m., local time, on Friday, September 27, 1996, at Three
Lincoln Centre, 5430 LBJ Freeway, Suite 1740, Dallas, Texas 75240-2697, and at
any adjournments or postponements of the Keystone Meeting.
This Joint Proxy Statement/Prospectus is also being furnished to the
stockholders of DeSoto, in connection with the solicitation of proxies by the
DeSoto Board of Directors for use at the special meeting of DeSoto stockholders
(the "DeSoto Meeting") to be held at 10:00 a.m., local time, on Friday,
September 27, 1996, at the Bank of Montreal, 430 Park Avenue, 16th Floor, New
York, New York, and at any adjournments or postponements of the DeSoto Meeting.
This Joint Proxy Statement/Prospectus constitutes the Prospectus of
Keystone for use in connection with the offer and issuance of shares of Keystone
common stock, $1.00 par value per share ("Keystone Common Stock"), pursuant to
the merger (the "Merger") of a newly formed, wholly owned subsidiary of Keystone
("Sub") with and into DeSoto. As a result of the Merger, DeSoto will become a
wholly owned subsidiary of Keystone. Upon the effectiveness of the Merger (the
"Effective Time"), each outstanding share of DeSoto common stock, $1.00 par
value per share ("DeSoto Common Stock") (other than shares owned by DeSoto or
its subsidiaries), and the associated rights issued pursuant to the Rights
Agreement between DeSoto and Harris Trust and Savings Bank, will be converted
into the right to receive .7465 of a share of Keystone Common Stock (the
"Exchange Ratio"); each outstanding share of DeSoto Series B Senior Preferred
Stock, $1.00 par value per share ("DeSoto Preferred Stock"), will be converted
into the right to receive .7465 of a share of Keystone Series A Senior Preferred
Stock, no par value per share ("Keystone Preferred Stock"); and each outstanding
option to purchase DeSoto Common Stock will be assumed by Keystone and converted
into an option to acquire for the same aggregate exercise price such number of
shares of Keystone Common Stock as the holder would have been entitled to
receive had such holder exercised such option in full immediately prior to the
Effective Time. Pursuant to a warrant conversion agreement, upon consummation of
the Merger, one-half of the warrants to purchase an aggregate of 1,200,000
shares of DeSoto Common Stock ("DeSoto Warrants") will be cancelled and the
remaining one-half of the DeSoto Warrants will be converted into warrants to
purchase 447,900 shares of Keystone Common Stock ("Keystone Warrants")
(representing the shares of DeSoto Common Stock subject to the remaining DeSoto
Warrants multiplied by the Exchange Ratio) at an exercise price of approximately
$9.38 per share (representing the exercise price of a DeSoto Warrant divided by
the Exchange Ratio). Based upon the number of shares of the DeSoto Common Stock,
DeSoto Preferred Stock and Keystone Common Stock outstanding as of July 22,
1996, there will be an aggregate of approximately 3,500,000 shares of Keystone
Common Stock issued in connection with the Merger, representing approximately
thirty eight percent (38%) of the total number of shares of Keystone Common
Stock to be outstanding immediately after consummation of the Merger, and
435,456 shares of Keystone Preferred Stock issued in connection with the Merger,
representing one hundred percent (100%) of the total number of shares of
Keystone Preferred Stock to be outstanding immediately after consummation of the
Merger. Furthermore, as a result of the Merger, and as soon as practicable
thereafter, Keystone will merge its defined benefit pension plans with and into
the DeSoto defined benefit pension plan. See "The Merger and Related
Transactions -- Actions Subsequent to the Merger -- Merger of Pension Plans."
The Merger is structured to qualify as a tax free reorganization pursuant to
Section 368 of the Internal Revenue Code of 1986, as amended.
On August 21, 1996, the closing sales prices on the New York Stock Exchange
("NYSE") of Keystone Common Stock and DeSoto Common Stock were $9.75 and $5.75,
respectively. The DeSoto Preferred Stock has not been, and the Keystone
Preferred Stock is not expected to be, listed for trading on any stock exchange
or quotation system.
This Joint Proxy Statement/Prospectus and the accompanying forms of proxy
are first being mailed to stockholders of Keystone and DeSoto on or about August
26, 1996.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS JOINT PROXY
STATEMENT/PROSPECTUS. THE PROPOSED MERGER IS A COMPLEX TRANSACTION, AND
STOCKHOLDERS ARE STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS JOINT PROXY
STATEMENT/PROSPECTUS IN ITS ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO ON
PAGE 21 UNDER "RISK FACTORS."
THE SHARES OF KEYSTONE COMMON STOCK TO BE ISSUED IN THE MERGER HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS AUGUST 23, 1996.
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION............................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..................................... 3
SUMMARY............................................................................. 5
RISK FACTORS........................................................................ 21
THE KEYSTONE MEETING................................................................ 25
THE DESOTO MEETING.................................................................. 27
THE MERGER AND RELATED TRANSACTIONS................................................. 28
THE REORGANIZATION AGREEMENT........................................................ 42
DESCRIPTION OF KEYSTONE CAPITAL STOCK............................................... 50
INFORMATION ABOUT DESOTO............................................................ 51
CERTAIN INFORMATION ABOUT KEYSTONE.................................................. 64
COMPARISON OF RIGHTS OF STOCKHOLDERS OF KEYSTONE AND DESOTO......................... 72
EXPERTS............................................................................. 77
LEGAL MATTERS....................................................................... 77
STOCKHOLDER PROPOSALS............................................................... 77
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.............................. P-1
DESOTO CONSOLIDATED FINANCIAL STATEMENTS............................................ F-1
APPENDICES
A AGREEMENT AND PLAN OF REORGANIZATION........................................ A-CP
B OPINION OF PAINEWEBBER INCORPORATED......................................... B-1
C OPINION OF SALOMON BROTHERS INC............................................. C-1
D KEYSTONE ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31,
1995........................................................................ D-1
E KEYSTONE QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30,
1996........................................................................ E-1
</TABLE>
NO PERSON HAS BEEN AUTHORIZED BY KEYSTONE OR DESOTO TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE
OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY KEYSTONE OR
DESOTO. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED BY THIS JOINT
PROXY STATEMENT/PROSPECTUS OR A SOLICITATION OF A PROXY IN ANY JURISDICTION
WHERE, OR TO ANY PERSON TO WHOM, IT WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION.
NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF THE SECURITIES TO WHICH THIS JOINT PROXY STATEMENT/PROSPECTUS
RELATES SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE INFORMATION CONTAINED HEREIN SINCE THE DATE HEREOF.
AVAILABLE INFORMATION
Keystone and DeSoto are each subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). These materials can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Commission's regional offices at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New
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York 10048. Copies of these materials can also be obtained from the Commission
at prescribed rates by writing to the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition,
registration statements and certain other documents filed with the Commission
through its Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system
are publicly available through the Commission's site on the Internet's World
Wide Web located at http://www.sec.gov. The Registration Statement, of which
this Joint Proxy Statement/Prospectus is part, and all exhibits thereto and
amendments thereof, have been filed with the Commission through EDGAR.
Under the rules and regulations of the Commission, the solicitation of
proxies from stockholders of DeSoto to approve and adopt the Reorganization
Agreement (as defined below) constitutes an offering of the Keystone Common
Stock to be issued in connection with the Merger. Accordingly, Keystone has
filed with the Commission a Registration Statement on Form S-4 under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to such
offering (the "Registration Statement"). This Joint Proxy Statement/Prospectus
constitutes the prospectus of Keystone that is filed as part of the Registration
Statement. Other parts of the Registration Statement are omitted from this Joint
Proxy Statement/Prospectus in accordance with the rules and regulations of the
Commission. Copies of the Registration Statement, including the exhibits to the
Registration Statement and other material that is not included herein, may be
inspected, without charge, at the offices of the Commission referred to above,
or obtained at prescribed rates from the Public Reference Section of the
Commission at the address set forth above. The Registration Statement and other
information with respect to Keystone and DeSoto are available for inspection at
the library of the NYSE, 20 Broad Street, New York, New York 10005.
Statements made in this Joint Proxy Statement/Prospectus concerning the
contents of any contract or other documents are not necessarily complete. With
respect to each contract or other document filed as an exhibit to the
Registration Statement, reference is hereby made to that exhibit for a more
complete description of the matter involved, and each such statement is hereby
qualified in its entirety by such reference.
All information contained in this Joint Proxy Statement/Prospectus relating
to Keystone has been supplied by Keystone, and all information relating to
DeSoto has been supplied by DeSoto.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS JOINT PROXY STATEMENT/PROSPECTUS MAY INCORPORATE DOCUMENTS BY
REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THERE WILL BE
PROVIDED WITHOUT CHARGE TO EACH PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM
A JOINT PROXY STATEMENT/PROSPECTUS IS DELIVERED, UPON ORAL OR WRITTEN REQUEST OF
ANY SUCH PERSON, A COPY OF ANY OR ALL DOCUMENTS INCORPORATED BY REFERENCE HEREIN
(EXCLUDING EXHIBITS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE HEREIN). SUCH REQUESTS SHOULD BE DIRECTED TO KEYSTONE CONSOLIDATED
INDUSTRIES, INC., THREE LINCOLN CENTRE, 5430 LBJ FREEWAY, SUITE 1740, DALLAS,
TEXAS 75240-2697, ATTENTION: RALPH P. END, VICE PRESIDENT AND GENERAL COUNSEL
(TELEPHONE (214) 458-0028). IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS
IN ADVANCE OF THE SPECIAL MEETINGS TO WHICH THIS JOINT PROXY
STATEMENT/PROSPECTUS RELATES, ANY SUCH REQUEST SHOULD BE MADE BY SEPTEMBER 17,
1996.
KEYSTONE INCORPORATES HEREIN BY REFERENCE KEYSTONE'S ANNUAL REPORT ON FORM
10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 ("1995 10-K") AND KEYSTONE'S
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERS ENDED MARCH 31, 1996 AND JUNE 30,
1996. COPIES OF THE 1995 10-K AND KEYSTONE'S FORM 10-Q FOR THE QUARTER ENDED
JUNE 30, 1996 ARE INCLUDED AS APPENDICES TO THIS JOINT PROXY
STATEMENT/PROSPECTUS.
All reports and definitive proxy or information statements filed by
Keystone pursuant to Sections 13(a), 13(c), or 14 or 15(d) of the Exchange Act
subsequent to the date of this Joint Proxy Statement/Prospectus and prior to the
date of the Keystone Meeting shall be deemed incorporated by reference into this
Joint Proxy Statement/Prospectus from the date of filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated
herein shall be deemed to be modified or superseded for purposes of this Joint
Proxy Statement/Prospectus to the extent that a statement contained herein or in
any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or
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supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Joint Proxy Statement/Prospectus.
The statements in this Joint Proxy Statement/Prospectus relating to matters
that are not historical facts, including, but not limited to, statements found
in the "Summary," "Risk Factors," "The Merger and Related Transactions," "The
Reorganization Agreement," "Information About DeSoto," "Certain Information
About Keystone" and "Unaudited Pro Forma Consolidated Financial Information"
sections are forward looking statements that involve a number of risks and
uncertainties. Factors that could cause actual future results to differ
materially from those expressed in such forward looking statements include, but
are not limited to, cost of raw materials, future supply and demand for Keystone
and DeSoto products (including the seasonality thereof), general economic
conditions, competitive products and substitute products, customer and
competitor strategies, the impact of pricing and production decisions,
environmental matters, government regulations and possible changes therein, and
the ultimate resolution of pending litigation and possible future litigation as
discussed in this Joint Proxy Statement/Prospectus, including, without
limitation, the sections referenced above.
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information contained elsewhere in this Joint Proxy Statement/Prospectus and the
attached Appendices. The summary does not contain a complete description of the
Agreement and Plan of Reorganization, dated as of June 26, 1996, by and between
Keystone and DeSoto, a copy of which is attached as Appendix A (the
"Reorganization Agreement") and which is incorporated herein by reference. The
Keystone stockholders and DeSoto stockholders are urged to read carefully this
Joint Proxy Statement/Prospectus and the attached Appendices in their entirety.
See "Risk Factors."
THE COMPANIES
Keystone
Keystone is a diversified mini-mill manufacturer of carbon steel rod, wire
and a wide range of wire products for a variety of end uses. Keystone owns and
operates five (5) plants located in Illinois, Texas, Arkansas and Wisconsin.
Keystone was incorporated in Delaware in 1955 and is the successor to Keystone
Steel & Wire Company which was founded in 1889. Unless otherwise indicated,
"Keystone" refers to Keystone and its wholly owned subsidiaries. Keystone's
principal executive offices are located at Three Lincoln Centre, 5430 LBJ
Freeway, Suite 1740, Dallas, Texas 75240-2697. Its telephone number is (214)
458-0028.
DeSoto
DeSoto manufactures household cleaning products including powdered and
liquid laundry detergents. DeSoto also performs contract manufacturing and
packaging of household cleaning products. DeSoto was incorporated in Delaware in
1927. Unless otherwise indicated, "DeSoto" refers to DeSoto and its wholly owned
subsidiaries. DeSoto's principal executive offices and its operating facility
are located at 900 East Washington Street, Joliet, Illinois 60433. Its telephone
number is (815) 727-4931.
Sub
Sub, a Delaware corporation, will be a newly formed, wholly owned
subsidiary of Keystone to be formed for the purposes of merging with and into
DeSoto (the "Merger"). Prior to the Merger, Keystone will contribute the assets
and liabilities of its Sherman Wire division to Sub. Sub's principal executive
offices are located at Three Lincoln Centre, 5430 LBJ Freeway, Suite 1740,
Dallas, Texas 75240-2697. Its telephone number is (214) 458-0028.
SPECIAL MEETINGS OF STOCKHOLDERS
Date; Time and Place
Keystone. The Keystone Meeting will be held on Friday, September 27, 1996,
at 10:00 a.m., local time, at Three Lincoln Centre, 5430 LBJ Freeway, Suite
1740, Dallas, Texas 75240-2697.
DeSoto. The DeSoto Meeting will be held on Friday, September 27, 1996, at
10:00 a.m., local time, at the Bank of Montreal, 430 Park Avenue, 16th Floor,
New York, New York.
Purposes of the Special Meetings
Keystone Meeting. At the Keystone Meeting, stockholders of Keystone as of
the close of business on the Keystone Record Date (as defined below) will be
asked to consider and vote upon a proposal to approve the issuance of Keystone
Common Stock pursuant to the Reorganization Agreement.
DeSoto Meeting. At the DeSoto Meeting, stockholders of DeSoto as of the
close of business on the DeSoto Record Date (as defined below) will be asked to
consider and vote upon a proposal to approve and adopt the Reorganization
Agreement.
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Record Dates; Shares Outstanding and Entitled to Vote
Keystone. Holders of record of Keystone Common Stock at the close of
business on August 23, 1996 (the "Keystone Record Date"), will be entitled to
notice of and to vote at the Keystone Meeting. At the close of business on
August 21, 1996, there were 5,686,424 shares of Keystone Common Stock
outstanding, each of which will be entitled to one vote on each matter to be
acted upon.
DeSoto. Holders of record of DeSoto Common Stock and DeSoto Preferred Stock
at the close of business on August 23, 1996 (the "DeSoto Record Date"), will be
entitled to notice of and to vote at the DeSoto Meeting. At the close of
business on August 21, 1996, there were 4,688,523 shares of DeSoto Common Stock
and 583,333 shares of DeSoto Preferred Stock outstanding, each of which will be
entitled to one vote on each matter to be acted upon. Shares of DeSoto Common
Stock and DeSoto Preferred Stock vote together as one class on all matters
submitted to stockholders.
Quorum
The required quorum for the transaction of business at both the Keystone
Meeting and the DeSoto Meeting is a majority of the shares of Keystone Common
Stock or the DeSoto Common Stock and DeSoto Preferred Stock taken together, as
the case may be, issued and outstanding on the applicable record date.
Abstentions and broker non-votes represented at the applicable meetings will be
included in determining the number of shares present for purposes of determining
the presence of a quorum.
Votes Required
Keystone. The approval of the issuance of the shares of Keystone Common
Stock pursuant to the Reorganization Agreement requires the affirmative vote of
the holders of a majority of the shares present in person or by proxy at the
Keystone Meeting and voting, provided the total vote cast represents a majority
of the shares entitled to vote thereon. Abstentions and broker non-votes will be
included in determining the number of shares present for purposes of determining
the presence of a quorum but not be counted as a vote for or against approval of
the issuance of Keystone Common Stock pursuant to the Reorganization Agreement.
The approval by Keystone's stockholders of the issuance of shares of Keystone
Common Stock pursuant to the Reorganization Agreement is required by the rules
of the NYSE governing corporations with securities listed on the NYSE. As of
August 21, 1996, the directors and executive officers of Keystone and their
affiliates had the right to vote an aggregate of 4,168,881 shares of Keystone
Common Stock, representing approximately seventy-three percent (73%) of Keystone
Common Stock outstanding. Contran Corporation ("Contran") holds directly
approximately fifty six percent (56%) of the Keystone Common Stock outstanding
as of August 21, 1996, and is a party to an agreement with DeSoto pursuant to
which Contran has agreed to vote its shares of Keystone Common Stock in favor of
the Reorganization Agreement and the transactions contemplated thereby, thus
approval of the issuance of shares of Keystone Common Stock pursuant to the
Reorganization Agreement is assured.
DeSoto. Approval and adoption of the Reorganization Agreement requires the
affirmative vote of the holders of a majority of the outstanding shares of
DeSoto Common Stock and DeSoto Preferred Stock entitled to vote, voting together
as one class. Abstentions and broker non-votes will have the same effect as
votes against the Reorganization Agreement. As of August 21, 1996, the directors
and officers of DeSoto and their affiliates had the right to vote an aggregate
of 636,087 shares of DeSoto Common Stock and an aggregate of 583,333 shares of
DeSoto Preferred Stock, representing approximately twenty-three percent (23%) of
DeSoto voting stock outstanding as of such date. Certain entities affiliated
with directors of DeSoto and a director of DeSoto collectively having the right
to vote 596,989 shares of DeSoto Common Stock and 583,333 Shares of DeSoto
Preferred Stock, representing approximately twenty-two percent (22%) of the
combined shares of DeSoto Common Stock and DeSoto Preferred Stock outstanding as
of the DeSoto Record Date, are parties to an agreement with Keystone pursuant to
which they have agreed to vote their shares of DeSoto Common Stock and DeSoto
Preferred Stock in favor of approval and adoption of the Reorganization
Agreement. See "The Merger and Related Transactions -- Voting Agreements." Any
abstentions from voting thereon may be deemed a "ratification" of the Merger
under Delaware law which may provide either Keystone or DeSoto a
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complete or partial defense to any subsequent stockholder challenges to the
Merger. Neither Keystone nor DeSoto intends to waive any rights under Delaware
law relating thereto.
Effective Time of the Merger
The Merger will become effective upon the filing of a Certificate of Merger
(the "Certificate of Merger") with the Secretary of State of the State of
Delaware, or such later time as may be specified therein. The Certificate of
Merger is expected to be filed as soon as practicable after the satisfaction or
waiver of each of the conditions to consummation of the Merger, which is
expected to occur as soon as practicable following receipt of stockholder
approval at the Keystone and DeSoto Meetings.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
Keystone Board of Directors. The Board of Directors of Keystone has
unanimously approved the Reorganization Agreement and the Merger and believes
the Merger is fair to, and in the best interests of, Keystone and its
stockholders, and unanimously recommends that Keystone stockholders vote for the
approval of the issuance of Keystone Common Stock pursuant to the Reorganization
Agreement. The recommendation of the Board of Directors of Keystone is based on
a number of factors described in "The Merger and Related Transactions -- Reasons
for the Merger."
DeSoto Board of Directors. The Board of Directors of DeSoto has unanimously
approved the Reorganization Agreement and the Merger and believes the Merger is
fair to, and in the best interests of, DeSoto and its stockholders, and
unanimously recommends that DeSoto stockholders vote for the approval and
adoption of the Reorganization Agreement. The recommendation of the Board of
Directors of DeSoto is based on a number of factors described in "The Merger and
Related Transactions -- Reasons for the Merger."
REASONS FOR THE MERGER
Keystone. In reaching its determination that the terms of the
Reorganization Agreement are fair to, and in the best interests of, Keystone and
its stockholders, the Board of Directors of Keystone considered a number of
factors. Among those factors were the anticipated favorable effect of the Merger
on Keystone's balance sheet, the anticipated favorable effects on Keystone's
cash flows and pension expense following the merger of the Keystone defined
benefit pension plans with and into the DeSoto defined benefit pension plan, the
opinion of its financial advisor, the anticipated improved liquidity of the
Keystone Common Stock after the issuance of the approximately 3,500,000 shares
pursuant to the Reorganization Agreement, and the terms of the Reorganization
Agreement. The reasons for the Board of Directors of Keystone approving the
Reorganization Agreement are described in "The Merger and Related
Transactions -- Reasons for the Merger"; and the opinion of the financial
advisor to the Board of Directors is described in "The Merger and Related
Transactions -- Opinion of Financial Advisors -- Opinion of PaineWebber
Incorporated, Financial Advisor to Keystone."
DeSoto. In reaching its determination that the terms of the Reorganization
Agreement are fair to, and in the best interests of, DeSoto and its
stockholders, the Board of Directors of DeSoto considered a number of factors.
Among those factors were a review of the strategic alternatives available to
DeSoto, a comparison of the likely values to be realized pursuant to these
alternatives, the opinion of its financial advisor and the terms of the
Reorganization Agreement. The reasons for the Board of Directors of DeSoto
approving the Reorganization Agreement are described in "The Merger and Related
Transactions -- Reasons for the Merger"; and the opinion of the financial
advisor to the Board of Directors is described in "The Merger and Related
Transactions -- Opinion of Financial Advisors -- Opinion of Salomon Brothers,
Financial Advisor to DeSoto."
OPINIONS OF FINANCIAL ADVISORS
Keystone. At a meeting of the Board of Directors of Keystone held on June
13, 1996, PaineWebber Incorporated ("PaineWebber") delivered an oral opinion to
the Board of Directors of Keystone, which was subsequently confirmed in a
written opinion dated June 26, 1996, stating the consideration to be paid by
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Keystone in the Merger is fair to Keystone stockholders (except for Contran and
its affiliates as to whom PaineWebber has expressed no opinion) from a financial
point of view. PaineWebber has confirmed its opinion that as of the date of this
Joint Proxy Statement/Prospectus, the consideration to be paid by Keystone in
the Merger is fair to Keystone stockholders (except for Contran and its
affiliates) from a financial point of view. The full text of the opinion of
PaineWebber which sets forth the assumptions made, matters considered and
limitations on the review undertaken is attached as Appendix B to this Joint
Proxy Statement/Prospectus. Keystone stockholders are urged to read the opinion
in its entirety. See "The Merger and Related Transactions -- Opinions of
Financial Advisors -- Opinion of PaineWebber, Financial Advisor to Keystone."
DeSoto. At a meeting of the Board of Directors of DeSoto held on June 13,
1996, Salomon Brothers Inc ("Salomon Brothers") delivered an oral opinion that,
as of that date, the Exchange Ratio pursuant to the terms of the Reorganization
Agreement was fair to the holders of DeSoto Common Stock from a financial point
of view. Salomon Brothers has confirmed its oral opinion by delivering a written
opinion dated the date of this Joint Proxy Statement/Prospectus that, as of such
date, the Exchange Ratio was fair to the holders of DeSoto Common Stock from a
financial point of view. The full text of the written opinion of Salomon
Brothers, which sets forth the assumptions made, matters considered and
limitations on the review undertaken by Salomon Brothers, is attached as
Appendix C to this Joint Proxy Statement/Prospectus. DeSoto stockholders are
urged to read the opinion in its entirety. See "The Merger and Related
Transactions -- Opinion of Financial Advisors -- Opinion of Salomon Brothers,
Financial Advisor to DeSoto."
THE MERGER AND RELATED TRANSACTIONS
Effects of the Merger
Upon consummation of the Merger, DeSoto will become a wholly owned
subsidiary of Keystone; Keystone's Board of Directors will be increased from
seven to nine members and Keystone's Board of Directors will elect William
Spier, Chairman of the Board and Chief Executive Officer of DeSoto, and William
P. Lyons, another current member of the DeSoto Board of Directors, to fill the
vacancies thereby created; and as soon thereafter as practicable, Keystone's
defined benefit pension plans will be merged with and into the DeSoto defined
benefit pension plan. See "The Merger and Related Transactions -- Reasons for
the Merger."
Conversion of Shares
Upon consummation of the Merger, each then outstanding share of DeSoto
Common Stock and the associated rights issued pursuant to the Rights Agreement
between DeSoto and Harris Trust and Savings Bank (other than shares owned by
DeSoto or its subsidiaries) will automatically be converted into the right to
receive the Exchange Ratio of a share of Keystone Common Stock for each
outstanding share of DeSoto Common Stock. Cash will be paid in lieu of issuance
of fractional shares of Keystone Common Stock. Each then outstanding share of
DeSoto Preferred Stock will automatically be converted into the right to receive
the Exchange Ratio of a share of Keystone Preferred Stock. Cash will be paid in
lieu of issuance of fractional shares of Keystone Preferred Stock. Because the
Exchange Ratio is fixed, the number of shares to be received by stockholders of
DeSoto upon consummation of the Merger will remain the same, regardless of
whether the market price of the Common Stock of Keystone or DeSoto increases or
decreases at any time, including after the date of this Joint Proxy
Statement/Prospectus and after the dates of the Keystone and DeSoto Meetings.
See "The Merger and Related Transactions -- Opinions of Financial Advisors" and
"Risk Factors -- Fixed Exchange Ratio."
Assumption of DeSoto Options
Upon consummation of the Merger, each then outstanding option to purchase
DeSoto Common Stock (the "DeSoto Options") will be assumed by Keystone and
converted into an option to acquire that number of shares of Keystone Common
Stock equal to the number of shares of DeSoto Common Stock subject to such
DeSoto Option multiplied by the Exchange Ratio. The exercise price of such
DeSoto Options shall be adjusted by dividing such exercise price by the Exchange
Ratio. To avoid fractional shares, the number of
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shares of Keystone Common Stock subject to an assumed DeSoto Option will be
rounded up to the nearest whole share. The other terms of DeSoto Options,
including vesting schedules, will remain unchanged. Keystone will file a
Registration Statement on Form S-8 with the Commission with respect to the
issuance of Keystone Common Stock upon exercise of the assumed DeSoto Options.
Keystone will apply to have the shares of Keystone Common Stock reserved for
issuance upon the exercise of DeSoto Options listed on the NYSE, subject to
notice of issuance. As of August 21, 1996, DeSoto Options to acquire an
aggregate of approximately 184,000 shares of DeSoto Common Stock (approximately
137,000 equivalent shares of Keystone Common Stock) were issued and outstanding.
Merger of Pension Plans
The Reorganization Agreement provides that upon consummation of the Merger,
there will be no impediments to the merger of the Keystone defined benefit
pension plans with and into the DeSoto defined benefit pension plan. It is
expected such merger will take place as soon as practicable after consummation
of the Merger. See "The Merger Agreement and Related Transactions -- Actions
Subsequent to the Merger -- Merger of Pension Plans."
Voting Agreements
Asgard, Ltd. (an affiliate of Anders U. Schroeder, Vice Chairman of
DeSoto), Anders U. Schroeder, Parkway M&A Capital Corporation and M&A Investment
Pte Ltd (entities having a business relationship with David M. Tobey, a director
of DeSoto) and Coatings Group, Inc (an affiliate of William Spier, Chairman of
the Board and Chief Executive Officer of DeSoto), collectively the owners of
596,989 shares of DeSoto Common Stock and all of the shares of DeSoto Preferred
Stock outstanding, representing approximately twenty-two percent (22%) of
DeSoto's outstanding voting stock, have entered into an agreement with Keystone;
and Contran, the direct owner of 3,161,733 shares of Keystone Common Stock,
representing approximately fifty-six percent (56%) of Keystone's outstanding
voting stock, has entered into an agreement with DeSoto, pursuant to which
agreements (the "Voting Agreements") such stockholders agreed they will (i) vote
their shares in favor of approval of the issuance of Keystone Common Stock
pursuant to the Reorganization Agreement in the case of Contran or approval and
adoption of the Reorganization Agreement and the Merger in the case of the
holders of stock of DeSoto; and (ii) not transfer any of their shares of
Keystone Common Stock or DeSoto Common Stock, as the case may be, subject to
certain exceptions. As a result of the voting agreement to which Contran is a
party, the requisite Keystone stockholder approval for the issuance of shares of
Keystone Common Stock pursuant to the Reorganization Agreement is assured.
Related Agreements; Interests of Certain Persons in the Merger
At the time the Reorganization Agreement was entered into, Asgard Ltd.,
Parkway M&A Capital Corporation and Coatings Group, Inc. (the holders of all
outstanding shares of DeSoto Preferred Stock and DeSoto Warrants, collectively
the "Warrant and Preferred Stockholders"), Keystone, DeSoto and Contran, entered
into a stockholders agreement pursuant to which (i) Keystone agreed to assume
from DeSoto certain registration rights currently held by the Warrant and
Preferred Stockholders, and (ii) Keystone granted to Contran and its affiliates
the same rights with respect to registration of the Keystone Common Stock held
by Contran and its affiliates as Keystone had agreed to assume with respect to
the Warrant and Preferred Stockholders. At the same time, the Warrant and
Preferred Stockholders also entered into separate agreements with Keystone
regarding the DeSoto Warrants (the "Warrant Conversion Agreement") and the
DeSoto Preferred Stock (the "Preferred Stockholder Waiver and Consent
Agreement") pursuant to which they agreed that (i) one-half of the currently
outstanding DeSoto Warrants to purchase an aggregate of 1,200,000 shares of
DeSoto Common Stock held by the Warrant and Preferred Stockholders will be
cancelled upon consummation of the Merger, (ii) the remaining DeSoto Warrants
will be converted into Keystone Warrants to purchase that number of shares of
Keystone Common Stock obtained by multiplying the number of shares of DeSoto
Common Stock issuable upon exercise of the remaining DeSoto Warrants by the
Exchange Ratio, at an exercise price equal to the exercise price prior to the
Effective Time divided by the Exchange Ratio, (iii) the right of such persons to
require redemption of their DeSoto Preferred Stock
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pursuant to the existing terms of such stock by reason of the consummation of
the Merger will be waived, (iv) the DeSoto Preferred Stock will be converted
into Keystone Preferred Stock based on the Exchange Ratio and an amount of cash
equal to accrued but unpaid dividends on the DeSoto Preferred Stock (which, as
of the Effective Time, will aggregate approximately $1,700,000), and (v) any
appraisal rights they may have as a result of their ownership of the DeSoto
Preferred Stock are waived.
DeSoto has severance arrangements and policies with certain of its officers
and employees, pursuant to which DeSoto will be obligated to pay to such
officers and employees an aggregate of $110,000 upon consummation of the Merger
and up to an additional approximately $480,000 if their employment is thereafter
terminated under certain circumstances. See "The Reorganization
Agreement -- Related Agreements; Interests of Certain Persons in the Merger."
Upon the effective date of the Merger, William Spier, Chairman of the Board
and Chief Executive Officer of DeSoto, and William P. Lyons, another current
member of the Board of Directors of DeSoto, will be appointed to the Board of
Directors of Keystone, joining the current seven members of the Keystone Board
of Directors.
Representations and Covenants
Under the Reorganization Agreement, Keystone and DeSoto made a number of
representations regarding their respective capital structures, operations,
financial conditions and other matters. Each party agreed as to itself and its
subsidiaries that until consummation of the Merger or the earlier termination of
the Reorganization Agreement, it will, among other things, conduct its business
and maintain its business relationships in the ordinary and usual course, and
use its best efforts to consummate the Merger. DeSoto has agreed not to solicit,
engage in discussions, negotiate with any person or facilitate the efforts of
any person other than Keystone relating to the possible acquisition of DeSoto or
any of its subsidiaries or any material portion of its or their stock or assets
(any such efforts are referred to as an "Alternative Acquisition"), except that
DeSoto's Board of Directors may provide information to and engage in
negotiations with a third party regarding an Alternative Acquisition if (i) the
Board of Directors of DeSoto receives a written proposal for an Alternative
Acquisition which proposal identifies a price or range of values to be paid for
the outstanding securities or substantially all of the assets of DeSoto, and, if
consummated, based on the advice of DeSoto's investment bankers, the Board of
Directors of DeSoto determines is financially more favorable to the stockholders
of DeSoto than the terms of the Merger (a "Superior Proposal"); (ii) the Board
of Directors of DeSoto determines, based on the advice of its investment
bankers, that such third party is financially capable of consummating such
Superior Proposal; (iii) the Board of Directors of DeSoto shall have determined,
after consultation with outside legal counsel, that the fiduciary duties of the
Board require DeSoto to furnish information to and negotiate with such third
party; and (iv) at least two (2) business days prior thereto, Keystone shall
have been notified in writing of such Superior Proposal, including all of its
terms and conditions and the foregoing determination by the Board of Directors
of DeSoto, and shall have been given copies of such proposal. DeSoto shall not
be entitled to enter into an agreement concerning an Alternative Acquisition for
a period of not less than forty-eight hours after Keystone's receipt of a copy
of such proposal and certain other information.
Keystone has agreed, if the Merger is consummated, to indemnify the current
officers and directors of DeSoto with respect to any claim or liability arising
out of or pertaining to any act or omission occurring prior to the Effective
Time to the fullest extent that DeSoto could have done so on June 26, 1996.
Keystone has further agreed, for a period of six (6) years following the
Effective Time, to cause DeSoto to maintain indemnification and limitation of
liability provisions. Keystone has also agreed to (i) provide director and
officer insurance coverage, at a cost not to exceed $150,000, for the current
directors and officers of DeSoto for one year after the Effective Time for
claims made against such directors and officers relating to matters occurring
prior to the Effective Time, and (ii) provide, after the Effective Time,
director and officer insurance coverage to Keystone directors comparable to the
coverage maintained by DeSoto at the Effective Time, to the extent such coverage
may be obtainable at a comparable cost. See "The Reorganization Agreement --
Representations and Covenants."
10
<PAGE> 16
Conditions to the Merger
In addition to the requirement that Keystone stockholders approve the
issuance of Keystone Common Stock pursuant to the Reorganization Agreement and
DeSoto stockholders approve and adopt the Reorganization Agreement, the
consummation of the Merger is subject to a number of other conditions which, if
not satisfied or waived, would cause the Merger not to be consummated and the
Reorganization Agreement to be terminated. Each party's obligation to consummate
the Merger is conditioned upon, among other things, (i) the accuracy of the
other party's representations, (ii) each party's performance of its obligations
under the Reorganization Agreement, (iii) the absence of a material adverse
change in the condition (financial or otherwise), properties, assets,
liabilities, businesses, or results of operations of the other party and its
subsidiaries taken as a whole, (iv) the Pension Benefit Guaranty Corporation
(the "PBGC") raising Keystone's borrowing restrictions to an amount reasonably
expected to enable Keystone to perform its obligations under the Reorganization
Agreement, (v) availability to Keystone of sufficient financing in order to
effect the Merger and to satisfy its obligations and those of the surviving
corporation in the Merger, (vi) receipt of opinions of counsel in respect of
certain federal income tax consequences of the Merger, (vii) receipt of opinions
dated one business day before the closing of the Merger from the financial
advisors to each of Keystone and DeSoto as to the fairness from a financial
point of view of the consideration to be paid by Keystone and received by DeSoto
stockholders, (viii) the absence of legal action preventing consummation of the
Merger, and (ix) the receipt of other documents, including necessary consents of
third parties (including governmental agencies). Keystone's obligation to
consummate the Merger is further conditioned upon, among other things, (i) the
consent by DeSoto's trade creditors to the terms of payment contemplated by the
Reorganization Agreement and (ii) the resolution on terms satisfactory to
Keystone of certain claims arising from DeSoto's acquisition of J.L. Prescott
Company. DeSoto's obligation to consummate the Merger is further conditioned
upon, among other things, (i) approval for listing on the NYSE, subject to
official notice of issuance of the shares of Keystone Common Stock to be issued
pursuant to the Merger and (ii) the Board of Directors of Keystone taking
appropriate action to increase the number of directors comprising Keystone's
full Board of Directors from seven to nine, and to cause William Spier and
William P. Lyons to be directors of Keystone upon the effectiveness of the
Merger. See "The Reorganization Agreement -- Conditions to the Merger."
Keystone Financing Arrangements
Pursuant to the Reorganization Agreement, Keystone is obligated to cause
DeSoto to pay approximately $6.5 million to certain of its trade creditors who
are parties to a trade composition agreement with DeSoto, as soon as practicable
after the Effective Time, and an additional approximately $1.5 million to such
trade creditors within one year of the Effective Time. Additionally, pursuant to
the Preferred Stockholder Waiver and Consent Agreement, Keystone is obligated,
at the Effective Time, to pay to the holders of the DeSoto Preferred Stock all
their unpaid dividend arrearage, which will then amount to approximately $1.7
million.
As a result of these and other transactions related to the Merger, Keystone
will require additional funding from its primary lender. In order to obtain such
additional funds, Keystone has received the PBGC's consent and Keystone's
primary lender's commitment to increase Keystone's allowable borrowings by $20
million upon consummation of the Merger and the merger of the Keystone defined
benefit pension plans with and into the DeSoto defined benefit pension plan. The
PBGC's consent was necessary due to Keystone's prior agreements with the PBGC
whereby the PBGC and Keystone agreed to certain borrowing restrictions.
Regulatory Matters
Consummation of the Merger is subject to the expiration or termination of
the applicable waiting period (and any extension thereof) under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"). Notification reports were filed by Keystone and DeSoto with the
Department of Justice and the Federal Trade Commission under the HSR Act on July
22, 1996, and termination of the specified waiting period requirements of the
HSR Act was granted on August 2, 1996.
11
<PAGE> 17
Amendment of the Reorganization Agreement
The Reorganization Agreement may be amended by Keystone or DeSoto at any
time before or after approval of the issuance of shares in connection with the
Merger or the Reorganization Agreement, as the case may be, by the stockholders
of Keystone and DeSoto, except that, after such stockholder approval, no
amendment may be made which by law requires the further approval of such
stockholders without obtaining such approval. In the event the parties desire to
enter into an amendment to the Reorganization Agreement that materially alters
the terms of the Merger, the parties will circulate an amended Joint Proxy
Statement/Prospectus to solicit stockholder approval.
Termination of the Reorganization Agreement
The Reorganization Agreement may be terminated by mutual agreement of both
parties or by either party (i) as a result of a breach by the other party of a
representation, warranty, covenant or agreement set forth in the Reorganization
Agreement, or if any representation of the other party becomes untrue, in either
case which has or can reasonably be expected to have a Material Adverse Effect
(as defined in the Reorganization Agreement) and which the other party fails to
cure prior to the closing of the Merger (except that no cure period is provided
for a breach which by its nature cannot be cured); (ii) if the required
approvals of the stockholders of Keystone or DeSoto are not obtained by reason
of the failure to obtain the required vote; (iii) if all the conditions for
closing the Merger are not satisfied or waived on or before December 31, 1996,
other than as a result of a breach of the Reorganization Agreement by the
terminating party or a breach by any of the principal stockholders or affiliates
of the terminating party; or (iv) if a permanent injunction or other order by a
federal or state court which would make illegal or otherwise restrain or
prohibit the consummation of the Merger is issued and has become final and
nonappealable.
The Reorganization Agreement may be terminated by Keystone if prior to
consummation of the Merger, DeSoto enters into an agreement with respect to an
Alternative Acquisition. The Reorganization Agreement may be terminated by
DeSoto if, prior to the consummation of the Merger, DeSoto receives a Superior
Proposal and the DeSoto Board of Directors believes, after consultation with
legal counsel, that its fiduciary duties require termination of the
Reorganization Agreement (a "Superior Proposal Termination").
Breakup Fees
The Reorganization Agreement provides for the payment of a breakup fee of
$1 million (the "Breakup Fee") by DeSoto to Keystone if (i) the Reorganization
Agreement is terminated by Keystone where DeSoto has entered into an agreement
with respect to an Alternative Acquisition; (ii) the stockholders of DeSoto fail
to approve the Merger at a time when there is pending a proposal with respect to
an Alternative Acquisition; (iii) without the occurrence of a Keystone material
adverse change, the Board of Directors of DeSoto shall have failed to submit the
Merger to its stockholders for approval as required by, and in accordance with,
the terms of the Reorganization Agreement, or (iv) there occurs a Superior
Proposal Termination by DeSoto. The Breakup Fee is payable by Keystone to DeSoto
if, without a DeSoto material adverse change, the Board of Directors of Keystone
fails to hold a stockholders' meeting to vote on approval of the issuance of
Keystone Common Stock pursuant to the Reorganization Agreement as required by,
and in accordance with the terms of, the Reorganization Agreement. Payment of
the Breakup Fee shall not be in lieu of damages incurred in the event of breach
of the Reorganization Agreement, and neither party shall be entitled to receive
the Breakup Fee if it shall have committed a material breach of the
Reorganization Agreement.
Certain Federal Income Tax Consequences
The Merger is intended to qualify, and in the opinion of counsel to
Keystone and DeSoto it will qualify, as a tax-free reorganization for federal
income tax purposes, so that no gain or loss would generally be recognized by
the stockholders of DeSoto on the exchange of their DeSoto Common Stock for
Keystone Common Stock, except to the extent DeSoto stockholders receive cash in
the exchange (i.e., cash in lieu of fractional shares) and no income, gain or
loss will be recognized by Keystone or DeSoto. Consummation of the Merger is
conditioned upon delivery of opinions of counsel to this effect, dated as of the
closing date of the Merger.
12
<PAGE> 18
DeSoto stockholders are urged to consult their own tax advisors as to the tax
consequences of the Merger. See "The Reorganization Agreement -- Certain Federal
Income Tax Matters."
Accounting Treatment
For financial reporting purposes, Keystone will account for the Merger by
the purchase method.
Appraisal Rights
Both Keystone and DeSoto are incorporated in the State of Delaware, and,
accordingly, are governed by the provisions of the Delaware General Corporation
Law (the "DGCL"). Pursuant to Section 262 of the DGCL, the holders of DeSoto
Common Stock are not entitled to appraisal rights in connection with the Merger
because DeSoto Common Stock is quoted on the NYSE and such stockholders will
receive as consideration in the Merger only shares of Keystone Common Stock,
which shares will be listed on the NYSE upon the Effective Time, and cash in
lieu of fractional shares. In addition, the Keystone stockholders are not
entitled to appraisal rights under Section 262 of the DGCL because Keystone
Common Stock is listed on the NYSE and, even though approval of such
stockholders is required for the issuance of Keystone Common Stock in the
Merger, the approval of the stockholders of Keystone is not required for the
Merger itself.
Pursuant to Section 262 of the DGCL, the holders of the DeSoto Preferred
Stock would be entitled to appraisal rights in connection with the Merger.
However, the holders of the DeSoto Preferred Stock have agreed to vote in favor
of approval and adoption of the Reorganization Agreement and to waive their
appraisal rights pursuant to the Preferred Stockholder Waiver and Consent
Agreement. The Reorganization Agreement provides that, as a condition to
consummating the Merger, all terms and conditions of the Preferred Stockholder
Waiver and Consent Agreement, including such waivers, must be in full force and
effect. See "The Reorganization Agreement -- Appraisal Rights."
Comparison of Rights of Stockholders
Upon consummation of the Merger, holders of DeSoto Common Stock will become
holders of Keystone Common Stock. As a result, their rights as stockholders,
which are now governed by the DGCL and DeSoto's Certificate of Incorporation and
Bylaws, will be governed by the DGCL and Keystone's Certificate of Incorporation
and Bylaws. Because of certain differences between (i) the provisions of
DeSoto's Certificate of Incorporation and Bylaws and those of Keystone, and (ii)
other rights including the anti-takeover protection afforded holders of DeSoto
Common Stock by the associated preferred share purchase rights (the "Purchase
Rights"), the rights of DeSoto stockholders after the Merger will be different
than the rights of DeSoto stockholders before the Merger. For a discussion of
various differences between the rights of stockholders of DeSoto and the rights
of stockholders of Keystone, see "Comparison of Rights of Stockholders of
Keystone and DeSoto."
13
<PAGE> 19
MARKET PRICE DATA
Keystone. Keystone Common Stock has been traded on the NYSE under the
symbol "KES" since the common stock of Keystone and its predecessor began
publicly trading in 1936. The following table sets forth the range of high and
low closing sale prices reported on the NYSE for Keystone Common Stock for the
periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal Year Ended December 31, 1994
First Quarter.................................................... $12.00 $10.00
Second Quarter................................................... 15.88 11.50
Third Quarter.................................................... 17.38 14.38
Fourth Quarter................................................... 18.00 13.63
Fiscal Year Ended December 31, 1995
First Quarter.................................................... $13.88 $13.38
Second Quarter................................................... 13.75 13.38
Third Quarter.................................................... 15.13 13.50
Fourth Quarter................................................... 15.00 11.13
Fiscal Year Ended December 31, 1996
First Quarter.................................................... $12.00 $10.00
Second Quarter................................................... 10.38 9.50
Third Quarter (through August 21, 1996).......................... 10.00 9.75
</TABLE>
DeSoto. DeSoto Common Stock and the associated Purchase Rights are traded
on the NYSE under the symbol "DSO." (The Purchase Rights do not trade separately
from DeSoto Common Stock and are represented by certificates for the DeSoto
Common Stock). The following table sets forth the range of high and low closing
sale prices reported on the NYSE for DeSoto Common Stock for the periods
indicated:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal Year Ended December 31, 1994
First Quarter.................................................... $ 8.63 $ 6.75
Second Quarter................................................... 7.38 5.50
Third Quarter.................................................... 6.88 4.00
Fourth Quarter................................................... 5.38 3.00
Fiscal Year Ended December 31, 1995
First Quarter.................................................... $ 5.38 $ 3.00
Second Quarter................................................... 6.25 4.75
Third Quarter.................................................... 5.38 4.25
Fourth Quarter................................................... 5.38 2.75
Fiscal Year Ended December 31, 1996
First Quarter.................................................... $ 5.88 $ 3.13
Second Quarter................................................... 6.38 5.00
Third Quarter (through August 21, 1996).......................... 6.63 5.38
</TABLE>
14
<PAGE> 20
The following table sets forth the closing sales prices per share of
Keystone Common Stock and DeSoto Common Stock on the NYSE on March 12, 1996, the
last trading day before the announcement of merger discussions between Keystone
and DeSoto; on June 26, 1996, the last trading day before the announcement of
the signing of this Reorganization Agreement; and on August 21, 1996, the latest
practicable trading day before the printing of the Joint Proxy
Statement/Prospectus; and the equivalent per share prices for DeSoto Common
Stock based on the Keystone Common Stock Prices:
<TABLE>
<CAPTION>
DESOTO
KEYSTONE DESOTO EQUIVALENT
COMMON STOCK COMMON STOCK PRICE(1)
------------ ------------ ----------
<S> <C> <C> <C>
March 12, 1996......................................... $13.38 $ 4.63 $ 9.99
June 26, 1996.......................................... 10.00 6.13 7.47
August 21, 1996........................................ 9.75 5.75 7.28
</TABLE>
- ---------------
(1) Represents the equivalent of one share of Keystone Common Stock calculated
by multiplying the closing sales price per share of Keystone Common Stock by
the Exchange Ratio.
Stockholders are urged to obtain current quotations for the market prices
of Keystone Common Stock and DeSoto Common Stock. No assurance can be given as
to the market price of Keystone Common Stock or DeSoto Common Stock at the
Effective Time. Because the Exchange Ratio is fixed in the Reorganization
Agreement and neither Keystone nor DeSoto has the right to terminate the
Reorganization Agreement based on changes in the market price of either party's
stock, the market value of the shares of Keystone Common Stock that holders of
DeSoto Common Stock receive in the Merger may vary significantly from the prices
shown above.
Neither Keystone nor DeSoto has paid a dividend on outstanding shares of
Keystone Common Stock or DeSoto Common Stock, as the case may be, since at least
the beginning of the fiscal year ended December 31, 1994, and neither Keystone
nor DeSoto expects to pay a dividend on outstanding shares of Keystone Common
Stock or DeSoto Common Stock, as the case may be, in the foreseeable future.
However, the accrued dividend arrearage on the DeSoto Preferred Stock of
approximately $1,700,000 will be paid as of the Effective Time. Keystone
anticipates that it will pay timely dividends on the Keystone Preferred Stock.
15
<PAGE> 21
SELECTED KEYSTONE FINANCIAL DATA
The following is a summary of selected consolidated financial information
of Keystone. This data has been derived in part from, and should be read in
conjunction with, the consolidated financial statements of Keystone and the
related notes thereto incorporated by reference in, and included as appendices
to, this Joint Proxy Statement/Prospectus. Results of interim periods, which
include all adjustments management considers necessary for a fair presentation
thereof, are not necessarily indicative of results to be expected for the year.
The pro forma income statement data illustrates the effect of certain
adjustments to Keystone's historical consolidated financial statements that
would result from the Merger and the immediate, subsequent merger of the defined
benefit pension plans of Keystone and DeSoto as though such transactions had
occurred on December 31, 1994. In addition, the pro forma income statement data
also illustrates the effect of certain adjustments to DeSoto's historical
consolidated financial statements that would result from reflecting the April
1996 sale of DeSoto's Union City, California business and the 1995 sales of
DeSoto's Thornton and South Holland, Illinois businesses as though such
transactions had occurred on December 31, 1994. The pro forma balance sheet data
illustrates the effect of certain adjustments to Keystone's historical
consolidated financial statements that would result from the Merger and the
immediate, subsequent merger of the defined benefit pension plans of Keystone
with and into DeSoto's defined benefit pension plan as though such transactions
had occurred on June 30, 1996. The pro forma information is not necessarily
indicative of future operations or actual results had such transactions occurred
on December 31, 1994 or June 30, 1996. See "Unaudited Pro Forma Consolidated
Financial Information."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Income statement data:
Net sales............................... $302,132 $316,251 $345,186 $364,435 $345,657 $186,250 $170,118
Gross profit............................ 37,454 37,443 32,521 36,982 32,748 18,746 12,443
Income (loss) before income taxes....... 14,820 8,340 1,130 12,389 8,078 5,176 (542)
Income (loss) from continuing
operations............................ $ 9,769 $ 5,146 $ 749 $ 7,561 $ 4,887 $ 3,131 $ (327)
Extraordinary items(c).................. 3,502 -- -- -- -- -- --
Cumulative effect of changes in
accounting principles(a).............. -- (69,949) -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)................. $ 13,271 $(64,803) $ 749 $ 7,561 $ 4,887 $ 3,131 $ (327)
======== ======== ======== ======== ======== ======== ========
Per share data:
Earnings (loss) per common and common
equivalent share(b):
Continuing operations................. $ 1.75 $ .92 $ .14 $ 1.35 $ .86 $ .55 $ (.06)
Extraordinary items(c)................ .62 -- -- -- -- -- --
Cumulative effect of changes in
accounting principles(a)............ -- (12.53) -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)................. $ 2.37 $ (11.61) $ .14 $ 1.35 $ .86 $ .55 $ (.06)
======== ======== ======== ======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding......... 5,591 5,572 5,495 5,601 5,654 5,650 5,678
======== ======== ======== ======== ======== ======== ========
Cash dividends declared................. $ -- $ -- $ -- $ -- $ -- $ -- $ --
======== ======== ======== ======== ======== ======== ========
Balance sheet data (at period end):
Total assets............................ $182,077 $202,109 $206,654 $205,601 $198,822 $206,630 $194,997
Notes payable and long-term debt........ 37,290 34,485 27,190 26,054 29,945 34,037 36,294
Noncurrent accrued pension cost......... 55,462 51,638 60,102 40,470 39,222 25,600 26,650
Noncurrent accrued OPEB cost............ 3,109 93,727 96,336 98,310 97,868 97,499 97,746
Stockholders' equity (deficit).......... 27,149 (39,036) (50,908) (40,579) (37,493) (29,154) (32,229)
</TABLE>
- ---------------
(a) Relates to adoption of Statement of Financial Accounting Standards ("SFAS")
No. 106 -- "Postretirement Benefits Other Than Pensions" ("OPEB") and SFAS
No. 109 -- "Employers' Accounting for Income Taxes".
(b) Primary and fully diluted net income (loss) per share were the same for all
periods presented.
(c) Extraordinary items in 1991 relate to income tax benefits resulting from
utilization of loss carryforwards. Subsequent to adoption of SFAS No. 109 in
1992 such items are not classified as extraordinary items.
16
<PAGE> 22
Pro Forma Keystone Information
<TABLE>
<CAPTION>
SIX
MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Income statement data:
Net sales...................................................... $364,022 $117,738
Gross profit................................................... 38,025 14,443
Income (loss) before income taxes(c)........................... 12,913 (233)
Net income (loss) available for common shares.................. 7,375 (402)
Net income (loss) per Keystone common and common equivalent
share....................................................... $ .79 $ (.04)
Net income (loss) per equivalent present DeSoto common and
common equivalent share(b).................................. .59 (.03)
Weighted average common and common equivalent shares
outstanding................................................. 9,348 9,244
Balance sheet data (at period end):
Noncurrent prepaid pension cost................................ (a) $102,294
Total assets................................................... (a) 279,472
Notes payable and long-term debt............................... (a) 46,499
Noncurrent accrued OPEB cost................................... (a) 100,544
Redeemable preferred stock..................................... (a) 3,500
Common stockholders' equity.................................... (a) 33,522
Book value per Keystone common share........................... (a) $ 3.65
Book value per equivalent present DeSoto common share(b)....... (a) 2.72
</TABLE>
- ---------------
(a) Not required pursuant to regulations of the Commission.
(b) Determined by multiplying the corresponding pro forma amounts by the
Exchange Ratio.
(c) Includes certain nonrecurring income of DeSoto of approximately $6.4 million
in 1995 and $.7 million in the 1996 period.
17
<PAGE> 23
SELECTED DESOTO FINANCIAL DATA
The following is a summary of selected consolidated financial information
of DeSoto. This summary has been derived in part from, and should be read in
conjunction with, the consolidated financial statements of DeSoto and the
related notes thereto appearing elsewhere in this Joint Proxy
Statement/Prospectus. Results of interim periods, which include all adjustments
management considers necessary for a fair presentation thereof, are not
necessarily indicative of results to be expected for the year.
The pro forma income statement data illustrates the effect of certain
adjustments to DeSoto's historical consolidated financial statements that would
result from reflecting the April 1996 sale of DeSoto's Union City, California
business and the 1995 sales of DeSoto's Thornton and South Holland, Illinois
businesses as though such transactions had occurred December 31, 1994. The pro
forma information is not necessarily indicative of future operations or actual
results had such transactions occurred at December 31, 1994. See "Unaudited Pro
Forma Consolidated Financial Information."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- -------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Income statement data:
Net sales(a)............................ $58,872 $59,799 $101,175 $87,182 $52,339 $35,241 $ 9,481
Gross profit (loss)..................... 7,704 4,306 4,866 2,382 (1,730) (574) 1,098
Income (loss) before income taxes....... (202) (3,542) (13,322) (2,284) (5,393) 2,980 (930)
Income (loss) from continuing
operations(b)......................... $ (402) $(2,156) $ (8,090) $(1,635) $(4,635) $ 1,875 $ (579)
Cumulative effect of changes in
accounting principles(c).............. -- (162) -- -- -- -- --
------- ------- -------- ------- ------- ------- -------
Net income (loss)................. $ (402) $(2,318) $ (8,090) $(1,635) $(4,635) $ 1,875 $ (579)
======= ======= ======== ======= ======= ======= =======
Per share data:
Earnings (loss) per common and common
equivalent share(d):
Continuing operations................. $ (.10) $ (.54) $ (1.83) $ (.42) $ (1.10) $ .37 $ (.18)
Cumulative effect of changes in
accounting principles(c)............ -- (.04) -- -- -- -- --
------- ------- -------- ------- ------- ------- -------
Net income (loss)................. $ (.10) $ (.58) $ (1.83) $ (.42) $ (1.10) $ .37 $ (.18)
======= ======= ======== ======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding......... 4,071 4,142 4,598 4,657 4,677 4,674 4,684
======= ======= ======== ======= ======= ======= =======
Cash dividends declared on common
stock................................. $ .04 $ -- $ -- $ -- $ -- $ -- $ --
======= ======= ======== ======= ======= ======= =======
Balance sheet data (at period end):
Noncurrent prepaid pension cost......... $21,185 $27,124 $ 32,218 $39,319 $46,913 $43,065 $50,710
Total assets(a)......................... 64,559 95,634 91,957 83,112 64,968 84,448 63,643
Notes payable and long-term debt........ 10,000 8,322 7,700 8,381 -- 7,012 --
Noncurrent accrued OPEB cost............ -- 1,283 1,323 1,510 1,223 1,357 1,431
Redeemable preferred stock.............. -- 2,566 3,052 3,569 4,288 3,842 4,684
Common stockholders' equity............. 26,993 31,473 23,141 21,249 15,934 22,889 15,004
</TABLE>
- ---------------
(a) Operating results subsequent to November 1992 include revenues and results
from operations of J.L. Prescott Company which was acquired on that date. In
July 1995, DeSoto sold the Thornton and South Holland, Illinois businesses
it had acquired from J.L. Prescott Company.
(b) The loss from continuing operations included net non-operating income of
$2,420,000, $1,303,000 and $6,360,000 in 1993, 1994 and 1995, respectively;
provision for restructuring of operations of $1,229,000, $2,900,000 and
$3,100,000 in 1992, 1993 and 1995, respectively; and $3,025,000 and
$3,059,000 of other nonrecurring charges in 1993 and 1995, respectively.
(c) Relates to adoption of SFAS No. 106 (OPEB) and SFAS No. 109 (income taxes).
(d) Primary and fully diluted net income were the same for all periods
presented.
18
<PAGE> 24
Pro Forma DeSoto Information
<TABLE>
<CAPTION>
SIX
YEAR ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Income statement data:
Net sales.................................................. $ 18,098 $ 7,434
Gross profit............................................... 1,889 571
Income before income taxes(a).............................. 8,521 2,121
Net income available for common shares..................... 4,699 1,012
Net income per common and common equivalent share.......... $ 1.00 $ .22
Weighted average common and common equivalent shares
outstanding............................................. 4,677 4,684
</TABLE>
- ---------------
(a) Includes nonrecurring income of approximately $6.4 million in 1995 and $.7
million in the 1996 period.
19
<PAGE> 25
COMPARATIVE PER SHARE DATA
<TABLE>
<CAPTION>
EQUIVALENT
KEYSTONE DESOTO
PRO FORMA PRO FORMA
BOOK VALUE PER SHARE(A) KEYSTONE DESOTO COMBINED COMBINED(B)
- ---------------------------------------------------- -------- ------ --------- -----------
<S> <C> <C> <C> <C>
June 30, 1996....................................... $(5.67) $ 3.20 $3.65 $2.72
</TABLE>
<TABLE>
<CAPTION>
EQUIVALENT
NET INCOME (LOSS) PER KEYSTONE DESOTO
COMMON AND COMMON PRO FORMA PRO FORMA
EQUIVALENT SHARE KEYSTONE DESOTO COMBINED COMBINED
- ---------------------------------------------------- -------- ------ --------- -----------
<S> <C> <C> <C> <C>
Six months ended June 30:
1996................................................ $ (.06) $ (.18) $(.04) $(.03)
1995................................................ .55 .37 (c) (c)
Years Ended December 31:
1995................................................ $ .86 $(1.10) $ .79 $ .59
1994................................................ 1.35 (.42) (c) (c)
1993................................................ .14 (1.83) (c) (c)
</TABLE>
<TABLE>
<CAPTION>
EQUIVALENT
KEYSTONE DESOTO
PRO FORMA PRO FORMA
CASH DIVIDENDS DECLARED PER SHARE KEYSTONE DESOTO COMBINED COMBINED
- ---------------------------------------------------- -------- ------ --------- -----------
<S> <C> <C> <C> <C>
Six months ended June 30, 1996...................... $ -- $ -- $ -- $ --
Years Ended December 31:
1995................................................ $ -- $ -- $ -- $ --
1994................................................ -- -- -- --
1993................................................ -- -- -- --
</TABLE>
- ---------------
(a) Historical book value per share is computed by dividing common stockholders'
equity by the number of shares of common stock outstanding at the end of the
period. Pro forma book value per share is computed by dividing pro forma
common stockholders' equity by the pro forma number of shares of common
stock outstanding at the end of the period.
(b) The unaudited equivalent DeSoto pro forma per share amounts are calculated
by multiplying the Keystone combined pro forma per share amounts for each
period by the Exchange Ratio.
(c) Not required pursuant to regulations of the Commission.
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RISK FACTORS
Each Keystone stockholder and DeSoto stockholder should carefully consider
and evaluate the following factors, among others, before voting on the matters
described herein.
CONTROL PERSON AND POTENTIAL CONFLICTS OF INTEREST
After consummation of the Merger, Contran will beneficially own, directly
and indirectly, approximately thirty-nine percent (39%) of the outstanding
Keystone Common Stock and may continue to be deemed to control Keystone. As a
result, the election of directors and taking of other corporate actions,
including mergers, requiring the approval of Keystone stockholders after the
Merger may be difficult if opposed by Contran. In addition, third parties may be
discouraged from seeking to acquire Keystone without the prior agreement of
Contran. Each of Contran and Keystone may be deemed to be controlled by Harold
C. Simmons. Certain of the officers and directors of Keystone are also officers
and directors of Contran or of entities that may be deemed to be controlled by
or affiliated with Contran and/or Harold C. Simmons. In addition, from time to
time, corporations that may be deemed to be controlled by or affiliated with
Harold C. Simmons, including Keystone, engage in (i) intercorporate transactions
with related companies, including guarantees, management and expense sharing
arrangements, shared fee arrangements, joint ventures, partnerships, loans,
options, advances of funds on open account, sales, leases and exchanges of
assets, including securities issued by both related and unrelated parties, and
(ii) common acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions may involve both related and unrelated parties and may
include transactions which result in the acquisition by one related party of a
publicly-held minority equity interest in another related party. Depending upon
the business, tax and other objectives then relevant, it is possible that
Keystone might be a party to one or more such transactions in the future. The
foregoing relationships, transactions and agreements may create potential
conflicts of interest.
It is the policy of Keystone to engage in transactions with related parties
on terms, in the opinion of Keystone, no less favorable to Keystone than could
be obtained from unrelated parties.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the Boards of Directors of Keystone
and DeSoto with respect to the Reorganization Agreement and the Merger,
stockholders of Keystone and DeSoto should be aware that certain affiliates and
members of management of Keystone and DeSoto have interests in the Merger in
addition to the interests of holders of Keystone Common Stock and DeSoto Common
Stock generally. Specifically, (i) pursuant to the Reorganization Agreement,
William Spier, the Chairman of the Board and Chief Executive Officer of DeSoto,
and William P. Lyons, a member of the DeSoto Board of Directors, will be elected
to serve as directors of Keystone upon consummation of the Merger; (ii) pursuant
to the Reorganization Agreement, DeSoto Options will be assumed by Keystone and
converted into options to acquire shares of Keystone Common Stock and, prior to
the Merger, the terms of the DeSoto Options will be amended to extend the period
for exercise of the DeSoto Options until the second anniversary of the Effective
Time; (iii) DeSoto has severance agreements which obligate DeSoto to pay certain
employees and officers of DeSoto in the event of a change in control of DeSoto
and upon the subsequent termination of their employment under certain
circumstances; (iv) DeSoto Preferred Stock, which is held by affiliates of
DeSoto, will be converted into Keystone Preferred Stock and cash in an amount
equal to the accrued and unpaid dividends on the DeSoto Preferred Stock
(approximately $1.7 million as of the Effective Time) will be paid to the
holders of the DeSoto Preferred Stock upon consummation of the Merger; (v)
pursuant to the Stockholders' Agreement entered into in connection with the
Reorganization Agreement, Keystone has assumed certain registration rights
previously granted by DeSoto to the Warrant and Preferred Stockholders and has
granted similar registration rights to Contran and its affiliates; (vi) pursuant
to the Reorganization Agreement, if the Merger is consummated, Keystone has
agreed to indemnify the current officers and directors of DeSoto for any act or
omission occurring prior to the Merger and has also agreed to provide director
and officer insurance coverage to current officers and directors of DeSoto for
one year after the Effective Time; and (vii) Harold C. Simmons, who may be
deemed to control Keystone, is the sole member
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of the Corporate Committee appointed by Keystone to direct the investments of
the Keystone Master Pension Trust and is the sole trustee of, and the sole
member of the trust investment committee for, The Combined Master Retirement
Trust formed by Valhi, Inc. ("Valhi"), an affiliate of Keystone, to permit the
collective investment by trusts that maintain the assets of certain employee
defined benefit pension plans adopted by Valhi and related companies, including
Keystone. See "The Merger and Related Transactions -- General", "The
Reorganization Agreement -- Representations and Covenants; -- Related
Agreements; Interests of Certain Persons in Matters Acted Upon" and "Information
About DeSoto -- Stock Ownership of Management and Others."
ENVIRONMENTAL LIABILITIES
Keystone and DeSoto are subject to federal and state "Superfund" and other
legislation that impose cleanup and remediation responsibility upon present and
former owners and operators of, and persons that generated hazardous waste
deposited upon, sites determined by state or federal regulators to contain
hazardous waste. Keystone and DeSoto have been notified by the United States
Environmental Protection Agency ("EPA") that each is a potentially responsible
party under the federal "Superfund" statute for the alleged release or threat of
release of hazardous waste into the environment in several instances. Most of
these situations involve cleanup of landfills and disposal facilities which
allegedly received hazardous waste generated by either Keystone or DeSoto. A
determination that Keystone or DeSoto is wholly or partially responsible for the
cleanup of hazardous waste at one or more sites under applicable laws or
regulations could require large and unanticipated expenses and possible capital
expenditures, which could have a material adverse effect on the respective
financial conditions of Keystone and DeSoto. See Note 13 to the Keystone
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in Appendix D, Note I
to the DeSoto Consolidated Financial Statements for the year ended December 31,
1995, and "Information About DeSoto -- Legal Proceedings; -- Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
FACTORS RELATING TO KEYSTONE
Competition and Other Market Factors. The carbon steel rod, wire and wire
products markets served by Keystone are seasonal and highly competitive and
include both domestic and foreign competitors. This degree of competition is not
expected to decline in the foreseeable future as worldwide over-capacity in the
steel industry continues to exist. As a result, any significant economic
downturn in the domestic or worldwide economy could have a material adverse
effect on Keystone's liquidity, financial condition and results of operations.
Certain of Keystone's competitors have significantly greater financial and other
resources than Keystone, and may have lower labor costs and/or more efficient
technology, which could affect Keystone's ability to compete effectively.
Scrap Steel and Other Material Costs. The principal raw material used by
Keystone in steel rod production is scrap steel. The purchase of scrap steel is
highly competitive and its price volatility is influenced by periodic shortages,
freight costs, weather and other conditions beyond the control of Keystone. The
cost of scrap steel has fluctuated significantly in the past, and may fluctuate
significantly in the future, and Keystone is not always able to pass on higher
scrap costs by increasing its selling prices. In addition to scrap steel,
Keystone's production is dependent upon the availability of certain other
materials and adequate energy supplies. Keystone's manufacturing processes
consume large amounts of energy in the form of electricity and natural gas.
Keystone purchases its electrical energy for its largest facility, located in
Peoria, Illinois, from a regulated utility under an interruptible service
contract which provides for more economical electricity rates. A significant
increase in the cost, or interruption in the supply, of such materials or energy
supplies could adversely affect Keystone's liquidity, financial condition and
results of operations.
Permits. Keystone's operations are affected by a variety of environmental
laws and regulations. Many of these laws and regulations require permits to
operate the facilities to which they pertain. Denial, revocation, suspension or
expiration of such permits could impact the ability of the affected facility to
continue operations. In addition, Keystone may be subject to increasingly
stringent environmental standards in the future.
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Plant Utilization and Capacity. The estimated annual capacity of Keystone's
rod mill currently exceeds its estimated annual billet producing capacity by
approximately 95,000 tons. As a result, Keystone has been purchasing additional
billets from other suppliers to improve utilization of its rod mill. There is no
assurance Keystone will continue to purchase billets or expand its billet
producing capacity and thus maintain higher utilization of its rod mill.
Furthermore, an economic downturn, Keystone's failure to compete effectively in
its major markets, a failure of plant or equipment requiring significant capital
expenditures or time to repair, or the other factors mentioned herein could
result in operating the rod mill and its other facilities at lower capacity
levels.
Operating Results and Liquidity. Pursuant to the Reorganization Agreement,
Keystone must increase its indebtedness in order to fund its obligations after
the Merger, including payment of DeSoto's trade creditors. Keystone incurs
significant ongoing costs for health and welfare benefits for current and
retired employees and for plant and equipment and may incur relatively
significant capital expenditures to upgrade its equipment over the next few
years in order to avoid possible competitive disadvantages. In addition,
potential liabilities under environmental laws and regulations with respect to
the disposal and cleanup of wastes beyond amounts already accrued could have a
material adverse effect on Keystone's liquidity, financial condition and results
of operations.
Provided that Keystone is able to increase its credit availability as
contemplated by the Reorganization Agreement, Keystone believes its operations
and credit facilities will generate sufficient cash flows to meet its
anticipated operating, debt service and capital needs for the foreseeable
future. This belief is based upon management's assessment of various financial
and operational factors including, but not limited to, assumptions relating to
product shipments, product mix and selling prices; production schedules;
productivity rates; raw material, electricity, labor, employee benefits, and
other fixed and variable costs; working capital changes; interest rates;
repayments of long-term debt; capital expenditures; and available borrowings
under Keystone's credit facilities. If one or more of these assessments proves
incorrect, then such events may have a material adverse effect on Keystone's
liquidity, financial condition and results of operations. See "The
Reorganization Agreement -- Keystone Financing Arrangements."
FIXED EXCHANGE RATIO
The Exchange Ratio negotiated by Keystone and DeSoto is fixed and there
exists no condition for termination of the Merger if the stock prices of either
Keystone or DeSoto rise above or fall below a specified dollar amount. If such
fluctuations do occur, there will be no adjustment to protect either company's
stockholders who might be adversely affected by such fluctuations.
DESOTO FINANCIAL CONDITION
DeSoto has experienced liquidity and cash flow difficulties for a number of
years and, absent consummation of the Merger, believes it will be compelled to
terminate its defined benefit pension plan in order to acquire funds to pay its
trade creditors and otherwise meet its obligations. Although consummation of the
Merger should cause DeSoto's financial condition to improve as a result of the
payment to its trade creditors and payment of its preferred dividend arrearage
as contemplated by the Reorganization Agreement, there can be no assurance that
DeSoto will not experience future losses from its operations and contingent
liabilities, including potential liabilities under environmental laws. Any such
losses would be reflected in the consolidated financial statements of Keystone
for periods ending after consummation of the Merger and could reduce the
financial benefits expected to be realized by Keystone and DeSoto as a result of
the Merger.
Sears, Roebuck and Co. ("Sears"), DeSoto's largest customer, currently
accounts for over 75% of DeSoto's total sales. Sales to Sears are on open
account and may be terminated at any time. The loss of Sears as a customer would
have a material adverse effect on DeSoto's current business.
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DIVIDENDS
Keystone has not paid cash dividends on Keystone Common Stock since 1977.
Further, Keystone is prohibited from paying dividends without its primary
lender's consent. Except for dividends with respect to the Keystone Preferred
Stock, Keystone does not anticipate paying any cash dividends in the foreseeable
future.
LACK OF LIQUIDITY OF KEYSTONE COMMON STOCK; PURCHASES BY SIMMONS' RELATED
PARTIES
The liquidity of Keystone Common Stock may be negatively affected by the
relatively low number of shares held by nonaffiliates of Keystone and relatively
low historical trading volumes. The "public float" of Keystone Common Stock
(i.e., shares owned by nonaffiliates of Keystone) is relatively small.
Approximately 69% of the outstanding Keystone Common Stock is beneficially owned
by related parties of Harold C. Simmons (including Contran). See "Certain
Information About Keystone -- Security Ownership of Certain Beneficial Owners."
For 1996 (through August 21, 1996), the average daily trading volume of Keystone
Common Stock on days that shares traded was approximately 2,300 shares or
approximately 0.04% of the outstanding Keystone Common Stock. The market price
of Keystone Common Stock, accordingly, may not be indicative of the market price
of Keystone Common Stock in a more liquid market nor of Keystone's financial
performance or business prospects.
Related parties of Mr. H. Simmons (including Contran) from time to time
have purchased shares of Keystone Common Stock. Since Keystone's rights offering
completed in July 1988, such parties have increased their aggregate beneficial
ownership from approximately 57% to 69% of the outstanding Keystone Common
Stock. Such acquisitions include aggregate open-market purchases in 1995 of
87,150 shares (1.5% of the outstanding Keystone Common Stock) at an average
price of approximately $13.60 per share and aggregate open-market purchases in
1996 through August 21, 1996 of 39,700 shares (0.7% of the outstanding Keystone
Common Stock) at an average price of approximately $9.92 per share. Given the
relatively small public float and relatively low daily trading volume of
Keystone Common Stock, purchases by related parties of Mr. H. Simmons (including
Contran) may have had some effect on the market price of Keystone Common Stock.
Due to the factors mentioned above, the quoted market price of Keystone
Common Stock should only be one factor in analyzing the value of Keystone.
VOLATILITY OF MARKET PRICE OF KEYSTONE COMMON STOCK AFTER THE MERGER
Even though after the Merger the number of shares of Keystone Common Stock
held by nonaffiliates of Keystone will increase, the market price of Keystone
Common Stock could be subject to significant price fluctuations in response to a
number of factors, including those mentioned under "-- Lack of Liquidity of
Keystone Common Stock; Purchases by Simmons' Related Parties," efforts, if any,
to purchase or sell relatively large blocks of Keystone Common Stock, investor
perceptions and general economic and other conditions. These factors may or may
not relate to Keystone's financial performance or business prospects.
MARKET PRICE FOR DESOTO COMMON STOCK
The liquidity of DeSoto Common Stock may be negatively affected by the
relatively large number of shares held by directors, officers and related
entities as well as by certain persons unrelated to DeSoto and the resulting
negative impact on the number of shares which are actively traded. See
"Information About DeSoto -- Stock Ownership of Management and Others." As a
result, trading in shares of DeSoto Common Stock may be characterized by price
volatility, particularly, if efforts are made to buy or sell large amounts of
such shares. In addition, current trading volumes and prices of DeSoto's Common
Stock may reflect investor perceptions of the Merger. Therefore, the market
price of DeSoto Common Stock may not necessarily be indicative of the market
price of DeSoto Common Stock in a more liquid market or of DeSoto's financial
performance or business prospects. As a result, the quoted market price of
DeSoto Common Stock should only be one factor in analyzing the value of DeSoto.
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SHARES ELIGIBLE FOR FUTURE SALE
As a result of the Merger, it is anticipated that Keystone will issue
approximately 3,500,000 shares of Keystone Common Stock, approximately 137,000
shares of Keystone Common Stock will be issuable upon the exercise of assumed
DeSoto Options, and 447,900 shares of Keystone Common Stock will be issuable
upon the exercise of warrants to purchase Keystone Common Stock. In general,
except for shares issuable upon the exercise of such warrants whose
transferability will be restricted by Rule 144 under the Securities Act, these
shares will be freely tradable following the Merger, subject to certain resale
restrictions for affiliates of DeSoto pursuant to Rules 144 and/or 145 under the
Securities Act. See "The Merger and Related Transactions -- Affiliates'
Restrictions on Sale of Keystone Common Stock." An aggregate of approximately
474,839 of the shares of Keystone Common Stock to be issued in the Merger will
be beneficially owned by affiliates of DeSoto and, therefore, subject to resale
restrictions. The sale of any of the foregoing shares may cause substantial
fluctuations in the price of Keystone Common Stock over short time periods.
ISSUANCE OF KEYSTONE PREFERRED STOCK
Pursuant to the terms of the Reorganization Agreement, 435,456 shares of
Keystone Preferred Stock will be issued in the Merger. In the event of a
liquidation, dissolution or winding up of Keystone, no distribution will be made
to holders of Keystone Common Stock until, among other things, holders of
Keystone Preferred Stock have received $8.0375 per share of Keystone Preferred
Stock plus all accrued but unpaid dividends thereon, whether or not earned or
declared (the "Liquidation Preference"), to the date fixed for liquidation,
dissolution or winding up. After payment of any unpaid accumulated dividends,
the aggregate Liquidation Preference will be $3.5 million. There can be no
assurance that in the event of such liquidation, dissolution or winding up of
Keystone, the holders of Keystone Common Stock will receive any assets after
payment of the Liquidation Preference.
CERTAIN CHARTER PROVISIONS
Shares of preferred stock may be issued in the future by Keystone without
further stockholder approval and upon such terms and conditions, and having such
rights, privileges and preferences, as the Board of Directors of Keystone may
determine. The rights of the holders of Keystone Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. The issuance of preferred stock could
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, a majority of the outstanding voting
stock of Keystone. Keystone does not have any present plans to issue any shares
of preferred stock other than the Keystone Preferred Stock to be issued pursuant
to the Merger.
THE KEYSTONE MEETING
DATE, TIME AND PLACE OF MEETING
The Keystone Meeting will be held on Friday, September 27, 1996 at 10:00
a.m., local time, at Three Lincoln Centre, 5430 LBJ Freeway, Suite 1740, Dallas,
Texas 75240-2697.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of Keystone Common Stock at the close of business on
the Keystone Record Date are entitled to notice of and to vote at the Keystone
Meeting. As of the close of business on August 21, 1996, there were 5,686,424
shares of Keystone Common Stock outstanding and entitled to vote, held of record
by 1,049 stockholders. A majority, or 2,843,213 of these shares, present in
person or represented by proxy, will constitute a quorum for the transaction of
business. Each Keystone stockholder is entitled to one vote for each share of
Keystone Common Stock held as of the Keystone Record Date.
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VOTING OF PROXIES
The Keystone proxy accompanying this Joint Proxy Statement/Prospectus is
solicited on behalf of the Board of Directors of Keystone for use at the
Keystone Meeting. Stockholders are requested to complete, sign and date the
accompanying proxy and promptly return it in the accompanying envelope or
otherwise mail it to Keystone. All proxies that are promptly executed and
returned, and that are not revoked, will be voted at the Keystone Meeting in
accordance with the instructions indicated on the proxies or, if no direction is
indicated, to approve the issuance of shares of Keystone Common Stock pursuant
to the Reorganization Agreement. Keystone's Board of Directors does not
presently intend to bring any business before the Keystone Meeting other than
the specific proposals referred to in this Joint Proxy Statement/Prospectus and
specified in the notice of the Keystone Meeting. So far as is known to
Keystone's Board of Directors, no other matters are to be brought before the
Keystone Meeting. As to any business that may properly come before the Keystone
Meeting, however, it is intended that proxies, in the form enclosed, will be
voted in respect thereof in accordance with the judgment of the persons voting
such proxies. A Keystone stockholder who has given a proxy may revoke it at any
time before it is exercised at the Keystone Meeting by (i) delivering to the
Secretary of Keystone (by any means, including facsimile) a written notice,
bearing a date later than the proxy, stating the proxy is revoked; (ii) signing
and so delivering a proxy relating to the same shares and bearing a later date
prior to the vote at the Keystone Meeting; or (iii) attending the Keystone
Meeting and voting in person (although attendance at the Keystone Meeting will
not, by itself, revoke a proxy).
VOTE REQUIRED
Because the number of shares of Keystone Common Stock to be issued or
reserved for issuance in connection with the Merger will exceed twenty percent
(20%) of the number of shares of Keystone Common Stock outstanding prior to the
Merger, approval by holders of Keystone Common Stock of the proposal to issue
Keystone Common Stock pursuant to the Reorganization Agreement is required under
the rules of the NYSE. Under the NYSE rules, the proposal to issue Keystone
Common Stock pursuant to the Reorganization Agreement must be approved by a
majority of the votes cast at the Keystone Meeting, provided the total vote cast
represents a majority of the shares entitled to vote thereon. If the holders of
Keystone Common Stock do not vote to approve such issuance, the Merger will not
be consummated. As of August 21, 1996, the directors and executive officers of
Keystone and their affiliates had the right to vote an aggregate of 4,168,881
shares of Keystone Common Stock, representing approximately seventy-three
percent (73%) of Keystone Common Stock outstanding. Contran, holding directly
approximately fifty six percent (56%) of the Keystone Common Stock outstanding
as of August 21, 1996, is a party to an agreement with DeSoto pursuant to which
Contran has agreed to vote its shares of Keystone Common Stock in favor of the
Reorganization Agreement and the transactions contemplated thereby, thus
insuring Keystone stockholder approval. See "The Reorganization
Agreement -- Related Agreements; Interests of Certain Persons in Matters Acted
Upon -- Stockholders Agreement."
QUORUM; BROKER NON-VOTES
The required quorum for the transaction of business at the Keystone Meeting
is a majority of the shares of Keystone Common Stock issued and outstanding on
the Keystone Record Date. Abstentions and broker non-votes will be included in
determining the number of shares present for purposes of determining the
presence of a quorum but will not be counted as a vote for or against approval
of the issuance of Keystone Common Stock pursuant to the Reorganization
Agreement. Approval of the Merger or the Reorganization Agreement is not
required under the DGCL or Keystone's Certificate of Incorporation or its
Bylaws.
SOLICITATION OF PROXIES AND EXPENSES
Keystone will bear the cost of the solicitation of proxies in the enclosed
form from its stockholders. In addition to solicitation by mail, the directors,
officers and employees of Keystone may solicit proxies from stockholders by
telephone, telegram, letter, facsimile or in person. Following the initial
mailing of the proxies and other soliciting materials, Keystone will request
brokers, custodians, nominees and other record holders to forward copies of the
proxy and other soliciting materials to persons for whom they hold shares of
Keystone
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<PAGE> 32
Common Stock and to request authority for the exercise of proxies. In such
cases, Keystone, upon the request of the record holders, will reimburse such
holders for their reasonable expenses.
THE DESOTO MEETING
DATE, TIME AND PLACE OF MEETING
The DeSoto Meeting will be held on Friday, September 27, 1996 at 10:00
a.m., local time, at the Bank of Montreal, 430 Park Avenue, 16th Floor, New
York, New York.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of DeSoto Common Stock and DeSoto Preferred Stock at
the close of business on the DeSoto Record Date are entitled to notice of and to
vote at the DeSoto Meeting. As of the close of business on August 21, 1996,
there were 4,688,523 shares of DeSoto Common Stock outstanding and entitled to
vote, held of record by 1,691 stockholders and 583,333 shares of DeSoto
Preferred Stock outstanding and entitled to vote, held of record by three
stockholders. Each DeSoto stockholder is entitled to one vote for each share of
DeSoto Common Stock and each share of DeSoto Preferred Stock held as of the
DeSoto Record Date.
VOTING OF PROXIES
The DeSoto proxy accompanying this Joint Proxy Statement/Prospectus is
solicited on behalf of the Board of Directors of DeSoto for use at the DeSoto
Meeting. Stockholders are requested to complete, sign and date the accompanying
proxy and promptly return it in the accompanying envelope or otherwise mail it
to DeSoto. All proxies that are promptly executed and returned, and that are not
revoked, will be voted at the DeSoto Meeting in accordance with the instructions
indicated on the proxies or, if no direction is indicated, to approve and adopt
the Reorganization Agreement. DeSoto's Board of Directors does not presently
intend to bring any business before the DeSoto Meeting other than the specific
proposals referred to in this Joint Proxy Statement/Prospectus and specified in
the notice of the DeSoto Meeting. So far as is known to DeSoto's Board of
Directors, no other matters are to be brought before the DeSoto Meeting. As to
any business that may properly come before the DeSoto Meeting, however, it is
intended that proxies, in the form enclosed, will be voted in respect thereof in
accordance with the judgment of the persons voting such proxies. A DeSoto
stockholder who has given a proxy may revoke it at any time before it is
exercised at the DeSoto Meeting by (i) delivering to the Secretary of DeSoto (by
any means, including facsimile) a written notice, bearing a date later than the
proxy, stating that the proxy is revoked; (ii) signing and so delivering a proxy
relating to the same shares and bearing a later date prior to the vote at the
DeSoto Meeting; or (iii) attending the DeSoto Meeting and voting in person
(although attendance at the DeSoto Meeting will not, by itself, revoke a proxy).
VOTE REQUIRED
Pursuant to DeSoto's Certificate of Incorporation and the DGCL, the
Reorganization Agreement must be approved by a majority of the outstanding
shares of DeSoto Common Stock and DeSoto Preferred Stock voting together as one
class. If the holders of DeSoto do not vote to approve such transaction, the
Merger will not be consummated. As of August 21, 1996, the directors and
officers of DeSoto and their affiliates had the right to vote an aggregate of
636,087 shares of DeSoto Common Stock and all the outstanding DeSoto Preferred
Stock, representing approximately twenty-three percent (23%) of all DeSoto
voting stock outstanding as of such date. Certain entities affiliated with
directors of DeSoto and a director of DeSoto collectively having the right to
vote 596,989 shares of DeSoto Common Stock and all of the outstanding shares of
DeSoto Preferred Stock, representing approximately 22% of the combined shares of
DeSoto Common Stock and DeSoto Preferred Stock outstanding as of the DeSoto
Record Date are parties to an agreement with Keystone pursuant to which they
have agreed to vote their shares of DeSoto Common Stock and DeSoto Preferred
Stock in favor of the approval and adoption of the Reorganization Agreement.
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QUORUM; BROKER NON-VOTES
The required quorum for the transaction of business at the DeSoto Meeting
is a majority of the shares of DeSoto Common Stock and DeSoto Preferred Stock,
taken together, issued and outstanding on the DeSoto Record Date. Abstentions
and broker non-votes will have the same effect as votes against the
Reorganization Agreement.
SOLICITATION OF PROXIES AND EXPENSES
DeSoto will bear the cost of the solicitation of proxies in the enclosed
form from its stockholders. In addition to solicitation by mail, the directors,
officers and employees of DeSoto may solicit proxies from stockholders by
telephone, telegram, letter, facsimile or in person. Following the initial
mailing of the proxies and other soliciting materials, DeSoto will request
brokers, custodians, nominees and other record holders to forward copies of the
proxy and other soliciting materials to persons for whom they hold shares of
DeSoto Common Stock and to request authority for the exercise of proxies. In
such cases, DeSoto, upon the request of the record holders, will reimburse such
holders for their reasonable expenses. In addition, DeSoto has retained
Georgeson & Co., Inc. to assist in the solicitation of proxies for a fee of
approximately $10,000, plus expenses.
THE MERGER AND RELATED TRANSACTIONS
GENERAL
The Reorganization Agreement provides for the merger of Sub with and into
DeSoto, with DeSoto to be the surviving corporation of the Merger. As a
consequence of the Merger, DeSoto will become a wholly owned subsidiary of
Keystone. If the requisite approvals of the stockholders of DeSoto and Keystone
are received, the Merger is expected to be consummated as soon as practicable
after the satisfaction or waiver of each of the conditions to consummation of
the Merger, which is expected to occur as soon as practicable following receipt
of stockholder approval at the Keystone and DeSoto Meetings. The discussion in
this Joint Proxy Statement/Prospectus of the Merger and the description of the
principal terms of the Reorganization Agreement are subject to and qualified in
their entirety by reference to the Reorganization Agreement, a copy of which is
attached to this Joint Proxy Statement/Prospectus as Appendix A, and
incorporated herein by reference.
Upon consummation of the Merger, Keystone's Board of Directors will be
increased from seven to nine members, and the Keystone Board of Directors will
elect William Spier, the Chairman of the Board and Chief Executive Officer of
DeSoto, and William P. Lyons, another current member of the Board of Directors
of DeSoto, to fill the vacancies thereby created. The executive officers of
Keystone will remain unchanged as a result of the Merger. The stockholders of
DeSoto will become stockholders of Keystone (as described below), and their
rights will be governed by Keystone's Certificate of Incorporation and Bylaws.
As soon as practicable after the Merger, the Keystone defined benefit pension
plans will be merged with and into the DeSoto defined benefit pension plan.
Conversion of Shares
Upon the consummation of the Merger, each then outstanding share of DeSoto
Common Stock and DeSoto Preferred Stock, will automatically be converted into
.7465 of a share of Keystone Common Stock and Keystone Preferred Stock,
respectively. No fractional shares of Keystone Common Stock or will be issued in
the Merger. Instead, each DeSoto stockholder who would otherwise be entitled to
receive a fractional share of Keystone Common Stock will receive an amount of
cash equal to the per share market value of Keystone Common Stock (based on the
average of the closing sales prices of Keystone Common Stock as quoted on the
NYSE during the ten trading day period ending on the closing date of the Merger)
multiplied by the fraction of a share of Keystone Common Stock to which the
stockholder would otherwise be entitled. Based upon the capitalization of DeSoto
and Keystone as of August 21, 1996, the stockholders of DeSoto will own Keystone
Common Stock representing approximately thirty-eight percent (38%) of the
Keystone Common Stock outstanding immediately after consummation of the Merger
and one hundred percent (100%) of the Keystone Preferred Stock outstanding
immediately after consummation of the Merger. Because the Exchange Ratio is
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fixed, the number of shares to be received by stockholders of DeSoto upon
consummation of the Merger will remain the same, regardless of whether the
market price of the Common Stock of Keystone or DeSoto increases or decreases at
any time, including after the date of this Joint Proxy Statement/Prospectus and
after the dates of the Keystone and DeSoto Meetings. See "The Merger and Related
Transactions -- Opinions of Financial Advisors" and "Risk Factors -- Fixed
Exchange Ratio."
Assumption of Options and Conversion of Warrants
Upon consummation of the Merger, each then outstanding DeSoto Option will
be assumed by Keystone and will automatically be converted into an option to
purchase the number of shares of Keystone Common Stock determined by multiplying
the number of shares of DeSoto Common Stock subject to the DeSoto Option by the
Exchange Ratio, at an exercise price equal to the exercise price of such DeSoto
Option at the time of the Merger divided by the Exchange Ratio. To avoid
fractional shares, the number of shares of Keystone Common Stock subject to an
assumed DeSoto Option will be rounded up to the nearest whole share. The other
terms of DeSoto Options, including vesting schedules, will remain unchanged.
Keystone will file a Registration Statement on Form S-8 with the Commission with
respect to the issuance of shares of Keystone Common Stock upon exercise of the
assumed DeSoto Options and cause such shares, upon issuance, to be listed with
the NYSE.
Pursuant to the Warrant Conversion Agreement, at the Effective Time,
one-half of the DeSoto Warrants to purchase an aggregate of 1,200,000 shares of
DeSoto Common Stock will be cancelled and the remaining one-half of the DeSoto
Warrants will be converted into Keystone Warrants to purchase 447,900 shares of
Keystone Common Stock (representing the shares of DeSoto Common Stock subject to
the remaining DeSoto Warrants multiplied by the Exchange Ratio) at an exercise
price equal to approximately $9.38 per share (representing the exercise price of
the DeSoto Warrants divided by the Exchange Ratio).
As of August 21, 1996, DeSoto Options to acquire approximately 184,000
shares of DeSoto Common Stock and DeSoto Warrants to acquire 1,200,000 shares of
DeSoto Common Stock were outstanding.
ACTIONS SUBSEQUENT TO THE MERGER
Operation of DeSoto
After consummation of the Merger, Keystone intends to continue to maintain
DeSoto as a separate subsidiary and to operate DeSoto's Joliet manufacturing
facility. Prior to the Merger, Keystone will contribute the net assets of its
Sherman Wire division to Sub. Accordingly, following the Merger, DeSoto's
operations will be comprised of DeSoto's Joliet operations and Keystone's
Sherman Wire operations.
Merger of Pension Plans
Keystone intends, as soon as practicable after consummation of the Merger,
to merge the Keystone defined benefit pension plans with and into the DeSoto
defined benefit pension plan. Keystone believes that after such merger, it will
no longer have an underfunded pension obligation. See "Unaudited Pro Forma
Consolidated Financial Information."
BACKGROUND OF THE MERGER
On January 6, 1995, William Spier, Chairman and Chief Executive Officer of
DeSoto, sent a letter to Mr. H. Simmons, Chairman and Chief Executive Officer of
Contran, to determine if there was any interest on the part of Keystone in a
potential transaction with DeSoto. Soon thereafter, Glenn R. Simmons, Chairman
and Chief Executive Officer of Keystone and Vice Chairman of Contran, contacted
Mr. Spier concerning a potential transaction.
On January 11, 1995, Keystone and DeSoto executed a letter agreement,
pursuant to which the parties agreed to keep confidential any information
exchanged by the parties in connection with a possible transaction between
Keystone and DeSoto. The parties also agreed not to propose to the other's
security holders an
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extraordinary transaction involving the two parties without the consent of the
other company's Board of Directors.
On January 17, 1995, Harold Curdy, Vice President -- Finance of Keystone,
and Messrs. G. Simmons and Spier met and had preliminary discussions concerning
a potential transaction.
From January 18, 1995 through June 1995, the parties performed due
diligence proceedings through meetings and phone conferences between the parties
and their respective legal and financial advisors.
On June 9, 1995, Messrs. Curdy, Robert Singer, President of Keystone, and
Joseph Compofelice, an executive officer of certain companies related to
Contran, met with Mr. Spier and representatives of Salomon Brothers, DeSoto's
financial advisor, to discuss, among other things, terms of a potential
transaction. At that meeting, as a result of Keystone's due diligence to such
date, Keystone offered the following alternatives: (i) Keystone would issue
3,500,000 shares of Keystone Common Stock for DeSoto, subject to further due
diligence by Keystone or (ii) Contran would sell its interest in Keystone to Mr.
Spier and his affiliates at a price to be determined.
On July 27, 1995, Mr. Spier, in a letter to Mr. G. Simmons, indicated the
transaction to purchase Contran's interest in Keystone would not be feasible but
DeSoto would be willing to accept 4,250,000 shares of Keystone Common Stock.
By letter dated August 9, 1995, Keystone notified DeSoto that Keystone was
no longer interested in pursuing discussions in respect of a possible merger of
the two companies.
There were no further formal discussions between the parties until January
18, 1996, when Messrs. G. Simmons, Singer, Spier, and Curdy met to discuss the
terms of a possible merger, including the issuance of approximately 3,500,000
shares of Keystone Common Stock (the "Proposed Exchange Ratio") subject to
further due diligence, receipt of fairness opinions, and approvals by the
parties' respective Boards of Directors and stockholders and Keystone's primary
lender. Thereafter, the parties renewed due diligence proceedings.
On January 23, 1996, Messrs. G. Simmons, Curdy and Spier met to discuss
terms and financial constraints on Keystone's ability to consummate the proposed
merger.
On February 5, 1996, Mr. Curdy and Ms. Anne Eisele, President of DeSoto,
met to coordinate the due diligence process.
On February 13, 1996, Messrs. Curdy, Spier and Ms. Eisele met with
representatives of Keystone's primary lender to discuss possible funding for
DeSoto.
On March 5, 1996, Mr. Curdy met with representatives of the PBGC to discuss
the proposed merger and the subsequent merger of the Keystone and DeSoto defined
benefit pension plans.
On March 13, 1996, Keystone and DeSoto issued press releases indicating
that the parties were involved in discussions about a proposed merger at the
Proposed Exchange Ratio. Thereafter, the parties continued due diligence
proceedings and began negotiating the terms of the Reorganization Agreement and
the related agreements.
On June 13, 1996, the Board of Directors of Keystone met to consider the
proposed Reorganization Agreement and the transactions contemplated thereby. At
such meeting, members of Keystone's senior management, together with Keystone's
legal and financial advisors, reviewed with the Keystone Board of Directors,
among other things, the background of the proposed transaction, the potential
benefits and risks of the transaction, including the strategic and financial
rationale, analysis of the transaction and the terms of the Reorganization
Agreement. PaineWebber delivered its oral opinion (confirmed in writing as of
the date of the Reorganization Agreement) that the consideration to be paid by
Keystone is fair, from a financial point of view, to the stockholders of
Keystone (except that as to Contran and its affiliates PaineWebber did not
express an opinion). See "-- Opinions of Financial Advisors -- Opinion of
PaineWebber, Financial Advisor to Keystone" for a discussion of the factors
considered and the analytical methods employed by PaineWebber in reaching such
conclusion. The Keystone Board of Directors unanimously approved the principal
terms of the Reorganization Agreement and the transactions contemplated thereby.
The Keystone Board of Directors also
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unanimously approved the principal terms of the Voting Agreements (including the
possible acquisition of beneficial ownership of Keystone Common Stock pursuant
thereto by DeSoto for purposes of Section 203 of the DGCL), the Warrant
Conversion Agreement, the Preferred Stockholder Waiver and Consent Agreement,
and the Stockholders' Agreement. See "The Reorganization Agreement -- Related
Agreements; Interests of Certain Persons in Matters Acted Upon."
On June 13, 1996, the Board of Directors of DeSoto met to consider the
proposed Reorganization Agreement and the transactions contemplated thereby. At
such meeting, members of DeSoto's senior management, together with DeSoto's
legal and financial advisors, reviewed with the Board, among other things, the
background of the proposed transaction, the potential benefits and risks of the
transaction, including the strategic and financial rationale, analysis of the
transaction and the terms of the Reorganization Agreement. Salomon Brothers
delivered its oral opinion (confirmed in writing as of the date of the Joint
Proxy Statement/Prospectus) that as of that date, the Exchange Ratio was fair,
from a financial point of view, to the holders of DeSoto Common Stock. See
"-- Opinions of Financial Advisors -- Opinion of Salomon Brothers, Financial
Advisor to DeSoto" for a discussion of the facts considered and the analytical
methods employed by Salomon Brothers in reaching such conclusion. The DeSoto
Board of Directors unanimously approved the Reorganization Agreement and the
transactions contemplated thereby. The DeSoto Board of Directors also
unanimously approved the principal terms of the Voting Agreements and the
Preferred Stockholder Waiver and Consent Agreement (including the possible
acquisition by Keystone of beneficial ownership of DeSoto Common Stock and
DeSoto Preferred Stock pursuant thereto for purposes of Section 203 of the
DGCL). See "The Reorganization Agreement -- Related Agreements; Interests of
Certain Persons in Matters Acted Upon."
Following the Keystone and DeSoto Board meetings and through June 26, 1996,
the Reorganization Agreement and the related agreements were finalized. Keystone
and DeSoto each executed the Reorganization Agreement and related agreements on
June 26, 1996, and the Reorganization Agreement was announced immediately
thereafter by the issuance of press releases.
The Exchange Ratio and other terms of the Merger were determined in
arms-length negotiations between the management teams and the Boards of
Directors of the two companies. The Exchange Ratio was determined after
consideration of, among other things, the shares, options and warrants
outstanding of each company, the relative trading prices of the two companies'
stock over various periods of time, the companies' respective capital structures
and pension funding status, historical and prospective revenues and operating
profits, the respective growth rates of the two companies, the business
prospects of the combined company, the relative contributions of the two
companies to the business, liquidity and financial condition of the combined
company and consultation with the financial advisors of the companies (who
participated in discussions regarding the Exchange Ratio but did not determine
or recommend the Exchange Ratio).
REASONS FOR THE MERGER
Keystone's Reasons for the Merger
The Board of Directors has determined the terms of the Reorganization
Agreement and the transactions contemplated thereby, which were established
through arms-length negotiations with DeSoto, are fair to, and in the best
interests of, Keystone and its stockholders. Accordingly, the Board of Directors
of Keystone has unanimously approved the Reorganization Agreement and
unanimously recommends the stockholders of Keystone vote FOR approval of the
issuance of shares pursuant to the Reorganization Agreement. In reaching its
determination, the Board of Directors consulted with Keystone's management, as
well as its legal counsel and financial advisor, and considered a number of
reasons and factors, including the following:
(i) At June 30, 1996, Keystone's defined benefit pension plans were
underfunded by approximately $33 million and the net pension liabilities
adjustment in common stockholders' equity amounted to approximately $31
million. Based on Keystone's and DeSoto's balance sheets at June 30, 1996,
the Merger and subsequent merger of the Keystone and DeSoto defined benefit
pension plans would result in an increase of approximately $66 million in
Keystone's common stockholders' equity due to the issuance of approximately
3,500,000 shares of Keystone Common Stock and the elimination of the net
pension
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liabilities adjustment. Additionally, the proposed merger of the pension
plans would also result in the elimination of the $33 million accrued
pension liability and recording of an approximate $102 million pension
asset. See Note 2 to the Unaudited Pro Forma Consolidated Financial
Information.
(ii) The merger of the Keystone defined benefit pension plans with and
into the DeSoto defined benefit pension plan should also result in lower
pension contributions and pension expense than Keystone has historically
experienced. The anticipated increase in cash flows due to lower pension
contributions should eventually more than offset the cash payments required
to be made as a result of the Merger. Likewise, it is expected the decrease
in pension expense will also more than offset the increase in interest
expense from the higher borrowings required to fund payments required by
the Merger, thus resulting in increased earnings. See Note 2 to the
Unaudited Pro Forma Consolidated Financial Information.
(iii) In addition to an improved balance sheet and the anticipated
favorable impact on cash flows and reduction in pension expense, Keystone's
Board of Directors also believes the increased public holdings of
Keystone's Common Stock, as a result of the issuance of approximately
3,500,000 shares to the DeSoto stockholders, will make Keystone Common
Stock more attractive to potential investors and increase the liquidity of
Keystone Common Stock.
In the course of its deliberations, the Board of Directors of Keystone
reviewed and considered a number of other factors relevant to the Merger with
Keystone's management. In particular, the Keystone Board considered, among other
things:
(i) information concerning Keystone's and DeSoto's respective
businesses, prospects, financial performances, liquidity, financial
condition and operations;
(ii) the comparative stock prices of Keystone Common Stock and DeSoto
Common Stock;
(iii) an analysis of the respective contributions to revenues,
operating profits, net profits and cash flows of the combined companies;
and
(iv) a presentation by PaineWebber, including the opinion of
PaineWebber that the consideration to be paid by Keystone pursuant to the
Merger was fair from a financial point of view to Keystone stockholders
(other than Contran and its affiliates) as well as the underlying financial
analysis of PaineWebber presented in connection therewith.
Following its deliberations concerning such factors and its review of the
presentation and financial opinion of PaineWebber, the Board of Directors of
Keystone concluded the Merger may improve the long-term prospects of the
combined company for earnings growth, may increase stockholder value and was in
the best interest of Keystone and its stockholders from both a financial and
strategic perspective.
In connection with its deliberations, the Keystone Board of Directors was
aware of the potential benefits to be received in the Merger by Contran and its
affiliates, as described in "Risk Factors -- Interests of Certain Persons in the
Merger" and "The Reorganization Agreement -- Related Agreements; Interests of
Certain Persons in Matters Acted Upon."
The Board of Directors of Keystone also considered a variety of potentially
negative factors in its deliberations concerning the Merger, including: (i) the
possible dilutive effect of the issuance of Keystone stock in the Merger; (ii)
the risk that the public market price of Keystone's stock might be adversely
affected by announcement of the Merger; (iii) the costs expected to be incurred
in connection with the Merger, including the transaction costs and payments
required by the Merger; (iv) the risk that other benefits sought to be obtained
by the Merger will not be obtained; and (v) other risks described above under
"Risk Factors."
In view of the wide variety of factors considered in connection with its
evaluation of the proposed Merger, the Board of Directors did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination, each
of which was viewed as supportive of its conclusion that the terms of the
Reorganization Agreement are fair to, and in the best interest of, Keystone and
all of its stockholders.
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THE KEYSTONE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT KEYSTONE
STOCKHOLDERS VOTE TO APPROVE THE ISSUANCE OF KEYSTONE COMMON STOCK PURSUANT TO
THE REORGANIZATION AGREEMENT.
DeSoto's Reasons for the Merger
The DeSoto Board of Directors has determined the terms of the
Reorganization Agreement and the transactions contemplated thereby, which were
established through arms-length negotiation with Keystone, are fair to, and in
the best interests of, DeSoto and its stockholders. Accordingly, the Board of
Directors of DeSoto has unanimously approved the Reorganization Agreement and
unanimously recommends the stockholders of DeSoto vote FOR approval and adoption
of the Reorganization Agreement. In reaching its determination, the Board of
Directors consulted with DeSoto's management, as well as its legal counsel and
financial advisor, and considered a number of reasons and factors, including the
following:
(i) The conclusion that the only strategic alternatives available to
DeSoto were either termination of DeSoto's overfunded pension plan or a
sale of DeSoto or another extraordinary corporate transaction providing
value to stockholders and resolving DeSoto's liquidity problems. This
conclusion resulted from the Board's ongoing review of DeSoto's past
performance and future prospects. DeSoto has suffered negative cash flow
from operations (excluding one time items, such as insurance settlements)
for a number of years and has attempted to address the resultant cash flow
and business consequences in a number of ways. In March 1992, the DeSoto
Board adopted a resolution eliminating the regular quarterly dividend on
DeSoto Common Stock. In the second half of 1992, DeSoto raised $3.5 million
through the sale of warrants and DeSoto Preferred Stock and acquired J. L.
Prescott Company, in an effort to improve its competitive position in the
industry and diversify its business. The results of this acquisition were
disappointing and DeSoto attempted to explore strategic alliances with
other companies in its industry beginning in late 1994. These efforts
focused on promoting and leveraging DeSoto's position in the industry as
well as on opportunities to enable it to preserve and maximize stockholder
value. No significant transactions resulted from these efforts and, in
order to raise cash, DeSoto, among other things, began to dispose of
certain assets in 1995 and 1996. (These dispositions are described in the
business description of DeSoto under "Information About DeSoto"). At the
same time, throughout 1995 and 1996, DeSoto continued to seek out
opportunities to maximize stockholder value, which objectives were publicly
announced in DeSoto's periodic filings with the Commission. In light of
DeSoto's continuing liquidity difficulties, remaining a public company
without termination of the pension plan was not viewed as a viable
alternative. In that regard, DeSoto's current agreement with its trade
creditors requires either consummation of the Merger or termination of the
pension plan. See "Information About DeSoto -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
(ii) The conclusion that the only strategic alternative identified by
DeSoto management to termination of the pension plan is the Merger. This
conclusion is based on the failure of discussions with a number of third
parties in 1995 and 1996 to result in any viable proposal to acquire DeSoto
or otherwise engage in a transaction resolving DeSoto's liquidity problems.
The DeSoto Board of Directors took into account the amount of time that had
transpired between the public announcement on March 13, 1996, of the terms
of a possible transaction with Keystone and its June 13 meeting without any
serious expression of interest from a third party regarding an alternative
transaction.
(iii) A comparison of the relative values likely to be realized by
DeSoto stockholders pursuant to the Merger and a termination of the pension
plan which resulted in the view that the Merger was likely to provide
significantly greater value per share of DeSoto Common Stock in the
foreseeable future. Although there is no assurance as to actual values of
the consideration to be received by DeSoto stockholders pursuant to the
Merger or of DeSoto Common Stock following a termination of the pension
plan, a number of factors were reviewed. These included the recent trading
ranges of Keystone Common Stock, the expected financial benefits of the
Merger to Keystone, the high rates of taxes applicable to the surplus
pension assets reverting to DeSoto upon a termination of the pension plan
(which since 1990, include, in addition to federal and state income taxes,
a federal excise tax of either 20% or 50% depending
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upon whether, among other things, a "qualified replacement plan" receiving
25% of surplus plan assets is established), and the uncertainty relating to
the business diversification opportunities for the use of excess cash
generated by the pension plan termination (distribution to stockholders was
not considered feasible in light of potential taxes payable by stockholders
and the need to maintain reserves for contingencies). In the course of its
review during 1995 and 1996 of the possibility of terminating the pension
plan, the DeSoto Board of Directors determined that a reasonable rough
estimate of possible ranges of values realizable through this alternative
might be between $3 and $6 per share of DeSoto Common Stock depending upon
values attributed to a qualified replacement plan, assumptions made
regarding the satisfaction of contingent and other liabilities, and an
expectation that operating losses from DeSoto's operating business would be
eliminated, possibly through the termination of this business. This
determination was not made with a view toward public disclosure and was
viewed as inherently uncertain and subject to significant variation from
actual values achievable, which may be materially higher or lower than this
rough estimate. This broad range of values was compared with the value to
be received pursuant to the Merger, which based on the market price of
Keystone Common Stock as of June 12, 1996 of $10 per share, would be
approximately $7.47 per share of DeSoto Common Stock (although the actual
market value of the Keystone Common Stock to be received in the Merger will
be dependent upon market conditions at the Effective Time, which may be
materially different from the market price as of June 12, 1996). See "Risk
Factors -- Lack of Liquidity of Keystone Common Stock; Purchase by Simmons'
Related Parties."
(iv) The terms of the Reorganization Agreement, including
(a) provisions requiring confirmation of the opinion of Salomon
Brothers as to the fairness from a financial point of view of the
Exchange Ratio to holders of DeSoto Common Stock as of one day before
the Effective Time; and
(b) the right of DeSoto to terminate the Reorganization Agreement
if it enters into an agreement relating to a superior proposal and to
provide information to, and negotiate with, third parties under certain
circumstances (the DeSoto Board did not view its obligation to pay the
$1 million Break-up Fee to Keystone and the restrictions on its ability
to discuss alternative transactions with third parties as unreasonably
precluding any third party from proposing an alternative transaction).
(v) The presentation of DeSoto's financial advisor, Salomon Brothers,
and its oral opinion to the effect that, as of June 13, 1996, and based
upon the assumptions made, matters considered and limits of review, the
Exchange Ratio was fair to the holders of DeSoto Common Stock from a
financial point of view. For a summary of Salomon Brothers written opinion
as of the date hereof and its presentation, see "-- Opinions of Financial
Advisors -- Opinion of Salomon Brothers -- Financial Advisor to DeSoto".
(vi) Information relating to the financial performance, prospects and
business operations of each of DeSoto and Keystone.
(vii) The willingness of the Warrant and Preferred Stockholders to
accept cancellation of one-half of their warrants to purchase DeSoto Common
Stock in order to generate additional value for other holders of DeSoto
Common Stock and facilitate the Merger.
(viii) The ability of holders of DeSoto Common Stock to continue to
own equity in a combined Keystone/DeSoto entity which is expected to
realize substantial financial benefits as a result of the Merger in a
transaction which should be non-taxable to holders of DeSoto Common Stock
for federal income tax purposes.
In considering the fairness of the terms of the Reorganization Agreement to
the holders of DeSoto Preferred Stock, the Board of Directors of DeSoto also
considered the following additional factors:
(i) The agreement by all of the holders of DeSoto Preferred Stock to
vote in favor of the Reorganization Agreement; and
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(ii) Keystone's agreement to pay an amount of cash to such holders in
an amount equal to accrued but unpaid dividends on the DeSoto Preferred
Stock.
In connection with its deliberations at its June 13, 1996 meeting, the
DeSoto Board of Directors was aware of the potential benefits to be received in
the Merger by DeSoto's officers and directors, as described under "The
Reorganization Agreement -- Related Agreements; Interests of Certain Persons in
Matters Acted Upon."
In view of the wide variety of factors considered in connection with its
evaluation of the proposed Merger, the Board of Directors did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination, each
of which was viewed as supportive of its conclusion that the terms of the
Reorganization Agreement are fair to, and in the best interest of, DeSoto and
its stockholders.
THE DESOTO BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT DESOTO
STOCKHOLDERS VOTE TO APPROVE AND ADOPT THE REORGANIZATION AGREEMENT.
BOARD RECOMMENDATIONS
THE BOARD OF DIRECTORS OF KEYSTONE BELIEVES THE MERGER IS FAIR TO, AND IN
THE BEST INTEREST OF KEYSTONE AND ITS STOCKHOLDERS AND, THEREFORE, UNANIMOUSLY
RECOMMENDS A VOTE FOR APPROVAL OF THE ISSUANCE OF SHARES OF KEYSTONE COMMON
STOCK PURSUANT TO THE REORGANIZATION AGREEMENT.
THE BOARD OF DIRECTORS OF DESOTO BELIEVES THE MERGER IS FAIR TO, AND IN THE
BEST INTERESTS OF, DESOTO AND ITS STOCKHOLDERS AND, THEREFORE, UNANIMOUSLY
RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE REORGANIZATION AGREEMENT.
OPINIONS OF FINANCIAL ADVISORS
Opinion of PaineWebber, Financial Advisor to Keystone
Keystone retained PaineWebber on May 16, 1996, to provide certain
investment banking advice and services in connection with the Merger, including
rendering its opinion as to the fairness, from a financial point of view to
Keystone stockholders (other than Contran and its affiliates), of the
consideration to be paid by Keystone in the Merger. At the June 13, 1996 meeting
of the Keystone Board of Directors, representatives of PaineWebber made a
presentation with respect to the Merger and rendered an oral opinion to the
Keystone Board, subsequently confirmed in writing as of the date of the
Reorganization Agreement, that, based upon the facts and circumstances as they
existed at the time, and subject to certain assumptions, factors and limitations
set forth in such opinion, the consideration to be paid by Keystone in the
Merger was fair, from a financial point of view, to Keystone stockholders (other
than Contran and its affiliates). No limitations were imposed by the Board upon
PaineWebber with respect to the investigations made or procedures followed by it
in rendering its opinion.
The full text of PaineWebber's written opinion, dated June 26, 1996, which
sets forth, among other things, assumptions made, matters considered and
limitations on the review undertaken, is attached as Appendix B to this Joint
Proxy Statement/Prospectus. Keystone stockholders are urged to read this opinion
in its entirety. PaineWebber did not recommend to Keystone that any specific
exchange ratios constituted the appropriate exchange ratio for the Merger.
PaineWebber's opinion is directed to the Keystone Board, addresses only the
fairness of the consideration to be paid by Keystone in the Merger to Keystone
stockholders (other than Contran and its affiliates) from a financial point of
view and does not constitute a recommendation to any Keystone stockholder as to
how such stockholder should vote at the Keystone Meeting. The opinion was
rendered to the Keystone Board for its consideration in determining whether to
approve the Reorganization Agreement. The discussion of the opinion in this
Joint Proxy Statement/Prospectus is qualified in its entirety by reference to
the full text of the opinion.
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In arriving at its opinion, PaineWebber, among other things: (i) reviewed,
among other public information, Keystone's Annual Reports, Forms 10-K and
related financial information for the five fiscal years ended December 31, 1995
and Keystone's Form 10-Q for the three months ended March 31, 1996; (ii)
reviewed Keystone's projections prepared by Keystone's management; (iii)
reviewed certain financial information relating to Keystone, including,
earnings, cash flow, assets and liabilities statements, furnished to PaineWebber
by Keystone; (iv) conducted discussions with senior management of Keystone
regarding (a) the Company's operations and business prospects, (b) DeSoto's
operations and business prospects and (c) certain studies prepared by Keystone
and its legal and accounting advisors relating to potential off-balance sheet
items; (v) considered the pro forma effect of the Merger on Keystone's cash flow
and earnings per share; (vi) considered the pro form balance sheet effects of
the Merger on Keystone; (vii) reviewed, among other public information, DeSoto's
Annual Reports, Forms 10-K and related financial information for the five fiscal
years ended December 31, 1995 and DeSoto's Form 10-Q for the three months ended
March 31, 1996; (viii) conducted interviews with senior management of DeSoto,
regarding DeSoto's operations, financial condition and business prospects; (ix)
reviewed the Reorganization Agreement dated June 26, 1996; and (x) reviewed such
other financial studies and analyses and performed such other investigations and
took into account such other matters as PaineWebber deemed necessary including
an assessment of regulatory, general economic, market and monetary conditions.
In preparing its opinion, PaineWebber relied on the accuracy and
completeness of all information that was publicly available or supplied or
otherwise communicated to PaineWebber by or on behalf of Keystone and DeSoto,
and PaineWebber has not assumed any responsibility to independently verify such
information. PaineWebber has assumed that the projections were reasonably
prepared on bases reflecting the best currently available estimates and good
faith judgments of the management of Keystone as to the future performance of
Keystone. In arriving at its opinion, PaineWebber assumed that, as a result of
the Merger and the follow on merger of the pension plans, Keystone's liabilities
calculated in accordance with generally accepted accounting principles with
respect to its pension plan will be eliminated and that certain projected
obligations of Keystone to fund such liabilities will be reduced. PaineWebber
has not undertaken, or caused to be taken, an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise, known or
unknown) of Keystone and DeSoto and has assumed that all material liabilities
(contingent or otherwise) are as set forth in Keystone's and DeSoto's respective
consolidated financial statements and other provided information. PaineWebber's
opinion is directed to the Board of Directors of Keystone and does not
constitute a recommendation to any shareholder of Keystone as to how such
shareholder should vote with respect to the issuance of Keystone Common Stock
pursuant to the Reorganization Agreement. PaineWebber's opinion does not address
the relative merits of the Merger and any other potential transactions or
business strategies discussed by the Board of Directors of Keystone as
alternatives to the Merger or the decision of the Board of Directors of Keystone
to proceed with consummation of the Merger.
PaineWebber assumed that there has been no material change in Keystone or
DeSoto's assets, financial condition, results of operations, business or
prospects since the date of the last financial statements made available to
PaineWebber. PaineWebber assumed no responsibility to revise or update its
opinion if there is a change in the financial condition or prospects of Keystone
and DeSoto from that disclosed or projected in the information PaineWebber
reviewed as set forth above or in the general, economic or market conditions.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative methods of financial analyses and
the application of these methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to partial analysis or summary
description. Furthermore, in arriving at its fairness opinion, PaineWebber did
not attribute any particular weight to any analysis or factor considered by it.
Accordingly, PaineWebber believes that its analysis must be considered as a
whole and that considering any portion of such analysis and of the factors
considered, without considering all analyses and factors, could create a
misleading or incomplete view of the process underlying its opinion. In its
analyses, PaineWebber made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of Keystone and DeSoto. Any estimates contained in
these analyses are not necessarily indicative of actual values or predictive of
future results or values, which may be, significantly more or less favorable
than as set forth
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therein, and neither Keystone, DeSoto, nor PaineWebber assumes any
responsibility for their accuracy. In addition, analyses relating to the value
of the business do not purport to be appraisals or to reflect the prices at
which businesses may actually be sold.
The following is a summary of the analyses prepared by PaineWebber in
connection with rendering its oral opinion to the Board of Directors of Keystone
on June 13, 1996.
Approach to Merger Analysis. Because Keystone expressed the view that it
was undertaking the Merger primarily to eliminate the underfunding of its
defined benefit pension plans, traditional forms of valuation analysis, such as
comparable company analysis and comparable transaction analysis, were not
considered meaningful indicators of value. Therefore, PaineWebber reviewed the
fairness of the Merger through the methodologies summarized below. The financial
projections of Keystone and DeSoto that were provided to PaineWebber were
utilized and relied upon by PaineWebber in its analyses summarized below.
Net Present Value (NPV). PaineWebber performed a 10-year net present value
(NPV) analysis to determine the difference between (x) the present value of the
pro forma cash flows contributed by DeSoto to Keystone, and (y) the
consideration paid by Keystone in the Merger and the liabilities assumed by the
surviving corporation to the Merger. For purposes of PaineWebber's analysis, and
based on discussions with Keystone and DeSoto management, it was assumed that
the DeSoto operating assets operate on a cash flow breakeven basis and thus have
no cash flow impact. It was also assumed that the combined pro forma pension
plan will terminate in year 10 following the Merger, and that after the Merger,
Keystone would not be subject to any cash payments for environmental liabilities
above insured and escrowed amounts. PaineWebber discounted the combined pro
forma cash flows using discount rates ranging from 7% to 8%.
Based on the above analysis, PaineWebber determined that the (x) present
value of the pro forma cash flows contributed by DeSoto to Keystone pursuant to
the Merger exceeded (y) the consideration paid by Keystone in the Merger and the
liabilities assumed by the surviving corporation to the Merger by a range of
between $4.8 million and $8.4 million.
Pro Forma Earnings Analysis. PaineWebber performed a five-year analysis of
the potential pro forma effect of the Merger on Keystone's earnings per share,
assuming the Merger had been completed in 1991 and that certain actuarial
assumptions for Keystone's defined benefit pension plans remained unchanged
during such five-year period. Under this analysis, Keystone would have shown
earnings per share accretion in each year ranging from a low of 5% in 1991 to a
high of 69% in 1993. As an alternative to the Merger (but using the foregoing
actuarial assumptions regarding the defined benefit pension plans), PaineWebber
assumed that Keystone sold $50 million of common equity in 1991 at prices
ranging from $9.25 to $11.25 per share for the purpose of reducing the
underfunding in its pension account. (Keystone's stock price at January 1, 1991
was $10.25.) In all instances, the Merger, if completed in 1991, would have been
more accretive on an earnings per share basis than Keystone's reported actual
earnings or the presumed sale of equity.
PaineWebber also performed a three-year analysis of the potential pro forma
effect of the Merger on Keystone's earnings per share assuming the Merger is
completed in 1996 and that certain actuarial assumptions for Keystone's defined
benefit pension plans remained unchanged during such three-year period. Under
this analysis, Keystone would have shown earnings per share accretion of 317%,
59% and 7% for the years ending December 31, 1996, 1997 and 1998, respectively.
As an alternative to the Merger (but using the foregoing actuarial assumptions
regarding the Keystone defined benefit pension plans), PaineWebber assumed that
Keystone sold $40 million of common equity in 1996 at prices ranging from $8.00
to $10.00 per share for the purpose of reducing the underfunding in its pension
account. In all instances, the Merger, if completed in 1996, was more accretive
on an earnings per share basis than Keystone's projected earnings or the
presumed sale of equity.
Balance Sheet Analysis. PaineWebber reviewed the pro forma balance sheet
effects of the Merger incorporating Keystone's balance sheet as of March 31,
1996 and DeSoto's projected balance sheet as of December 31, 1996. This analysis
showed that Keystone's liabilities increased from $235 million to $277 million
while common stockholders' equity increased from a negative $31 million to a
positive $40 million.
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Pursuant to a letter agreement dated May 16, 1996, between Keystone and
PaineWebber, Keystone has agreed to pay PaineWebber a fee of $225,000 for
rendering its opinion.
In addition, Keystone has agreed to reimburse PaineWebber for its
reasonable out-of-pocket expenses incurred in connection with rendering
financial advisory services, including fees and disbursements of its legal
counsel. This fee is payable regardless of the outcome of PaineWebber's opinions
and whether or not the Merger is consummated. Keystone has agreed to indemnify
PaineWebber and its directors, officers, agents, employees and controlling
persons, for certain costs, expenses, losses, claims, damages and liabilities
related to or arising out of its rendering of services under its engagement as
financial advisor.
The Board of Directors of Keystone retained PaineWebber to act as its
advisor based upon PaineWebber's qualifications, experience and expertise.
PaineWebber is an internationally recognized investment banking firm and, as a
customary part of its investment banking business, is engaged in the valuation
of businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, private placements and valuations for corporate and
other purposes. PaineWebber may actively trade the equity securities of Keystone
and DeSoto for its own account and for the account of its customers and,
accordingly, may at any time hold a long or short position in such securities.
Opinion of Salomon Brothers, Financial Advisor to DeSoto
DeSoto has retained Salomon Brothers to act as its financial advisor in
connection with the Merger. At the June 13, 1996 meeting of DeSoto's Board of
Directors, Salomon Brothers delivered its oral opinion to the Board of Directors
of DeSoto that, as of that date, the Exchange Ratio was fair to the holders of
DeSoto Common Stock from a financial point of view. On the date of this Joint
Proxy Statement/Prospectus, Salomon Brothers has delivered its written opinion
to the Board of Directors of DeSoto that, as of the date hereof, the Exchange
Ratio was fair to the holders of DeSoto Common Stock from a financial point of
view. No limitations were imposed by the Board of Directors of DeSoto upon
Salomon Brothers with respect to the investigations made or the procedures
followed by Salomon Brothers in rendering its opinions.
The full text of the written opinion of Salomon Brothers dated as of the
date of this Joint Proxy Statement/Prospectus, which sets forth the assumptions
made, matters considered, and limits on the review undertaken by Salomon
Brothers in rendering its opinion, is attached as Appendix C to this Joint Proxy
Statement/Prospectus. DeSoto stockholders are urged to read the opinion
carefully and in its entirety. Salomon Brothers' opinion addresses only the
fairness of the Exchange Ratio from a financial point of view to the holders of
DeSoto Common Stock as of the date of the opinion, and does not constitute a
recommendation to any stockholder of DeSoto as to how such stockholder should
vote at the DeSoto Meeting. The summary of the opinion of Salomon Brothers set
forth in this Joint Proxy Statement/Prospectus is qualified in its entirety by
reference to the full text of such opinion.
In arriving at its opinions, Salomon Brothers (i) reviewed the
Reorganization Agreement and its related schedules, (ii) reviewed certain
publicly available business and financial information relating to Keystone and
DeSoto, (iii) reviewed certain other information, including financial
projections, provided to Salomon Brothers by Keystone and DeSoto, (iv) reviewed
certain information relating to the defined benefit pension plans of Keystone
and DeSoto, and (v) conducted due diligence discussions with members of senior
management of both Keystone and DeSoto to discuss the past and current
operations and financial condition and prospects of Keystone and DeSoto. Salomon
Brothers also considered such other information, financial studies, analyses,
investigations and financial, economic and market criteria as it deemed
relevant.
In connection with its review, Salomon Brothers did not assume any
responsibility for independently verifying any of the foregoing information and
relied on such information being complete and accurate in all material respects.
With respect to the financial projections, Salomon Brothers assumed that they
had been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the management of Keystone and DeSoto, as the case
may be, as to the future financial performance of Keystone and DeSoto, as the
case may be. Salomon Brothers did not express any opinion with respect to such
projections or the assumptions on which they are based, including assumptions
regarding the effects of any outstanding or potential litigation,
investigations, inquiries or other actions. In addition, Salomon Brothers did
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not make an independent evaluation or appraisal of any of the assets of Keystone
or of DeSoto, nor was it furnished with any such appraisals. Each of Salomon
Brothers' opinions was necessarily based upon business, market, economic and
other conditions as they existed on, and could be evaluated as of, the
respective dates of such opinions, and did not address DeSoto's underlying
business decision to effect the Merger. Salomon Brothers' opinions do not imply
any conclusion as to the likely trading range for the Keystone Common Stock
following the consummation of the Merger, which may vary depending on, among
other factors, changes in interest rates, dividend rates, market conditions,
general economic conditions and other factors that generally influence the price
of securities.
In connection with its opinions, Salomon Brothers performed certain
financial analyses, which were reviewed with the Board of Directors of DeSoto at
its June 13, 1996 meeting. The following is a summary of these analyses.
Overview of Keystone. Salomon Brothers reviewed the business of Keystone
and its historical financial performance for the years 1991, 1992, 1993, 1994,
and 1995 and its latest twelve months ("LTM") as of March 31, 1996, including
for such periods net sales, percentage growth in net sales, cost of goods sold
("COGS"), COGS as a percentage of revenues, gross profit and gross profit
margins, selling, general and administrative expenses ("SGA") and SGA as a
percentage of revenues, earnings before interest, taxes, depreciation and
amortization ("EBITDA"), EBITDA margins, earnings before interest and taxes
("EBIT"), EBIT margins, net income, capital expenditures, capital expenditures
as a percentage of revenues and of depreciation, free cash flow (net income plus
depreciation less capital expenditures), free cash flow as a percentage of
revenues, total assets, and total net capitalization (stockholders' equity plus
net debt).
Comparison of Keystone to Selected Comparable Companies. Salomon Brothers
compared Keystone to a number of wire rod producers in the United States,
including GS Tech/Georgetown, North Star Steel, Raritan River Steel, American
Steel & Wire (a subsidiary of Birmingham Steel), CF&I, Northwestern Steel &
Wire, Cascade, Atlantic Steel, Connecticut Steel, Charter Steel, Laclede Steel
and Florida Steel. Of these companies, Keystone ranked fourth in terms of wire
rod capacity (after taking into account planned capacity for the other
companies). Salomon Brothers also compared certain financial and stock market
information relating to Keystone and five publicly traded mini-mill and rod and
wire companies (the "Comparable Group"), Birmingham Steel, Insteel Industries,
Laclede Steel, Northwestern Steel & Wire and Oregon Steel. This analysis
indicated that, based on weekly stock price data from June 10, 1994 through June
7, 1996, Keystone Common Stock has slightly outperformed the index of the stocks
of the Comparable Group over the last two years but has underperformed both the
index of the Comparable Group and the Standard & Poors Industrial Average for
the period from January 2, 1995 through June 10, 1996. Salomon Brothers also
compared certain stock market trading statistics for Keystone and the Comparable
Group), the ratio of market price to LTM earnings per share (which was 16.4x in
the case of Keystone and a median of 17.8x for the Comparable Group), the ratio
of market price to earnings per share for 1996 (which was 24.4x in the case of
Keystone and a median of 20.4x for the Comparable Group), the ratio of market
price to estimated 1997 earnings per share (which was 8.0x in the case of
Keystone and a median of 8.1x for the Comparable Group), and estimated five year
growth rates (which was not applicable for Keystone and a median of 11% for the
Comparable Group). Salomon Brothers also reviewed certain company valuation
statistics, including the ratio of "firm value" (the market value of equity plus
book value of debt and minority interests plus liquidation value of preferred
stock less excess cash) to LTM sales (which was 1.3x in the case of Keystone and
a median of .5x for the Comparable Group), the ratio of firm value to LTM EBITDA
as adjusted to reflect non-cash charges for pension and similar liabilities
(which was 9.6x in the case of Keystone and a median of 10.1x for the Comparable
Group), the ratio of firm value to LTM EBIT (which was 10.9x in the case of
Keystone and a median of 18.1x for the Comparable Group), and the ratio of firm
value as adjusted to include employee-related liabilities to LTM EBITDA after
adjusting for non-cash pension and similar liabilities (which was 6.0x in the
case of Keystone and a median of 7.8x for the Comparable Group). Salomon
Brothers compared certain operating performance statistics, including LTM EBITDA
margin (which was 6.5% for Keystone and a median of 7.5% for the Comparable
Group), LTM EBIT margin (which was 2.8% for Keystone and a median of 3.6% for
the Comparable Group), three-year historical sales growth (which was 0.0% for
Keystone and a median of 2.7% for the Comparable Group), and three-year
historical EBITDA growth (which was 11.6% for
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Keystone and a median of 10.5% for the Comparable Group). Sources of earnings
per share estimates were Institutional Brokers Estimate System and First Call,
which are data services that monitor and publish compilations of earnings
estimates produced by selected research analysts regarding companies of interest
to institutional investors.
Comparative Valuation Analysis. Salomon Brothers reviewed aggregate equity
values which could be realized by holders of DeSoto Common Stock pursuant to the
two strategic alternatives available to the Company, the Merger and termination
of DeSoto's pension plan. Salomon Brothers noted that based on the market price
of a share of DeSoto Common Stock on June 10, 1996 of $6.125, the market
capitalization of all DeSoto Common Stock was approximately $28.7 million. As
more fully described below, termination of the pension plan was estimated to
produce an aggregate value of approximately $5.3 million and the Merger would,
under various analyses, result in estimated aggregate values for DeSoto Common
Stock of between $27 million and $35 million, based on certain assumptions.
Valuation of Pension Plan Termination. Salomon Brothers calculated a net
value of between approximately $5 million and $5.5 million for DeSoto Common
Stock in the aggregate as a result of a termination of DeSoto's defined benefit
pension plan. This calculation was based upon a number of assumptions and
estimates, including the establishment of a "qualified replacement plan" to
which 25% of the surplus plan assets would be transferred and to which no value
was assigned in this valuation. Based upon approximately $159 million in plan
assets as of March 31, 1996 and an estimated cost of $81 million purchasing
annuities to satisfy plan obligations and the transfer of $19.5 million to a
qualified replacement plan, approximately $58.5 million of surplus assets would
revert to DeSoto on a pre-tax basis. After use of available net operating loss
carryforwards of approximately $20 million and the payment of federal income
taxes at an assumed rate of 35%, federal excise taxes at a rate of 20%, and
state income taxes at a rate of 4%, approximately $31.8 million of the surplus
reversion would remain. After application of these reversionary assets to
satisfy DeSoto's creditors and to redeem the DeSoto Preferred Stock in July
1997, approximately $14.5 million would remain. Salomon Brothers then calculated
a present discounted value of estimated payments DeSoto would be required to
make in respect of continued negative cash flow from DeSoto's operating business
and third party claims and contingent liabilities, including environmental
liabilities, employing weighted average costs of capital of between 14% and 18%
ranging between $9.4 million and $9.0 million. A range of aggregate equity
values between $5.0 and $5.5 million resulted (or between $1.07 and $1.18 per
share of DeSoto Common Stock). The assumptions employed in this analysis are not
necessarily indicative of actual costs and liabilities which would result from
termination of the DeSoto pension plan and, therefore, are not necessarily
indicative of actual values which would be realized by the holders of DeSoto
Common Stock in this situation.
Merger Valuation. Salomon Brothers reviewed the values of the consideration
to be paid to all holders of DeSoto Common Stock in the Merger based upon
"exchange ratio," "public market," and "discounted cash flow" analyses.
Exchange Ratio Analysis. Based upon a market price per share for Keystone
Common Stock on June 10, 1996 of $10, the issuance of an aggregate of 3,500,000
shares of Keystone Common Stock to the holders of DeSoto Common Stock, Salomon
Brothers calculated an aggregate value of $35 million for the Merger. This
represented a 22% premium to the $6.125 per share market price of DeSoto Common
Stock and a 560% premium to the value calculated for the pension plan
termination described above ("Plan Termination Value").
Public Market Analysis. Salomon Brothers analyzed possible trading market
values for shares of Keystone Common Stock following the Merger, after taking
into account the merger of the pension plans of the two companies and assumed
cost savings of $1 million per year. The analysis indicated that as a result of
the Merger earnings per share for Keystone Common Stock would be $.87 for LTM
and 1996, based upon projections of Keystone management as adjusted downward by
Salomon Brothers. (This analysis indicated that the Merger would result in 41.8%
earnings per share accretion for Keystone Common Stock for the LTM.) Based on a
market price per share of Keystone Common Stock of $10 on June 10, 1996, the
price to earnings multiple for Keystone Common Stock was approximately 16.3x for
LTM earnings per share. Based on price to earnings multiples ranging from 10x to
12.5x calculated 1996 earnings per share; Salomon Brothers
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calculated an aggregate common equity value for Keystone following the Merger of
between $80.4 million and $100.5 million (or an implied per share price for
Keystone Common Stock ranging from $8.75 to $10.93). The share of this equity
value allocated to holders of DeSoto Common Stock in the Merger would be between
$30.6 million and $38.3 million. This would result in a premium to DeSoto's
current market capitalization ranging from 27.5% to 59.4%, and to Plan
Termination Value ranging from 477.7% to 622.1%. In arriving at these estimates
of possible trading values for Keystone Common Stock, Salomon Brothers advised
the DeSoto Board that these estimated ranges of possible trading values were
relevant only to the trading of the stock on a fully distributed basis and after
adequate dissemination of financial and operating information relating to
Keystone. Salomon Brothers advised that trading in Keystone Common Stock for a
period following the Merger could be characterized by a redistribution of such
securities among the stockholders of DeSoto immediately preceding the Merger and
other investors and, accordingly, such securities may be subject to downward
price pressures during this period resulting in trading prices below the
estimated ranges. In addition, in connection with this presentation, Salomon
Brothers advised the DeSoto Board that any estimate of trading ranges is
speculative, and subject to uncertainties and contingencies, all of which are
difficult to predict and beyond the control of Salomon Brothers. Therefore, the
actual trading prices of the Keystone Common Stock may be outside the estimated
range and will depend upon, and fluctuate with, changes in interest rates,
market conditions, the condition and prospects, financial and otherwise, of
Keystone and other factors which generally influence the prices of securities.
Discounted Cash Flow Analysis. Salomon Brothers calculated ranges of equity
value for Keystone following the Merger based upon the value, discounted to the
present, of its fiscal year end five-year stream of projected cash flow and
projected fiscal year 2000 terminal values based upon a range of multiples of
projected fiscal year 2000 earnings before interest, taxes, and depreciation.
Salomon Brothers applied discount rates ranging from 12% to 14% and multiples
for terminal values ranging from 6x to 8x EBITDA. Based on this analysis,
Salomon Brothers calculated a discounted cash flow value of all Keystone Common
Stock ranging from $70.6 million to $119.8 million. The present value of the
Keystone Common Stock to be received by holders of DeSoto Common Stock in the
Merger would range from $26.8 million to $45.5 million based upon this analysis
(or a range of $7.67 to $13.01 per share of DeSoto Common Stock). This analysis
indicated that the premium of the discounted cash flow value to DeSoto's current
market capitalization ranged from 8% to 43% and the premium to the Plan
Termination Value ranged from 485% to 674%.
In connection with its opinion dated as of the date of this Proxy
Statement/Prospectus, Salomon Brothers reviewed the analyses used to render its
June 13, 1996 oral opinion to the DeSoto Board of Directors in order to confirm
that no changes had occurred which would materially impact the opinion.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying the opinions of Salomon Brothers. In arriving at its fairness
determination, Salomon Brothers considered the results of all such analyses and
did not assign relative weights to any of the analyses.
The analyses were prepared solely for the purpose of Salomon Brothers
providing its opinions to the DeSoto Board of Directors as to the fairness from
a financial point of view of the Exchange Ratio to holders of DeSoto Common
Stock and do not purport to be appraisals or necessarily reflect the prices at
which businesses or securities actually may be sold, which are inherently
subject to uncertainty. Any estimates incorporated in the analyses performed by
Salomon Brothers are not necessarily indicative of actual past or future values
or results, which may be significantly more or less favorable than any such
estimates. No public company utilized as a comparison is identical to Keystone
or the business segment for which a comparison is being made. Accordingly, an
analysis of publicly traded comparable companies is not mathematical; rather it
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the comparable companies and other
factors that could affect the public trading value of the comparable companies
to which they are being compared. In connection with the analyses, Salomon
Brothers made, and were provided estimates and forecasts by DeSoto and Keystone
management based upon, numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of Keystone and DeSoto. Similarly, analyses based
upon
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forecasts of future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than suggested by
such analyses. Because such analyses are inherently subject to uncertainty,
being based upon numerous factors or events beyond the control of DeSoto and
Keystone or their respective advisors, none of Keystone, DeSoto, Salomon
Brothers or any other person assumes responsibility if future results or actual
values are materially different from these forecasts or assumptions. The
opinions of Salomon Brothers necessarily were based on the economic, market and
other conditions as in effect on, and the information made available to them as
of, the dates of their opinions. The foregoing summary is qualified by reference
to the written opinion of Salomon Brothers set forth in Appendix C to this Joint
Proxy Statement/Prospectus.
As described above, the opinions and presentation of Salomon Brothers to
the DeSoto Board of Directors were only one of a number of factors taken into
consideration by the DeSoto Board of Directors in making its determination to
approve the Reorganization Agreement. In addition, the terms of the Merger were
determined through negotiations between Keystone and DeSoto and were approved by
the DeSoto Board of Directors. The decision to enter into the Reorganization
Agreement and to accept the Exchange Ratio was solely that of the DeSoto Board
of Directors.
The Board of Directors of DeSoto selected Salomon Brothers to act as its
financial advisor and render a fairness opinion because Salomon Brothers is an
internationally recognized investment banking firm with substantial expertise in
transactions similar to the Merger. As part of its investment banking business,
Salomon Brothers regularly engages in the valuation of business and other
securities in connection with mergers and acquisitions and for other purposes.
With respect to Salomon Brothers' services as a financial advisor to DeSoto
in connection with the Merger, DeSoto has agreed to pay Salomon Brothers a fee
of $250,000, payable upon the earlier to occur of the consummation of the Merger
or termination of DeSoto's pension plan. This fee is payable regardless of the
outcome of Salomon Brothers' opinions and whether or not the Merger is
consummated. DeSoto also has agreed to reimburse Salomon Brothers for its
reasonable out-of-pocket expenses (including reasonable fees and expenses of its
legal counsel) and to indemnify Salomon Brothers and certain related persons
against certain liabilities, including liabilities under the federal securities
laws, arising out of its engagement.
In the ordinary course of its business, Salomon Brothers may actively trade
in the securities of Keystone and DeSoto for its own account and for the
accounts of its customers and, accordingly, may at any time hold a long or short
position in such securities.
THE REORGANIZATION AGREEMENT
REPRESENTATIONS AND COVENANTS
Under the Reorganization Agreement, Keystone and DeSoto made a number of
representations regarding their respective capital structures, operations,
financial conditions and other matters. Each party agreed as to itself and its
subsidiaries that until consummation of the Merger or the earlier termination of
the Reorganization Agreement, it will, among other things, conduct its business
and maintain its business relationships in the ordinary and usual course, and
use its best efforts to consummate the Merger. DeSoto has agreed not to solicit,
engage in discussions, negotiate with any person or facilitate the efforts of
any person other than Keystone relating to an Alternative Acquisition, except
that DeSoto's Board of Directors may provide information to and engage in
negotiations with a third party regarding an Alternative Acquisition if (i) the
Board of Directors of DeSoto receives a Superior Proposal; (ii) the Board of
Directors of DeSoto determines, based on the advice of its investment bankers,
that such third party is financially capable of consummating such Superior
Proposal; (iii) the Board of Directors of DeSoto shall have determined, after
consultation with outside legal counsel, that the fiduciary duties of the Board
require DeSoto to furnish information to and negotiate with such third party;
and (iv) at least two (2) business days prior thereto, Keystone shall have been
notified in writing of such Superior Proposal, including all of its terms and
conditions and the foregoing determination by the Board of Directors of DeSoto,
and shall have been given copies of such proposal. DeSoto shall not be entitled
to enter into an agreement concerning an Alternative Acquisition for a
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period of not less than forty-eight hours after Keystone's receipt of a copy of
such proposal and certain other information.
Keystone has agreed, if the Merger is consummated, to indemnify the current
officers and directors of DeSoto with respect to any claim or liability arising
out of or pertaining to any act or omission occurring prior to the Effective
Time to the fullest extent that DeSoto could have done so on June 26, 1996.
Keystone has further agreed, for a period of six (6) years following the
Effective Time, to cause DeSoto to maintain indemnification and limitation of
liability provisions. Keystone has also agreed to (i) provide director and
officer insurance coverage, at a cost not to exceed $150,000, for the current
directors and officers of DeSoto for one year after the Effective Time for
claims made against such directors and officers relating to matters occurring
prior to the Effective Time, and (ii) provide, after the Effective Time,
director and officer insurance coverage to Keystone directors comparable to the
coverage maintained by DeSoto at the Effective Time, to the extent such coverage
may be obtainable at a comparable cost.
CONDITIONS TO THE MERGER
In addition to the requirement that Keystone stockholders approve the
issuance of Keystone Common Stock pursuant to the Reorganization Agreement and
DeSoto stockholders approve and adopt the Reorganization Agreement, the
consummation of the Merger is subject to a number of other conditions which, if
not satisfied or waived, would cause the Merger not to be consummated and the
Reorganization Agreement to be terminated. Each party's obligation to consummate
the Merger is conditioned upon, among other things, (i) the accuracy of the
other party's representations, (ii) each party's performance of its obligations
under the Reorganization Agreement, (iii) the absence of a material adverse
change in the condition (financial or otherwise), properties, assets,
liabilities, businesses, or results of operations of the other party and its
subsidiaries taken as a whole, (iv) the PBGC raising Keystone's borrowing
restrictions to an amount reasonably expected to enable Keystone to perform its
obligations under the Reorganization Agreement, (v) availability to Keystone of
sufficient financing in order to effect the Merger and to satisfy its
obligations and those of the surviving corporation in the Merger, (vi) receipt
of opinions of counsel in respect of certain federal income tax consequences of
the Merger, (vii) receipt of opinions dated one business day before the closing
of the Merger from the financial advisors to each of Keystone and DeSoto as to
the fairness from a financial point of view of the consideration to be paid by
Keystone and received by DeSoto stockholders, (viii) the absence of legal action
preventing consummation of the Merger, and (ix) the receipt of other documents,
including necessary consents of third parties (including governmental agencies).
Keystone's obligation to consummate the Merger is further conditioned upon,
among other things, (i) the consent by DeSoto's trade creditors to the term of
repayment contemplated by the Reorganization Agreement and (ii) the resolution
on terms satisfactory to Keystone of certain claims arising from DeSoto's
acquisition of J.L. Prescott Company.
DeSoto's obligation to consummate the Merger is further conditioned upon,
among other things (i) approval for listing on the NYSE, subject to official
notice of issuance, of the shares of Keystone Common Stock to be issued pursuant
to the Merger, and (ii) the Board of Directors of Keystone taking appropriate
action to increase the number of directors comprising Keystone's full Board of
Directors from seven to nine, and to cause William Spier and William P. Lyons to
be directors of Keystone upon the effectiveness of the Merger. At any time on or
prior to the Merger, to the extent legally allowed, Keystone or DeSoto, without
approval of the stockholders of such respective companies, may waive compliance
with any of the agreements or satisfaction of any of the conditions contained in
the Reorganization Agreement for the benefit of that company.
HSR ACT
Transactions such as the Merger are reviewed by the Department of Justice
and the Federal Trade Commission (the "FTC") to determine whether they comply
with applicable antitrust laws. Under the provisions of the HSR Act, the Merger
may not be consummated until such time as certain information has been furnished
to the Department of Justice and the FTC and the specified waiting period
requirements of the
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HSR Act have been satisfied. Notification reports were filed by Keystone and
DeSoto with the Department of Justice and the FTC under the HSR Act on July 22,
1996, and termination of the specified waiting period requirements of the HSR
Act was granted on August 2, 1996.
At any time before or after the Effective Time of the Merger, the
Department of Justice, the FTC, state attorneys general or a private person or
entity could challenge the Merger under the antitrust laws and seek, among other
things, to enjoin the Merger or to cause Keystone to divest itself, in whole or
in part, of DeSoto. Based on information available to them, Keystone and DeSoto
believe that the Merger will not violate federal or state antitrust laws.
However, there can be no assurance that a challenge to the Merger on antitrust
grounds will not be made or that, if such a challenge is made, Keystone and
DeSoto would prevail or would not be required to accept certain conditions,
possibly including certain divestitures or hold-separate agreements in order to
consummate the Merger.
Keystone and DeSoto are aware of no other governmental or regulatory
approvals required for consummation of the Merger, other than compliance with
applicable securities and "blue sky" laws of the various states.
RELATED AGREEMENTS; INTERESTS OF CERTAIN PERSONS IN MATTERS ACTED UPON
In considering the recommendations of the Boards of Directors of Keystone
and DeSoto with respect to the Reorganization Agreement and the Merger,
stockholders of Keystone and DeSoto should be aware that certain affiliates and
members of management of Keystone and DeSoto have interests in the Merger in
addition to the interests of holders of Keystone Common Stock and DeSoto Common
Stock generally. See "Risk Factors -- Interests of Certain Persons in the
Merger."
Warrant Conversion Agreement
Pursuant to the Warrant Conversion Agreement, upon consummation of the
Merger, one-half of the DeSoto Warrants to purchase an aggregate of 1,200,000
shares of DeSoto Common Stock will be cancelled and the remaining one-half of
the DeSoto Warrants will be converted into warrants to purchase 447,900 shares
of Keystone Common Stock (representing the shares of DeSoto Common Stock subject
to the remaining DeSoto Warrants multiplied by the Exchange Ratio) at an
exercise price of approximately $9.38 per share (representing the exercise price
of a DeSoto Warrant divided by the Exchange Ratio).
Preferred Stockholder Waiver and Consent Agreement
The Warrant and Preferred Stockholders have entered into a Preferred
Stockholder Waiver and Consent Agreement with Keystone, pursuant to which they
agreed their DeSoto Preferred Stock will be converted in the Merger into
Keystone Preferred Stock (at the Exchange Ratio of a share of Keystone Preferred
Stock for each share of DeSoto Preferred Stock) and cash in an amount equal to
accrued and unpaid dividends on the DeSoto Preferred Stock (which, as of the
Effective Time, will aggregate approximately $1.7 million), and that they will
waive their right to require redemption of the DeSoto Preferred Stock as a
result of the consummation of the Merger. The Warrant and Preferred Stockholders
have agreed to (i) waive any appraisal rights such owner may have under the DGCL
as a result of the Merger, and (ii) vote their shares of DeSoto Common Stock and
DeSoto Preferred Stock in favor of approval and adoption of the Reorganization
Agreement.
Stockholders Agreement
At the time the Reorganization Agreement was entered into, Keystone, the
Warrant and Preferred Stockholders, DeSoto and Contran entered into a
Stockholders Agreement pursuant to which (i) Keystone agreed to assume from
DeSoto certain registration rights currently held by the Warrant and Preferred
Stockholders as they relate to Keystone Common Stock to be acquired by such
persons in the Merger, and (ii) Keystone granted to Contran and its affiliates
the same rights as Keystone had assumed with respect to the Warrant and
Preferred Stockholders. These rights provide that the Warrant and Preferred
Stockholders and Contran and certain of its affiliates, respectively, each will
have the right to (i) require two registrations of
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Keystone Common Stock held by such party on an appropriate registration
statement, with the expenses for the first such registration by the respective
parties being paid by Keystone, and (ii) include for resale shares of Keystone
Common Stock held by such party in a registration statement prepared by
Keystone, to the extent such included shares would not adversely affect any
securities offering by Keystone. Keystone also agreed not to grant any party
rights superior to those being granted to the parties to the Stockholders
Agreement.
Severance Arrangements
DeSoto has agreements with four employees relating to a change in control
of DeSoto, including the Merger, and severance. Pursuant to one of these
agreements, Anne Eisele, President and Chief Financial Officer of DeSoto, will
receive her salary, currently $160,000 annually, and continued medical, dental
and insurance benefits for a period of two (2) years if, after a change of
control, her employment is terminated under certain circumstances, and any such
payments to Ms. Eisele would be in lieu of other severance payments. Under
another of these contracts, Fred Flaxmayer, Controller and Chief Accounting
Officer of DeSoto, is entitled to receive a $50,000 bonus within thirty (30)
days of a change of control of DeSoto and, if his employment is terminated under
certain circumstances, within one (1) year of a change of control, Mr. Flaxmayer
will receive severance payments equal to nine (9) months of his annual salary of
$90,000 and payments under DeSoto's normal severance policy. Two other employees
of DeSoto have agreements providing for the payment of bonuses aggregating
$60,000 within thirty days of a change of control of DeSoto and, if their
employment is terminated under certain circumstances within one year of a change
in control, severance payments aggregating approximately $70,000. Accordingly,
the maximum amount payable pursuant to these four agreements is approximately
$590,000.
Voting Agreements
The Warrant and Preferred Stockholders and Anders U. Schroeder,
collectively the owners of 596,989 shares of DeSoto Common Stock and 583,333
shares of DeSoto Preferred Stock, representing approximately twenty two percent
(22%) of DeSoto's outstanding voting stock, have entered into an agreement with
Keystone; and Contran, the direct owner of 3,161,733 shares of Keystone Common
Stock, representing approximately fifty six percent (56%) of Keystone's
outstanding voting stock, has entered into an agreement with DeSoto, pursuant to
which such stockholders have agreed they will (i) vote their shares in favor of
approval of the issuance of shares pursuant to the Reorganization Agreement, in
the case of Contran, or in favor of approval and adoption of the Reorganization
Agreement, in the case of the Warrant and Preferred Stockholders and Mr.
Schroeder, and (ii) not transfer any of their shares of Keystone Common Stock or
DeSoto Common Stock or DeSoto Preferred Stock, as the case may be, subject to
certain exceptions.
Options
Upon consummation of the Merger, DeSoto Options will be assumed by Keystone
and converted into options to acquire shares of Keystone Common Stock, See "The
Merger and Related Transactions -- General -- Assumption of Options and
Conversion of Warrants." Prior to the Merger, the terms of the DeSoto Options
will be amended to permit the exercise of the DeSoto Options until the second
anniversary of the Effective Time. Currently, the DeSoto Options generally
expire 90 days after termination of employment with DeSoto. Pursuant to the
Reorganization Agreement, the converted DeSoto Options will be registered under
the Securities Act on a Registration Statement on Form S-8. As of August 21,
1996, directors and officers held DeSoto Options to purchase an aggregate of
125,800 shares of DeSoto Common Stock.
AMENDMENT OF THE REORGANIZATION AGREEMENT
The Reorganization Agreement may be amended by Keystone or DeSoto at any
time before or after approval of the issuance of shares in connection with the
Merger or the Reorganization Agreement, as the case may be, by the stockholders
of Keystone and DeSoto, except that, after such stockholder approval, no
amendment may be made which by law requires the further approval of such
stockholders without obtaining such approval. In the event the parties desire to
enter into an amendment to the Reorganization Agreement
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that materially alters the terms of the Merger, the parties will circulate an
Amended Joint Proxy Statement/Prospectus to solicit stockholder approval.
TERMINATION OF THE REORGANIZATION AGREEMENT
The Reorganization Agreement may be terminated by mutual agreement of both
parties or by either party (i) as a result of a breach by the other party of a
representation, warranty, covenant or agreement set forth in the Reorganization
Agreement, or if any representation of the other party becomes untrue, in either
case which has or can reasonably be expected to have a Material Adverse Effect
(as defined in the Reorganization Agreement) and which the other party fails to
cure prior to the closing of the Merger (except that no cure period is provided
for a breach which by its nature cannot be cured); (ii) if the required
approvals of the stockholders of Keystone or DeSoto are not obtained by reason
of the failure to obtain the required vote; (iii) if all the conditions for
closing the Merger are not satisfied or waived on or before December 31, 1996,
other than as a result of a breach of the Reorganization Agreement by the
terminating party or a breach by any of the principal stockholders or affiliates
of the terminating party; or (iv) if a permanent injunction or other order by a
federal or state court which would make illegal or otherwise restrain or
prohibit the consummation of the Merger is issued and has become final and
nonappealable.
The Reorganization Agreement may be terminated by Keystone if prior to
consummation of the Merger, DeSoto enters into an agreement with respect to an
Alternative Acquisition. The Reorganization Agreement may be terminated by
DeSoto if, prior to the consummation of the Merger, DeSoto receives a Superior
Proposal and there occurs a Superior Proposal Termination.
BREAKUP FEES
The Reorganization Agreement provides for the payment of the Breakup Fee of
$1 million by DeSoto to Keystone if (i) the Reorganization Agreement is
terminated by Keystone where DeSoto has entered into an agreement with respect
to an Alternative Acquisition; (ii) the stockholders of DeSoto fail to approve
the Merger at a time when there is pending a proposal with respect to an
Alternative Acquisition; (iii) without the occurrence of a Keystone material
adverse change, the Board of Directors of DeSoto shall have failed to submit the
Merger to its stockholders for approval as required by, and in accordance with,
the terms of the Reorganization Agreement, or (iv) there occurs a Superior
Proposal Termination by DeSoto. The Breakup Fee is payable by Keystone to DeSoto
if, without a DeSoto material adverse change, the Board of Directors of Keystone
fails to hold a stockholders' meeting to vote on approval of the issuance of
Keystone Common Stock pursuant to the Reorganization Agreement as required by,
and in accordance with the terms of, the Reorganization Agreement. Payment of
the Breakup Fee shall not be in lieu of damages incurred in the event of breach
of the Reorganization Agreement, and neither party shall be entitled to receive
the Breakup Fee if it shall have committed a material breach of the
Reorganization Agreement.
KEYSTONE FINANCING ARRANGEMENTS
Pursuant to the Reorganization Agreement, Keystone is obligated to cause
DeSoto to pay approximately $6.5 million to certain of its trade creditors who
are parties to a trade composition agreement with DeSoto, as soon as practicable
after the Effective Time, and an additional approximately $1.5 million to such
trade creditors within one year of the Effective Time. Additionally, pursuant to
the Preferred Stockholder Waiver and Consent Agreement, Keystone is obligated,
at the Effective Time, to pay to the holders of the DeSoto Preferred Stock all
unpaid dividend arrearage, which will then amount to approximately $1.7 million.
As a result of these and other transactions related to the Merger, Keystone
will require additional funding from its primary lender. In order to obtain such
additional funds, Keystone has received the PBGC's consent and Keystone's
primary lender's commitment to increase Keystone's allowable borrowings by $20
million upon consummation of the Merger and the merger of the Keystone defined
benefit pension plans with and into the DeSoto defined benefit pension plan. The
PBGC's consent was necessary due to Keystone's prior agreements with the PBGC
whereby the PBGC and Keystone agreed to certain borrowing restrictions.
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CERTAIN FEDERAL INCOME TAX MATTERS
The following discussion summarizes the material federal income tax
considerations relevant to the exchange of DeSoto Common Stock for Keystone
Common Stock pursuant to the Merger. This summary is based upon opinions of
counsel delivered by Fried, Frank, Harris, Shriver & Jacobson and Godwin &
Carlton, P.C. which are included as Exhibits to the Registration Statement of
which this Joint Proxy Statement/Prospectus is a part (the "Tax Opinions") that
the Merger will qualify as a "reorganization" within the meaning of Section 368
of the Internal Revenue Code of 1986, as amended (a "Reorganization").
DeSoto stockholders should be aware this discussion does not deal with all
federal income tax considerations that may be relevant to particular
stockholders of DeSoto subject to special treatment under certain federal income
tax laws, such as stockholders who are banks, insurance companies, tax-exempt
organizations, dealers in securities, or non-United States persons, and persons
who do not hold their DeSoto Common Stock as capital assets, or who acquired
their shares in connection with stock options or stock purchase plans or in
other compensatory transactions. In addition, the following discussion does not
address the tax consequences of the Merger under foreign, state or local tax
laws. ACCORDINGLY, DESOTO STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE
APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE
MERGER IN THEIR PARTICULAR CIRCUMSTANCES AND THE EFFECT OF ANY PROPOSED CHANGE
IN THE TAX LAWS.
Subject to the limitations and qualifications referred to herein,
qualification of the Merger as a Reorganization will result in the following
federal income tax consequences to the DeSoto Common Stockholders:
(a) No gain or loss will be recognized by holders of DeSoto Common
Stock upon the receipt of Keystone Common Stock in exchange for DeSoto
Common Stock pursuant to the Merger (except to the extent of cash received
in lieu of a fractional share of Keystone Common Stock);
(b) The aggregate tax basis of the Keystone Common Stock received by
DeSoto stockholders in the Merger will be the same as the aggregate tax
basis of DeSoto Common Stock surrendered in exchange therefor, less the tax
basis, if any, allocated to fractional share interests;
(c) The holding period of the Keystone Common Stock received by DeSoto
stockholders pursuant to the Merger will include the period for which
DeSoto Common Stock surrendered in exchange therefor was held, provided the
DeSoto Common Stock is held by the DeSoto stockholders as a capital asset
at the Effective Time; and
(d) A cash payment received by a holder of DeSoto Common Stock in lieu
of a fractional share will be treated as if such fractional share had been
issued to such holder in the Merger and then redeemed by Keystone for the
cash received. A stockholder of DeSoto receiving such cash will generally
recognize gain or loss upon such payment, equal to the difference (if any)
between such stockholder's basis in the fractional share and the amount of
cash received. Such gain or loss will be capital gain or loss if the DeSoto
Common Stock was held as a capital asset at the Effective Time, and will be
long-term capital gain or loss if the DeSoto Common Stock was held for more
than one (1) year.
In addition, the exchange of shares pursuant to the Merger will constitute
a change of ownership with respect to DeSoto, and thereafter, the future
utilization of the net operating losses of DeSoto existing at the Effective Time
may be limited by operation of Section 382 of the Internal Revenue Code of 1986,
as amended.
Neither Keystone nor DeSoto will recognize income, gain or loss as a result
of the consummation of the Merger.
No ruling has been or will be obtained from the Internal Revenue Service
(the "IRS") in connection with the Merger. DeSoto stockholders should be aware
the Tax Opinions do not bind the IRS and the IRS is
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therefore not precluded from successfully asserting a contrary opinion. The Tax
Opinions are also subject to certain assumptions, and are subject to the truth
and accuracy of certain representations made by Keystone, DeSoto and certain
stockholders of DeSoto regarding, among other things, the presence of a
continuing interest in DeSoto by DeSoto stockholders through their ownership of
Keystone Common Stock following the Merger. If the facts as represented are not
accurate, the Merger may fail to qualify as a Reorganization. In such case, a
DeSoto stockholder would recognize gain or loss equal to the fair market value
of the Keystone Common Stock received, less such stockholder's basis in the
DeSoto shares surrendered. The consummation of the Merger is conditioned on (i)
the receipt by Keystone of a supplementary opinion of Godwin & Carlton, P.C. as
of the Effective Time confirming that the Merger will qualify as a
Reorganization, and (ii) the receipt by DeSoto of a supplementary opinion of
Fried, Frank, Harris, Shriver & Jacobson as of the Effective Time confirming
that the Merger will qualify as a Reorganization.
ACCOUNTING TREATMENT
For financial reporting purposes, Keystone will account for the Merger by
the purchase method.
AFFILIATES' RESTRICTIONS ON SALE OF KEYSTONE COMMON STOCK
The approximately 3,500,000 shares of Keystone Common Stock to be issued in
the Merger will have been registered under the Securities Act by a Registration
Statement on Form S-4 and the Keystone Common Stock issuable upon exercise of
the DeSoto Options assumed by Keystone pursuant to the Reorganization Agreement
is expected to be registered under the Securities Act by a Registration
Statement on Form S-8, thereby allowing those shares to be traded without
restriction by all former holders of DeSoto who (i) are not deemed to be
"affiliates" (as that term is defined in Rule 145 under the Securities Act) of
DeSoto at the time of DeSoto Meeting, and (ii) do not become affiliates of
Keystone after the Merger. The shares of Keystone Preferred Stock and the shares
of Keystone Common Stock issuable upon exercise of the Keystone Warrants will
not be registered under the Securities Act and the transferability of such
shares will be restricted by Rule 144 under the Securities Act. DeSoto
stockholders who are identified by DeSoto as its affiliates will be so advised
prior to the Merger.
Sales by affiliates of DeSoto prior to the Merger and affiliates of
Keystone (before and after the Merger) must be made in accordance with Rules 144
or 145, or as otherwise permitted under the Securities Act. The volume
limitations of Rules 144 and 145 should not impose any material limitation on
any DeSoto stockholder who owns less than one percent of Keystone's outstanding
Common Stock after the Merger unless, pursuant to Rule 144, such stockholder's
shares are required to be aggregated with those of other stockholders. Under the
Stockholders' Agreement certain affiliates of DeSoto and related entities have
rights to require Keystone to register shares of Keystone Common Stock they
acquire.
APPRAISAL RIGHTS
Both Keystone and DeSoto are incorporated in the State of Delaware, and,
accordingly, are governed by the provisions of the DGCL. Pursuant to Section 262
of the DGCL, the holders of DeSoto Common Stock are not entitled to appraisal
rights in connection with the Merger because DeSoto Common Stock is quoted on
the NYSE and such stockholders will receive as consideration in the Merger only
shares of Keystone Common Stock, which shares will be listed on the NYSE upon
the closing of the Merger, and cash in lieu of fractional shares. In addition,
the Keystone stockholders are not entitled to appraisal rights under Section 262
of the DGCL because Keystone Common Stock is listed on the NYSE and, even though
approval of such stockholders is required for the issuance of Keystone Common
Stock in the Merger, the approval of the stockholders of Keystone is not
required for the Merger itself.
Pursuant to Section 262 of the DGCL, the holders of the DeSoto Preferred
Stock will be entitled to appraisal rights in connection with the Merger.
However, the holders of the DeSoto Preferred Stock have agreed to waive their
appraisal rights pursuant to the Preferred Stockholder Waiver and Consent
Agreement. The Reorganization Agreement provides that, as a condition to
consummating the Merger, all terms and
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conditions of the Preferred Stockholder Waiver and Consent Agreement, including
such waivers, must be in full force and effect.
EXCHANGE OF CERTIFICATES
As soon as practicable after the Effective Time of the Merger, Keystone
will cause Chemical Mellon Shareholder Services, L.L.C. (the "Exchange Agent")
to mail to each stockholder of record of DeSoto Common Stock a letter of
transmittal with instructions to be used by such stockholder in surrendering
certificates which, prior to the Merger, represented shares of DeSoto Common
Stock in exchange for certificates representing shares of Keystone Common Stock.
Letters of transmittal will also be available as soon as practicable after the
Effective Time of the Merger at the offices of the Exchange Agent. After the
Effective Time of the Merger, there will be no further registration of transfers
on the stock transfer books of the Surviving Corporation of shares of DeSoto
Common Stock or Preferred Stock which were outstanding immediately prior to the
Effective Time of the Merger. SHARE CERTIFICATES SHOULD NOT BE SURRENDERED FOR
EXCHANGE PRIOR TO APPROVAL AND ADOPTION OF THE REORGANIZATION AGREEMENT AND THE
MERGER BY THE KEYSTONE AND DESOTO STOCKHOLDERS.
Upon the surrender of a DeSoto Common Stock certificate to the Exchange
Agent or to such other agent as may be appointed by Keystone together with a
duly executed letter of transmittal, the holder of such certificate will be
entitled to receive in exchange therefor the number of shares of Keystone Common
Stock to which the holder of DeSoto Common Stock is entitled pursuant to the
provisions of the Reorganization Agreement. In the event of a transfer of
ownership of DeSoto Common Stock which is not registered in the transfer records
of DeSoto, a certificate representing the appropriate number of shares of
Keystone Common Stock may be issued to a transferee if the certificate
representing such DeSoto Common Stock is presented to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer and
to evidence that any applicable stock transfer taxes have been paid, along with
a duly executed letter of transmittal.
Until a certificate representing DeSoto Common Stock has been surrendered
to the Exchange Agent, each such certificate will be deemed at any time after
the Effective Time to represent only the right to receive upon such surrender
the number of shares of Keystone Common Stock to which the DeSoto stockholder is
entitled under the Reorganization Agreement. Upon consummation of the Merger,
every share of DeSoto Common Stock will cease to be traded on the NYSE, and
there will be no further market for DeSoto Common Stock.
Pursuant to the Preferred Stockholder Waiver and Consent Agreement, the
holders of DeSoto Preferred Stock have agreed to tender their certificates, duly
endorsed, to Keystone at the Effective Time. At such time, Keystone will deliver
to such holders the Keystone Preferred Stock with a legend restricting the
transferability of such stock and such holders will receive a cash payment for
their fractional interests.
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DESCRIPTION OF KEYSTONE CAPITAL STOCK
Keystone is authorized by its Restated Certificate of Incorporation (the
"Keystone Certificate") to issue 12,000,000 shares of Keystone Common Stock and
500,000 shares of preferred stock, no par value, issuable in series.
Designation of Keystone Preferred Stock. Pursuant to the Reorganization
Agreement, 440,000 of the 500,000 shares of preferred stock of Keystone will be
designated as Series A Senior Preferred Stock. Keystone may redeem the Keystone
Preferred Stock, in whole or, from time to time in part, at a cash redemption
price equal to the Liquidation Preference (as defined below) (i) at any time
after July 21, 1997, or (ii) at any time if a majority of the Keystone Board of
Directors determines that redemption of the Keystone Preferred Stock is
necessary or appropriate to facilitate the Company's acceptance of a proposal to
acquire all of the Keystone Common Stock and at such time at least two-thirds of
the then outstanding shares of Keystone Preferred Stock are owned by the
original purchasers of such shares. Keystone must redeem the Keystone Preferred
Stock at a cash redemption price equal to the Liquidation Preference, to the
maximum extent legally permissible (i) on July 1, 2000; (ii) 30 days after a
change of control of Keystone; or (iii) if, within ten days after the exercise
of any warrants to purchase Keystone Common Stock by any of the Warrant and
Preferred Stockholders, such exercising Warrant and Preferred Stockholders
holding at least fifty percent (50%) of the outstanding shares of Keystone
Preferred Stock request redemption at fair market value in writing, provided,
however that Keystone will be required to redeem Keystone Preferred Stock only
to the extent that redemption payments are equal to the aggregate cash proceeds
to Keystone upon the exercise of such warrants.
Liquidation Rights. In the event of a liquidation, dissolution or winding
up of Keystone, no distribution will be made to holders of Keystone Common Stock
until holders of Keystone Preferred Stock have received $8.0375 per share plus
all accrued but unpaid dividends thereon, whether or not earned or declared (the
"Liquidation Preference"), to the date fixed for liquidation dissolution or
winding up. After satisfaction of the Liquidation Preference, holders of
Keystone Common Stock will be entitled pro rata to all the remaining assets
available for distribution to stockholders and no additional distributions will
be made to the holders of Keystone Preferred Stock.
Dividend Rights. Dividends are payable to holders of Keystone Preferred
Stock quarterly, at the rate of eight percent (8%) of the sum of the Liquidation
Preference of each share of Keystone Preferred Stock. If such dividends are in
arrears for four (4) quarterly periods at any time, dividends for any subsequent
quarterly periods are payable to holders of Keystone Preferred Stock at the rate
of ten percent (10%) of the sum of the Liquidation Preference of each share of
Keystone Preferred Stock, until the dividend arrearage exists for less than four
(4) quarterly periods. Holders of Keystone Common Stock are entitled to receive
dividends when, as and if declared by the Keystone Board of Directors out of
funds legally available therefor.
Voting Rights. Except as otherwise provided by law or the Keystone
Certificate, holders of Keystone Common Stock and Keystone Preferred Stock are
entitled to one vote in respect of each share of such stock on all matters voted
upon by the stockholders and will vote together as one class. Holders of
Keystone Common Stock and Keystone Preferred Stock are not entitled to
cumulative voting in election of directors. Accordingly, the holders of a
majority of the outstanding shares of Keystone Common Stock and Keystone
Preferred Stock are entitled to elect all the directors.
If any amount equal to the full accrued dividends for two or more quarterly
dividend periods shall not have been paid to holders of any shares of Keystone
Preferred Stock or any required redemption payments shall not have been paid,
holders of a majority of the Keystone Preferred Stock shall have, in addition to
any other voting rights, the exclusive right, voting separately as a single
class, to elect two additional directors of Keystone.
Miscellaneous. Holders of Keystone Common Stock and Keystone Preferred
Stock are not entitled to preemptive rights. The outstanding shares of Keystone
Common Stock are fully paid and non-assessable. Outstanding shares of Keystone
Common Stock are listed on the NYSE.
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INFORMATION ABOUT DESOTO
BUSINESS
DeSoto was incorporated in 1927 under the laws of Delaware. DeSoto's
principal executive offices and its only remaining operating facility are
located at 900 East Washington Street, Joliet, Illinois, 60433.
DeSoto currently operates in one industry segment, the manufacturing and
packaging of household products, primarily powdered and liquid laundry
detergents. Such operations include contract manufacturing and packaging of
household cleaning products. During 1996, DeSoto has operated facilities in
Joliet, Illinois and Union City, California. In April 1996, DeSoto announced the
sale of the domestic business and assets of its laundry detergent manufacturing
and distribution operations at its Union City facility to Star Pacific, Inc.
Star Pacific has subleased the Union City facility from DeSoto.
In July 1995, DeSoto announced the transfer and assignment of various
operations and assets involved in its former Thornton and South Holland,
Illinois businesses to two separate buyers. DeSoto assigned to the buyers the
rights to certain customers with respect to these businesses. Both transactions
also provided for DeSoto to receive royalties and other earn-out opportunities
over a three-year period in one case and over a four-year period in the other
case. The initial proceeds from these transactions were utilized to reduce
DeSoto's debt to its primary secured lender. For additional information, see
Note O of the Notes to DeSoto's Consolidated Financial Statements for the year
ended December 31, 1995.
Customers. DeSoto's sales include private label sales (including control
brands) and contract manufacturing. DeSoto manufactures its products on a make
and ship basis and carries a minimal buffer inventory for its private label
accounts; therefore, finished goods inventory levels are generally relatively
nominal. Generally, DeSoto extends standard industry terms to its customers. As
a result of the 1996 disposition of the Union City operations, DeSoto's current
sales are primarily to Sears. DeSoto expects that, in the foreseeable future,
sales to Sears will represent in excess of 75% of DeSoto's total sales. Although
DeSoto has been a supplier of Sears branded home laundry products for over 30
years, sales are currently conducted on open account and Sears could terminate
its relationship with DeSoto at any time. The loss of Sears as a customer would
have a material adverse effect on DeSoto's current business.
During 1995, DeSoto had four customers that accounted for approximately 55%
of sales; Sears (20%), Kmart (10%), Procter & Gamble (13%) and Benckiser (12%).
As a result of the 1995 and 1996 sales of certain businesses referred to above,
Kmart, Procter & Gamble and Benckiser are no longer customers of DeSoto. In
1994, Sears (16%), Kmart (15%) and Procter & Gamble (10%) accounted for an
aggregate of 41% of DeSoto's sales. In 1993, Sears (14%), Lever Brothers Company
(11%) and Kmart (10%) accounted for an aggregate of 35% of DeSoto's sales.
Distribution. DeSoto's private label and control label products are sold in
retail stores, including mass merchants and service centers. DeSoto primarily
uses its own sales force to sell its products. Products produced under contract
manufacturing agreements are generally distributed under arrangements made by
the purchaser.
Raw Materials. The primary raw materials used in DeSoto's products include
soda ash, surfactants, brighteners and packaging materials. In general, raw
materials and energy supplies have been available to DeSoto in adequate
quantities to meet the needs of its business and DeSoto believes raw materials
and energy supplies will, in general, be available to meet its anticipated
requirements for the foreseeable future.
As part of its quality control program, DeSoto subjects raw materials and
packaging components to quality tests upon purchase. DeSoto products are made to
predetermined specifications with quality tests conducted during production.
Competition. DeSoto faces significant competition in the household
detergent market. DeSoto believes there are 15 major domestic producers of
household detergent, of which the top five are the major national brand
detergent manufacturers who account for approximately 73% of industry sales. The
private label market represents approximately 3% of the household detergent
market and there are also approximately ten major
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second tier domestic producers, including DeSoto, that compete within this 3%
portion of the market. Several of these second tier producers also participate
in the contract packaging portion of the industry. DeSoto competes on the basis
of price, service and product quality and believes there is a heavy emphasis on
price in the marketplace. DeSoto believes it has expertise in a broad array of
detergent products and offers experience in contract packaging with major
companies.
Research and Development. During 1996, DeSoto anticipates its expenditures
on Company-sponsored research relating to the development of new products or the
improvement of existing products will be less than the $218,000 expended during
1995.
Patents, Licenses, Franchises and Concessions. In the opinion of DeSoto's
management, no material patents, licenses, franchises or concessions are held by
DeSoto. In addition, DeSoto has no licenses with foreign manufacturers.
Environmental Compliance. DeSoto believes its current operating facilities
are in material compliance with all presently applicable federal, state and
local laws regulating the discharge of materials into the environment, or
otherwise relating to the protection of the environment. Capital expenditures of
DeSoto attributable to compliance with such laws were not material in 1995 and
DeSoto anticipates such expenditures to be not material in 1996. For additional
information regarding accruals relating to environmental compliance with respect
to certain of DeSoto's former operations, see Note I of the Notes to DeSoto's
Consolidated Financial Statements for the year ended December 31, 1995 and
"-- Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Seasonality. DeSoto does not believe its business is seasonal; however,
promotional activities of its customers can result in increased sales during
specific time frames.
Employees. DeSoto had approximately 60 employees as of June 30, 1996, of
whom approximately 38 are represented by the United Paperworkers International
Union, AFL-CIO and its Local 903 (the "Paperworkers Union") and the District No.
55 of the International Association of Machinists, and Aerospace Workers,
AFL-CIO (the "Machinists Union"). The current collective bargaining agreements
with the Paperworkers Union and the Machinists Union expire in November 1996 and
August 1999, respectively. DeSoto believes its labor relations are satisfactory.
PROPERTIES
DeSoto's current manufacturing and warehousing operations are located in a
160,000 square foot facility in Joliet, Illinois. At June 30, 1996,
approximately 61% of this facility was used for warehousing and administrative
purposes. The property is well maintained and in good operating condition. In
general, DeSoto believes the facility is adequate for current production as well
as for a material increase in production.
In 1992, DeSoto sold three of its operating facilities (buildings and land)
to its defined benefit pension plan (the "DeSoto Pension Plan") and entered into
10-year leases by which DeSoto leased the facilities from the DeSoto Pension
Plan. This transaction included DeSoto's facilities in Joliet, Illinois,
Columbus, Georgia, and Union City, California. DeSoto ceased operations at the
Columbus, Georgia plant in March 1994 and the facility has been subleased to an
unrelated third party through September 30, 1997. Since April 1996, the Union
City facility has also been subleased to an unrelated third party. In December
1994, DeSoto sold its operating facility (building and land) in South Holland,
Illinois, to the DeSoto Pension Plan and leased it back. DeSoto ceased
operations at the South Holland, Illinois facility in October 1995. For further
information regarding these transactions, refer to "-- Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note C of the
Notes to DeSoto's Consolidated Financial Statements for the year ended December
31, 1995.
LEGAL PROCEEDINGS
DeSoto has been identified by governmental regulatory authorities as one of
the parties potentially responsible for the cleanup costs at a number of waste
disposal sites, several of which are on the EPA Superfund priority list. In
addition, damages are being claimed against DeSoto in private actions for
alleged
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personal injury or property damage in the case of certain other waste disposal
sites. See also "-- Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note I of the Notes to DeSoto's Consolidated
Financial Statements for the year ended December 31, 1995.
Lundman Development Corporation v. DeSoto, Inc. DeSoto was served with a
summons and complaint filed in the United States District Court for the Eastern
District of Wisconsin on September 8, 1994. The complaint alleges, inter alia,
that DeSoto violated the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") with respect to property DeSoto once owned in Fredonia,
Wisconsin. DeSoto has denied the allegations in the complaint. Motions for
summary judgment are pending, and a September 1996 trial date has been set.
Ninth Avenue Remedial Group et al v. Allis-Chambers Corporation et
al. DeSoto was named in a complaint filed in the United States District Court
for the Northern District of Indiana on December 6, 1994. The complaint alleges
DeSoto and numerous other parties are jointly and severally responsible under
CERCLA for the cleanup and future cleanup of the site. Also, the EPA issued an
administrative order against DeSoto under Section 106(a) of CERCLA demanding
that DeSoto undertake remediation at the Ninth Avenue site. DeSoto has responded
that it intends to comply with all terms of the order. The matter is in the
discovery stage.
United States of America v. Akzo et al. DeSoto was named in a complaint,
dated March 31, 1995, and filed in the United States District Court for the
Eastern District of Michigan. The complaint, filed on behalf of the EPA,
alleges, inter alia, that DeSoto and four other parties are responsible under
Section 107 of CERCLA for costs the EPA incurred at the Metamora Landfill site
in Lapeer, Michigan. The complaint also seeks a declaration under Section 113 of
CERCLA that DeSoto is liable for the EPA's future costs that may be incurred at
this site. Separately, on June 13, 1996, DeSoto was served with a complaint,
also filed in the United States District Court for the Eastern District of
Michigan, entitled Foamseal, Inc., et al. v. The Dow Chemical Co., et al., by a
group of firms seeking, inter alia, contribution from DeSoto and numerous other
parties for remediation costs being incurred by the plaintiff firms at the named
site. DeSoto's defense in these actions have been assumed by the company and its
principal shareholder from which DeSoto purchased certain assets of the business
which is alleged to be partially responsible for the alleged contamination at
this site. The former owners of the company have also agreed to indemnify DeSoto
with respect to the claims asserted in the complaints.
DeSoto received a unilateral amended Administrative Order dated March 25,
1996, issued by the EPA under Section 106 of CERCLA, alleging DeSoto is a
potentially responsible party in connection with the Marina Cliffs site in South
Milwaukee, Wisconsin. DeSoto presently believes it has no liability for the
claims made relating to the site.
Pennsauken Solid Waste Management Authority v. State of New Jersey DEP, et
al. On or about December 14, 1995, DeSoto was served with an amended complaint
filed in the New Jersey Superior Court, Camden County, alleging, inter alia,
that DeSoto and numerous other parties are jointly and severally responsible for
the disposition of hazardous wastes at the Pennsauken Sanitary Landfill in New
Jersey. An earlier complaint naming DeSoto was dismissed without prejudice.
Gerling-Service Nederland, BV v. DeSoto, Inc. In 1992, a claim was filed
against DeSoto in the Eastern Division of the Danish High Court by an insurance
carrier to a third party, for property damage allegedly incurred when a
fertilizer product manufactured by the third party, containing a chemical sold
to that party by one of DeSoto's discontinued operations, allegedly caused, or
promoted, a fungus infection resulting in failure of certain tomato crops in the
United Kingdom. The damages alleged are approximately $1.4 million. DeSoto's
defense, with a reservation of rights, has been undertaken by one of its
insurance carriers.
In re DeSoto, Inc. Shareholder Litigation. There are several shareholder
actions pending in the Delaware courts relating to various proposals of Sutton
Holding Corp. to acquire DeSoto in the period 1989 to 1991. These actions, all
of which were consolidated, have not been actively pursued and it appears the
case was removed from the court's calendar; however, the plaintiffs recently
served a discovery request upon DeSoto. DeSoto believes these actions are not
material.
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DeSoto, Inc. v. Liberty Mutual Insurance Company. On August 23, 1995,
DeSoto commenced an action in the United States District Court for the District
of New Jersey, seeking contract and declaratory relief with respect to
environmental insurance coverage that DeSoto purchased from Liberty Mutual
Insurance Company. The matter is now in the pre-trial discovery.
Fort Dearborn Lithograph Co. v. DeSoto, Inc. DeSoto was served with a
summons and complaint on July 19, 1995, filed by Fort Dearborn Lithograph Co. in
the Circuit Court of Cook County, Illinois, seeking to collect allegedly unpaid
invoices for goods and services, of approximately $500,000. The final
disposition of this action has been stayed, based on a payment arrangement made
with this creditor.
Liquid Container, L.P. v. DeSoto, Inc. DeSoto was served with a summons and
complaint on December 6, 1995, filed by Liquid Container, L.P. in the Circuit
Court of Cook County, Illinois, claiming breach of contract and damages relating
to a transaction involving, in part, DeSoto's former blow molding operations.
DeSoto has asserted a number of defenses and counterclaims. The action is in the
early stages of pre-trial discovery.
Rooney v. DeSoto, Inc., et al. This action was filed in 1991 in the
District Court of Tarrant County, Texas, by various emergency healthcare
providers against DeSoto, among others, claiming damages for alleged personal
injuries purportedly related to an industrial accident involving a DeSoto
employee at its former facility in Fort Worth, Texas. The case has now been set
for trial in the fall of 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Liquidity and Capital Resources
DeSoto continues to experience losses from operations and negative
operating and financing cash flows. As part of a continuing effort to manage its
accounts payable and cash flow requirements, DeSoto, as of January 1996,
executed a Trade Composition Agreement (the "Trade Composition Agreement") with
its trade creditors as represented by a committee of six major trade creditors
and an agent for DeSoto's trade creditors (the "Trade Agent"). The Trade
Composition Agreement includes a form of Standstill Agreement (the "Standstill
Agreement") executed by DeSoto's trade creditors related to accounts payable
existing as of September 22, 1995. Under the Standstill Agreement, if certain
conditions are met, the creditors who are party to such agreement ("Qualified
Trade Creditors") have agreed not to initiate litigation or other efforts to
collect amounts owed to them. As part of the Trade Composition Agreement, DeSoto
initiated the termination of its overfunded defined benefit pension plan to be
effective upon the receipt of appropriate governmental approvals. DeSoto has
agreed to pay each Qualified Trade Creditor the balance owed to that creditor,
plus interest from July 1, 1996, at a rate of 8% per annum, within 10 days of
receipt of the reverted excess DeSoto Pension Plan assets. The Trade Composition
Agreement stipulates DeSoto may suspend efforts to terminate its defined benefit
pension plan if DeSoto enters into a binding agreement for a merger, asset sale
or similar transaction, involving substantially all of DeSoto's assets, if such
binding agreement provides that all Qualified Trade Creditors will be paid in
full. The Trade Composition Agreement provides that upon the receipt (the
"Requisite Consent Amount") by the Trade Agent and DeSoto of executed Standstill
Agreements from trade creditors holding at least 80% in dollar amounts of the
outstanding trade claims as reflected on DeSoto's books and records (other than
amounts owed to Procter & Gamble and Witco Chemical), DeSoto agreed to execute
and deliver a security agreement (the "Security Agreement") granting a security
interest and lien on all of DeSoto's assets to collateralize the obligations of
DeSoto to the Qualified Trade Creditors. As a result of the Reorganization
Agreement, DeSoto is no longer pursuing the pension plan termination. If the
Merger is not consummated, DeSoto will reinstate the pension plan termination
process.
On or about May 9, 1996, under the Trade Composition Agreement, the Trade
Agent and DeSoto received the Requisite Consent Amount and thereafter, DeSoto
and the Trade Agent executed the Security Agreement. The Security Agreement
provides that DeSoto may consummate the transactions contemplated by the
Reorganization Agreement provided that DeSoto provides assurances reasonably
satisfactory to the Trade Agent that the provisions of the Reorganization
Agreement relating to payment of DeSoto's trade creditors will be satisfied. See
"The Reorganization Agreement -- Keystone Financing Agreements."
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As a result of its liquidity problems, DeSoto is currently operating on a
cash on delivery or limited credit basis with respect to purchases of supplies
and raw materials. DeSoto has been able to operate within these constraints and
expects to be able to continue to do so for the foreseeable future. DeSoto
currently has no outstanding secured debt or revolving credit arrangements.
DeSoto also expects to fund operations in 1996 with proceeds from insurance and
other settlements and spot factoring of accounts receivable. The disposition of
businesses during 1995 and 1996 and the resulting shut-down of certain operating
facilities are expected to reduce the cash required to fund remaining operations
in the future.
DeSoto reported negative operating cash flows of approximately $1.2 million
during the first six months of 1996 which was primarily funded by the proceeds
from the sale, in February 1996, of machinery and equipment formerly used at
facilities sold in 1995. The Company has also factored certain accounts
receivable from time to time to address short-term cash requirements. Proceeds
of $4.3 million were received from factoring during the first six months of
1996, of which $1.3 million related to invoices due after June 30, 1996. The
proceeds from the sale of DeSoto's Union City, California facility in April 1996
did not have a material impact on DeSoto's cash flows or financial position. See
also "Unaudited Pro Forma Consolidated Information."
Accounts receivable at June 30, 1996 decreased versus December 31, 1995,
reflecting the fact there were no second quarter sales to Proctor & Gamble (due
to the April 1996 sale of the Union City facility), an increase in the allowance
for doubtful accounts, an offset of accounts receivable and payable relative to
certain parties who were both debtors and creditors of DeSoto, and an increase
in the level of factored receivables. The trade receivables are net of the
factored accounts receivable as discussed above.
Lower inventory levels at June 30, 1996 verses December 31, 1995 reflect
DeSoto's efforts to manage its cash flow, as well as the impact of the Union
City disposition discussed above.
The decline in property, plant and equipment during the first six months of
1996 reflects the sale of machinery and equipment in February 1996 as discussed
above and the sale of the machinery and equipment at the Union City facility in
April 1996. The balance of the reduction in property, plant and equipment
represents depreciation.
The reduction in non-current assets during the first six months of 1996
reflects reclassification of certain amounts to current as well as a reserve
against certain assets due to questions with respect to realizability.
The reduction in trade payables at June 30, 1996 as compared to December
31, 1995, reflects continued cost control efforts as well as an offset of
accounts receivable and payable relative to certain parties who were both
debtors and creditors of DeSoto. Reserves and liabilities related to
restructuring programs increased during the first six months of 1996 due to
provisions for expenses related to the disposition of the Union City, California
operations. Significant components of this accrual include the write-down of
property, plant and equipment to net realizable value, future rental commitments
on a leased warehouse and severance pay.
Cash flows from operations in 1995 were a positive $1 million and included
cash proceeds of $6.1 million from insurance settlements related to the cost of
cleanup at certain hazardous waste sites. Cash flows from operations also
reflects the impact of no longer carrying receivables or inventory related to
the businesses sold during 1995.
Accounts receivable at December 31, 1995, when compared to December 31,
1994, also reflects a reduction in trade accounts receivable due to the impact
of reduced sales resulting in part from the business dispositions. Inventory
levels have declined during the same time period due in part to lower
requirements stemming from the lower sales levels as well as the continued
impact of a product rationalization/inventory control program.
The decline in DeSoto's property, plant and equipment during 1995 reflects
the 1995 business dispositions, the sale of equipment no longer used in
operations as well as the write-down to net realizable value of property, plant
and equipment at DeSoto's former South Holland facility. In addition, the excess
of depreciation over capital expenditures in 1995 contributed to the overall
reduction in net property, plant and equipment.
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The decline in other noncurrent assets during 1995 was due primarily to the
third quarter write-off of approximately $3.3 million of goodwill related to the
businesses sold by DeSoto during 1995. This write-off of goodwill was partially
offset by a minimum long-term royalty receivable of $1.5 million recorded as
part of the sale of the businesses.
Reserves and liabilities related to restructuring programs increased during
1995 primarily due to provisions for expenses related to the disposition, and
related shutdown, of DeSoto's South Holland facility. Significant components of
this accrual include future rental payments to the DeSoto Pension Plan and
future real estate taxes on the property.
DeSoto has been identified by governmental regulatory authorities as one of
the parties potentially responsible for the cleanup costs at a number of waste
disposal sites and for certain alleged contamination. In addition, damages are
being claimed against DeSoto in private actions for alleged personal injury or
property damages in the case of some of the waste disposal sites. Accruals have
been made for the estimated costs of DeSoto's expected resulting liability.
These estimates are subject to numerous variables, the effects of which are
difficult to measure, including the stage of the investigations, the nature of
potential remedies, the joint and several liability with other potentially
responsible parties and other issues. Accordingly, these waste site accruals
represent DeSoto's best estimate of its potential exposure. It is the opinion of
DeSoto's management, after evaluating the variables discussed above, as well as
the anticipated time frame for remediation, that the resolution of environmental
liabilities will not have a material adverse effect on DeSoto's financial
position, results of operations or liquidity. Of the $2 million accrued as a
current liability at June 30, 1996 for waste site cleanup, $755,000 is fully
funded by a trust fund which is included in restricted short-term investments in
DeSoto's balance sheet. This fund was established in 1990 as part of the sale of
specific discontinued operations of DeSoto and may be accessed by DeSoto and, in
certain circumstances, a certain purchaser of the discontinued operations. In
1995, DeSoto paid out approximately $2.3 million on waste site related
liabilities, excluding legal and administrative costs; and of this amount, $1.1
million and $29,000 was disbursed, respectively, from the trust fund and
restricted cash account discussed above. Based upon currently available
information, DeSoto's management is unable to determine the timing of future
payments for that portion of the waste site liability which has been classified
as long-term. For additional information regarding DeSoto's waste site cleanup
liability, refer to Note I of the Notes to DeSoto's Consolidated Financial
Statements for the year ended December 31, 1995.
Results of Operations
Six Months Ended June 30, 1996 Versus Six Months Ended June 30, 1995.
DeSoto's net revenues for the first six months of 1996 were $9.5 million versus
$35.2 million in the comparable 1995 period. Results of operations for the 1995
six-month period include DeSoto's former Thornton and South Holland businesses
which were sold in July 1995 and the Union City business sold in April 1996. The
disposed businesses accounted for approximately $26.9 million of net revenues in
the first six months of 1995 and $2 million of net revenues in the first six
months of 1996. Excluding sales of the disposed businesses, net revenues in the
first half of 1996 were $7.5 million, down 10% from $8.3 million in the first
half of 1995, primarily as a result of lower sales levels to customers other
than Sears.
Gross profit for the 1996 six month period was $1.1 million versus a loss
in 1995 of $574,000. The change in customer mix resulting from the sales of
certain businesses referred to above contributed to the 1996 increase in gross
profit.
Sales to Sears in the first six months of 1996 were slightly higher than
the same period of 1995 as volume increases in the first quarter of 1996 were
largely offset by a decline in selling prices. Contract packaging revenues
declined in the first six months of 1996 versus the 1995 comparable period
largely due to a change in the manner of doing business with Procter & Gamble.
The Procter & Gamble business in 1995 included packaging materials that had been
purchased by DeSoto on behalf of Procter & Gamble. However, in 1996 the
packaging materials were furnished by Procter & Gamble which resulted in a
corresponding decrease in revenues and cost of sales. A temporary change in
Procter & Gamble's purchasing pattern during the first quarter of 1996 resulted
in increased volume and gross profit during the first six months of 1996, as
compared
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to the comparable 1995 period, at DeSoto's Union City facility. Sales by DeSoto
to Procter & Gamble were discontinued as of April 1996 upon disposition of the
Union City facility.
Selling, general and administrative expenses were $2.7 million in the first
six months of 1996 versus $5.7 million in the comparable 1995 period. This
decrease primarily reflects the disposition of the Thornton, South Holland and
Union City businesses.
Nonrecurring expense in the first six months of 1996 amounted to $1.6
million and primarily reflects provisions in the first quarter of 1996 for
expenses related to the disposition of the Union City facility. Significant
components of the provisions include the write-down of fixed assets to net
realizable value, future rental commitments on a leased warehouse and severance
pay.
Interest expense in the first six months of 1995 related to borrowings
repaid in September 1995 when DeSoto's credit facility with its primary secured
lender was terminated. Nonoperating expense for the first six months of 1996 of
$1.2 million represents the provision for an allowance against certain
receivables related to disposed businesses. The nonoperating income in the
comparable 1995 period primarily resulted from approximately $6.1 million in
insurance settlements and royalty income of $244,000 related to technology sold
by DeSoto in 1990.
1995 versus 1994. Results of operations for 1995 reflect the disposition of
DeSoto's Thornton and South Holland, Illinois businesses in July 1995. These
businesses accounted for approximately $27.2 million of net revenues in 1995
versus $51.7 million of net revenues during 1994.
Overall net revenues in 1995 decreased approximately 40% versus the prior
year. Net revenues from the continuing business in 1995 (excluding the 1995
business dispositions) decreased approximately 29% from 1994. This decline can
be attributed largely to a decrease in sales to two customers: Sears and Lever.
Sales to Sears in 1995 were approximately $3.5 million lower than the previous
year; a decrease of approximately 25%. This decline was partially attributable
to promotional activity in 1994 as well as competitive pressures that had a
negative impact on sales in general. Sales to Lever in 1994 included
approximately $2.0 million of sales of autodish gel and concentrated fabric
softener and $1.3 million of sales of fabric softener sheets. Lever transferred
this business out of DeSoto during the second and third quarters of 1994 and
DeSoto no longer manufactures either product.
Sales to Kmart in 1995 were approximately $8.2 million lower than sales in
1994. Sales were made to Kmart as part of the businesses which were sold in July
of 1995. Approximately $3.4 million of the decline in sales to Kmart occurred
before the disposition of these businesses.
The 1995 decline in gross profit from the 1994 level resulted from pricing
pressures, changes in product and customer mix, reduced volume, increased
packaging costs and unrecovered fixed costs at certain of DeSoto's operating
facilities. In addition, DeSoto continued to manufacture products through
October 1995 for the buyer of one of the businesses it sold in 1995. These
products were sold to the buyer at prices that approximated cost.
Selling, general and administrative costs declined approximately 15% in
1995 versus 1994. This decline reflects the elimination of administrative
personnel subsequent to the business dispositions in 1995 as well as continued
cost containment efforts. Selling, general and administrative expenses in 1994
also included the operation of DeSoto facilities in Columbus, Georgia, which
closed in March 1994, and Stone Mountain, Georgia, which closed in July 1994.
Nonrecurring expense in 1995 included a net loss on the sale of the
Thornton and South Holland, Illinois businesses (including the write-off of
related goodwill of $3.3 million) and a $3.1 million provision for costs
associated with the resulting closure of operating facilities due to these
dispositions.
Interest expense in 1995 related to borrowings repaid in September 1995
when DeSoto's credit facility with its primary secured lender was terminated.
Nonoperating income in 1995 included approximately $6.1 million from insurance
settlements and approximately $244,000 of royalty income related to technology
sold by DeSoto in 1990.
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1994 Versus 1993. In 1994, DeSoto's net revenues decreased approximately
14% from 1993. This decrease was primarily the result of lower sales to Lever
and the loss of a customer to which DeSoto made $5 million in sales during 1993.
Other losses of existing business and gains of new business for the most part
offset each other. The 1993 revenues also included approximately $3.1 million in
sales related to a former business of DeSoto, the assets and business of which
were sold in December 1993. Sales to Lever declined approximately $7 million
versus 1993 as a result of Lever transferring its autodish gel business to one
of Lever's own production facilities and its fabric sheet business to another
company during 1994.
The 1994 decline in gross profit as compared to 1993 was attributable to
changes in customer and product mix. Competitive pricing pressures in the
marketplace depressed pricing. New business obtained in 1994 was, in most cases,
at a lower gross profit than the lost business it replaced. There was also
continued pressure to participate in advertising and promotional support of
various customers resulting in a negative impact on gross profit.
Selling, general, and administrative costs in 1994 were reduced
significantly from 1993 levels. Approximately $1.2 million of this reduction
related to the fact that 1993 results included an entire year of expenses
related to the former business of DeSoto which was sold in December 1993. The
shutdown of DeSoto's Columbus and Stone Mountain, Georgia facilities also
resulted in a reduction in selling, general and administrative costs of
approximately $500,000 in 1994. The disposition of DeSoto's former headquarters
facility in 1993 resulted in the elimination of approximately $750,000 in
carrying costs in 1993. In 1993 there was a significant reduction in legal fees
and outside professional fees resulting from the settlement of various
outstanding legal matters and reflected DeSoto's continued focus on cost control
and containment across all functions of DeSoto.
Nonoperating income in 1994 included the settlement of arbitration related
to a portion of a business sold in 1990. Other components of nonoperating income
included a settlement related to fees paid for professional services and royalty
income related to technology sold by DeSoto in 1990.
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STOCK OWNERSHIP OF MANAGEMENT AND OTHERS
The following table sets forth certain information as of July 31, 1996
(except as otherwise indicated) regarding the beneficial ownership of shares of
voting stock of DeSoto held by (i) directors, (ii) each person or entity known
to DeSoto who beneficially owns more than 5% of the outstanding DeSoto Common
Stock or DeSoto Preferred Stock, (iii) the officers of DeSoto, and (iv) all
directors and officers of DeSoto as a group. Except as otherwise indicated, each
person or entity has sole voting and investment power of the shares listed. For
purposes of this table, shares which are not outstanding but which are subject
to DeSoto Options or DeSoto Warrants are deemed to be outstanding for purposes
of computing the percentage of outstanding shares of the class owned by the
holder of the DeSoto Options or DeSoto Warrants but are not deemed to be
outstanding for the purpose of computing the percentage of the class owned by
other persons.
<TABLE>
<CAPTION>
COMBINED
OWNERSHIP OF
DESOTO
AMOUNT AND COMMON AND
NATURE OF APPROXIMATE AMOUNT AND PREFERRED STOCK
BENEFICIAL PERCENTAGE OF NATURE OF APPROXIMATE
NAME OF INDIVIDUAL OWNERSHIP OF OUTSTANDING BENEFICIAL PERCENT OF APPROXIMATE
OR ENTITY DESOTO DESOTO OWNERSHIP OF OUTSTANDING PERCENT OF ALL
OR NUMBER COMMON STOCK COMMON DESOTO PREFERRED DESOTO DESOTO
IN GROUP (SHARES)(1) STOCK STOCK (SHARES) PREFERRED STOCK VOTING STOCK
- ------------------------------- ------------ ------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Sutton Holding Corp.(2)........ 1,797,089(3) 30.5% 583,333(4) 100.0% 36.8%(5)
William Spier.................. 809,840(6) 15.4% 259,259(7) 44.4% 18.3%
Anders U. Schroeder............ 639,470(8) 12.5% 194,444(9) 33.3% 14.6%
The Gabelli Group.............. 512,600(10) 10.9% 0 0 9.7%
Pioneering Management Corp..... 459,400(11) 9.8% 0 0 8.7%
LL Capital Partners, L.P....... 276,700(12) 5.9% 0 0 5.2%
Narragansett First Fund........ 261,388(13) 5.6% 0 0 5.0%
Dimensional Fund Advisors
Inc.......................... 242,300(14) 5.2% 0 0 4.6%
Anne E. Eisele................. 36,374(15) * 0 0 *
William P. Lyons............... 30,000(16) * 0 0 *
Daniel T. Carroll.............. 8,500(17) * 0 0 *
David M. Tobey................. 8,000(18) * 0(19) 0 * (20)
Paul E. Price.................. 5,200(21) * 0 0 *
All directors and officers as a
group (9 persons)............ 1,969,087(22) 32.7% 583,333 100% 38.6%(22)
</TABLE>
- ---------------
* Denotes less than 1%
(1) The information under this caption is based on representations made to
DeSoto by individual directors and/or filings made with the Commission.
(2) Sutton Holding Corp., a New York corporation ("Sutton"), is part of a group
filing a joint Schedule 13D with respect to ownership of shares of DeSoto
Common Stock that includes Anders U. Schroeder, an affiliate of William
Spier, and parties having a business relationship with David Tobey. Sutton
is owned by Asgard Ltd. (an affiliate of Anders U. Schroeder) ("Asgard"),
Parkway M&A Capital Corporation ("Parkway"), M&A Investment Pte Ltd ("M&A")
(entities having a business relationship with David Tobey), and an
individual having no other relationship with DeSoto. Messrs. Spier,
Schroeder and Tobey are directors and officers of Sutton. Sutton's address
is 101 East 52nd Street, 11th Floor, New York, New York 10022. As a result
of a recent agreement, Mr. Schroeder and the affiliated entity have ceased
to be a part of the group filing the joint Schedule 13D.
(3) Sutton is the record owner of 100 shares of DeSoto Common Stock. The stock
ownership reported in the table for Sutton also includes the stock
ownership of the other parties to the Schedule 13D referred to in Note 2 as
follows: Coatings Group, Inc. ("Coatings Group") beneficially owns 779,840
shares of DeSoto Common Stock, of which 246,507 shares are currently
outstanding and 533,333 shares are issuable upon DeSoto Warrants
beneficially owned by Coatings Group; Anders U. Schroeder and an affiliated
entity beneficially own 618,970 shares of DeSoto Common Stock, of which
218,970 shares are currently outstanding and 400,000 are issuable upon the
exercise of DeSoto Warrants beneficially owned by the affiliate of Mr.
Schroeder (DeSoto Options granted to Mr. Schroeder pursuant to the DeSoto
1992 Stock Plan have not been included in the foregoing or in the ownership
for Sutton reported in the
59
<PAGE> 65
table); Parkway beneficially owns 350,811 shares of DeSoto Common Stock, of
which 84,144 are currently outstanding and 266,667 are issuable upon
exercise of DeSoto Warrants beneficially owned by Parkway; and M&A
beneficially owns 47,368 shares of DeSoto Common Stock, all of which are
currently outstanding. Consequently, Sutton and these related parties
currently beneficially own an aggregate of 597,089 currently outstanding
shares of DeSoto Common Stock and 1,200,000 shares of DeSoto Common Stock
issuable upon exercise of DeSoto Warrants having an exercise price of $7.00
per share, representing the 1,797,089 shares of DeSoto Common Stock
reported in the table. (DeSoto Options granted pursuant to the DeSoto 1992
Stock Plan to affiliates of any of these parties have not been included in
these numbers.)
(4) Parties related to Sutton own all of the shares of DeSoto Preferred Stock
reported in the table. Coatings Group owns 259,259 of such shares, an
affiliate of Anders U. Schroeder owns 194,444 of such shares, and Parkway
owns 129,630 of such shares.
(5) Represents shares of DeSoto Common Stock and DeSoto Preferred Stock
currently owned by parties referred to in Note 2 and 1,200,000 shares of
Common Stock issuable upon exercise of DeSoto Warrants owned by such
parties as described in Note 3.
(6) Mr. Spier's stock ownership includes 246,507 currently outstanding shares
of DeSoto Common Stock and 533,333 shares of DeSoto Common Stock issuable
upon exercise of DeSoto Warrants owned by Coatings Group, a corporation of
which Mr. Spier is President and Chairman of the Board, and DeSoto Options
to purchase 30,000 shares of DeSoto Common Stock which are currently
exercisable and were granted pursuant to the DeSoto 1992 Stock Plan. (The
Coatings Group stock ownership also has been included in the stock
ownership reported for Sutton. See Note 3.) The listed shares do not
include the 100 shares owned by Sutton or 100 shares held by Mr. Spier's
father-in-law, as to which Mr. Spier may be deemed the beneficial owner.
(7) All such shares are owned by Coatings Group. See Note 3.
(8) Mr. Schroeder's stock ownership includes stock owned by Asgard. Asgard, a
corporation affiliated with Mr. Schroeder, owns 218,970 currently
outstanding shares of DeSoto Common Stock, 194,444 shares of DeSoto
Preferred Stock and beneficially owns 400,000 shares of DeSoto Common Stock
issuable upon exercise of DeSoto Warrants. (Asgard's stock ownership has
been included in the stock ownership reported for Sutton. See Note 3.) Also
includes DeSoto Options to purchase 20,500 shares of DeSoto Common Stock,
which are currently exercisable and were granted pursuant to the De Soto
1992 Stock Plan.
(9) All such shares are owned by Asgard, a corporation affiliated with Mr.
Schroeder.
(10) As reported by Mario J. Gabelli and various entities which he directly or
indirectly controls and for which he acts as chief investment officer (the
"Gabelli Group") its members include the following: Gabelli Funds, Inc.
("GFI"), GAMCO Investors, Inc. ("GAMCO"), Gabelli Securities, Inc. ("GSI"),
Gabelli & Company, Inc. ("Gabelli & Company"), Gabelli Performance
Partnership ("GPP"), GLI, Inc. ("GLI"), The Gabelli Associates Fund
("Gabelli Associates"), Gabelli Associates Limited ("GAL"), The Gabelli &
Company, Inc. Profit Sharing Plan, Gabelli International Limited ("GIL"),
Gabelli International II Limited ("GIL II"), Mario J. Gabelli ("Mr.
Gabelli"), Lynch, Safety Railway and Western New Mexico. The address of
Mario J. Gabelli and the Gabelli Group is c/o J. Hamilton Crawford, Jr.,
Gabelli Funds, Inc., One Corporate Center, Rye, New York 10580-1434. Based
on information in Amendment No. 24 to Schedule 13D, dated July 9, 1996, the
Gabelli Group owns its shares of DeSoto Common Stock as follows: Mario J.
Gabelli, 7,500 shares; GAMCO, 498,600 shares; and GIL II, 6,500 shares.
Each of the above persons or entities has sole voting and dispositive power
over its shares, except that GAMCO does not have authority to vote 52,500
reported shares.
(11) Based on information in a Schedule 13G, dated as of January 26, 1996. The
address of Pioneering Management Corporation is 60 State Street, Boston,
Massachusetts 02109.
60
<PAGE> 66
(12) Based on information in Amendment No. 3 to Schedule 13D filed jointly by LL
Capital Partners, L.P. and its general partner Lance Lessman, dated as of
December 1, 1995. The address of LL Capital Partners, L.P. is 375 Park
Avenue, New York, New York 10152.
(13) Based on information in Amendment No. 1 to Schedule 13D, dated as of July
19, 1996. The address of Narragansett First Fund is 900 Fleet Center,
Providence, Rhode Island, 02903.
(14) Based on information in a Schedule 13G, dated as of February 7, 1996, filed
by Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, Dimensional is deemed to have beneficial ownership of 242,300
shares of DeSoto Common Stock, all of which shares are held in portfolios
of DFA Investment Dimensions Group Inc., a registered open-end investment
company, or in series of the DFA Investment Trust Company, a Delaware
business trust, or the DFA Group Trust and DFA Participation Group Trust,
investment vehicles for qualified employee benefit plans, all of which
Dimensional Fund Advisors Inc. serves as investment manager. Dimensional
disclaims beneficial ownership of all such shares.
(15) Includes shares of DeSoto Common Stock held in Ms. Eisele's account in the
DeSoto Stock Ownership Plus Plan and DeSoto Options to purchase 30,000
shares of DeSoto Common Stock which are currently exercisable and were
granted pursuant to the DeSoto 1992 Stock Plan.
(16) Includes 25,000 shares of DeSoto Common Stock owned by the William P. Lyons
and Co., Inc. Pension Trust, the only participant and beneficiary of which
is Mr. Lyons. Also includes DeSoto Options to purchase 5,000 shares of
DeSoto Common Stock, which are currently exercisable and were granted
pursuant to the DeSoto 1992 Stock Plan.
(17) Includes DeSoto Options to purchase 4,500 shares of DeSoto Common Stock
which are currently exercisable and were granted pursuant to the DeSoto
1992 Stock Plan.
(18) Includes DeSoto Options to purchase 5,000 shares of DeSoto Common Stock,
which are currently exercisable and were granted pursuant to the 1992 Stock
Plan. Does not include the stock ownership of Parkway and M&A. See Note 3.
(19) Does not include the 129,630 shares owned by Parkway. See Note 4.
(20) Does not include stock ownership of Parkway and M&A. See Note 3.
(21) Includes DeSoto Options to purchase 5,000 shares of DeSoto Common Stock
which are currently exercisable and were granted pursuant to the DeSoto
1992 Stock Plan.
(22) Includes 1,498 shares of DeSoto Common Stock beneficially held in the
DeSoto Stock Ownership Plus Plan for the account of officers. Also includes
stock ownership of Sutton to the extent not otherwise included in the
beneficial ownership of directors and officers, DeSoto Options held by
directors and officers if exercisable within 60 days and shares issuable
upon exercise of DeSoto Warrants. (Without inclusion of such Sutton stock
ownership, directors and officers, as a group, would own (i) 1,570,808
shares of DeSoto Common Stock, representing approximately 27.3% of the
outstanding shares of DeSoto Common Stock, (ii) 453,703 shares of DeSoto
Preferred Stock, representing approximately 77.8% of all such shares, and
(iii) approximately 31.9% of all voting stock.)
61
<PAGE> 67
DESOTO DIRECTORS WHO WILL BE KEYSTONE DIRECTORS
Set forth below is certain information, as of the date hereof, about
William Spier and William P. Lyons, each of whom will be elected to serve as a
director of Keystone upon consummation of the Merger.
WILLIAM SPIER, age 61, has been a director of DeSoto since 1990 and
Chairman of DeSoto since 1991. Mr. Spier has also been Chief Executive Officer
of DeSoto from 1991 to January 1994 and from September 1995 to present,
President and Chairman of Sutton (a corporation formed for the purpose of
acquiring DeSoto) from 1989 to present, and a private investor from 1982 to
present. Mr. Spier also is a director of Geotek Communications, Inc., Holmes
Protection Group, Inc. and Video Lottery Technologies, Inc.
WILLIAM P. LYONS, age 54, has been a director of DeSoto since 1991. Mr.
Lyons has also been Chairman of JVL Corp. (a manufacturer of generic and
over-the-counter pharmaceutical products) since 1992, President and Chief
Executive Officer of William P. Lyons and Co., Inc. (an investment firm) since
1975 and Chairman and Chief Executive Officer of Duro Test Corp. (a manufacturer
of specialty lighting products) from 1988 to 1991. Mr. Lyons also is a director
of Holmes Protection Group, Inc., Lydell, Inc., and Video Lottery Technologies,
Inc.
The following table sets forth certain information for the years ended
December 31, 1995, 1994, and 1993 concerning the compensation paid by DeSoto to
William Spier. (Mr. Spier has not received cash compensation from DeSoto in
1994, 1995 or 1996.) Mr. Lyons, as a director who is not an employee of DeSoto,
receives the same compensation from DeSoto as other directors who are not DeSoto
employees. Directors who are not employees of DeSoto are paid an annual retainer
of $6,000 and, in addition, receive $800 for each meeting of the DeSoto Board or
committee thereof attended. In addition, under the terms of the DeSoto 1992
Stock Plan, each non-employee director receives an initial grant of DeSoto
Options to purchase 3,000 shares of DeSoto Common Stock upon becoming a director
and, thereafter, annual grants of DeSoto Options to purchase 500 shares of
DeSoto Common Stock.
DESOTO SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
----------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY OPTIONS(#)
- -------------------------------------------------------------- ---- -------- ------------
<S> <C> <C> <C>
William Spier................................................. 1995 $ -- 10,000
Chairman of the Board 1994 -- 10,000
and Chief Executive Officer 1993 123,750 10,000
</TABLE>
Mr. Spier served as Chief Executive Officer of DeSoto until December 13,
1993, and effective as of September 1, 1995, Mr. Spier was again appointed Chief
Executive Officer of DeSoto.
Shown below is information with respect to DeSoto Options granted during
the year ended December 31, 1995 to William Spier under the DeSoto 1992 Stock
Plan, which provides, among other things, for the grant of DeSoto Options.
DESOTO OPTION GRANTS IN 1995
<TABLE>
<CAPTION>
POTENTIAL
NUMBER OF PERCENTAGE REALIZABLE VALUE
DESOTO OF TOTAL AT ASSUMED ANNUAL
OPTIONS DESOTO RATES OF STOCK
GRANTED OPTIONS PRICE APPRECIATION
(IN COMMON GRANTED EXERCISE FOR OPTION TERM(B)
SHARES TO EMPLOYEES PRICE EXPIRATION ------------------
(A)) IN 1995 PER SHARE DATE 5% 10%
---------- ------------ --------- ---------------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
William Spier(c)...................... 10,000 50.0% $4.38 November 8, 2005 $27,514 $69,740
</TABLE>
62
<PAGE> 68
- ---------------
(a) Stock appreciation rights may not be granted under the DeSoto 1992 Stock
Plan.
(b) Under the rules and regulations of the Commission, the potential realizable
value of a grant is the product of (i) the difference between (x) the
product of the per share market price of the time of grant and the sum of 1
plus the adjusted stock price appreciation rate (the assumed rates of
appreciation compounded annually over the term of the options) and (y) the
per share exercise price of the DeSoto Option and (ii) the number of
securities underlying the grant at year-end. Assumed annual rates of stock
price appreciation of 5% and 10% are specified by the Commission and are not
intended to forecast possible future appreciation, if any, of the price of
the shares of DeSoto Common Stock. (For example, if the price of shares of
DeSoto Common Stock remained at the exercise price of the DeSoto Options,
(i.e., a 0% appreciation rate), the potential realized value of the grant
would be $0.) The actual performance of such shares may be significantly
different from the rates specified by the Commission.
(c) This grant was made as of November 8, 1995 with an exercise price equal to
the market price at that time. The DeSoto Options were immediately
exercisable.
The following table provides certain information with respect to the number
and value of unexercised options outstanding as of December 31, 1995.
DECEMBER 31, 1995 DESOTO OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
DESOTO OPTIONS IN-THE-MONEY
(IN COMMON SHARES) DESOTO OPTIONS
AT DECEMBER 31, 1995 AT DECEMBER 31, 1995 (A)
------------------------------ ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
William Spier.......................................... 30,000 0 $-- $--
</TABLE>
- ---------------
(a) Calculated by determining the difference between the fair market value of
the DeSoto Common Stock underlying the options on December 31, 1995 ($3.50,
the closing price on the NYSE -- Composite Transactions) and the exercise
price of the DeSoto Options on that date.
DESOTO PENSION PLAN
The compensation covered by the DeSoto Employees' Retirement Pension Plan
(the "Pension Plan") and the DeSoto Salaried Employees' Pension Preservation
Plan (the "Preservation Plan") is substantially the same as that reported under
the "Salary" column of the Summary Compensation Table, limited, however, to
$150,000 for 1995 (or such other amount provided by Section 401(a)(17) of the
Internal Revenue Code). As of December 31, 1995, the estimated credited years of
service of Mr. Spier was approximately five and Mr. Spier's average annual
compensation during the highest five consecutive years of pay was $63,156. Thus,
Mr. Spier's estimated annual benefit payable upon retirement at age 65 is
$4,228. Benefits are computed on the basis of a straight life annuity and are
subject to offset for Social Security benefits (although the calculation of the
offset under the Salaried Pension Plan differs from the offset under the
Preservation Plan). To the extent an employee's benefit as computed under the
Salaried Pension Plan exceeds the limitations provided under the Code or an
employee's service exceeds 35 years, the benefit will be provided under the
Preservation Plan.
63
<PAGE> 69
CERTAIN INFORMATION ABOUT KEYSTONE
KEYSTONE MANAGEMENT
The current directors and executive officers of Keystone are listed below.
<TABLE>
<CAPTION>
NAME AGE TITLE
---------------------------------------- --- ----------------------------------------
<S> <C> <C>
Glenn R. Simmons........................ 68 Chairman of the Board and Chief
Executive Officer
J. Walter Tucker, Jr. .................. 70 Vice Chairman of the Board
Thomas E. Barry......................... 53 Director
Paul M. Bass, Jr. ...................... 60 Director
David E. Connor......................... 70 Director
Donald A. Sommer........................ 68 Director
Richard N. Ullman....................... 62 Director
Robert W. Singer........................ 59 President and Chief Operating Officer
Harold M. Curdy......................... 49 Vice President -- Finance and Treasurer
Bert E. Downing, Jr. ................... 40 Corporate Controller
Ralph P. End............................ 58 Vice President and General Counsel
Bill J. Johnson......................... 60 President, Sherman Wire Division
Sandra K. Myers......................... 53 Corporate Secretary
</TABLE>
GLENN R. SIMMONS is Chairman of the Board of Directors and Chief Executive
Officer of Keystone and has served in such capacities since 1987 but has been a
director of Keystone since 1986. Mr. Simmons has served as Vice Chairman of the
Board of Directors of Contran since prior to 1991. Mr. Simmons has been a
director of Contran and an executive officer and/or director of various
companies related to Contran since prior to 1991. He is Vice Chairman of the
Board of Valhi and Valcor, Inc. and a director of NL Industries, Inc. ("NL") and
Tremont Corporation ("Tremont"), all of which companies may be deemed to be
affiliates of Keystone. Mr. G. Simmons is also the brother of Harold C. Simmons.
Mr. G. Simmons' term as a director expires at Keystone's 1999 annual meeting of
stockholders.
J. WALTER TUCKER, JR. is Vice Chairman of the Board of Directors of
Keystone and has served in such capacity since 1987 but has been a director of
Keystone since 1971. Mr. Tucker has served as a director, President, and
Treasurer of Tucker & Branham, Inc., a privately owned real estate, mortgage
banking and insurance firm since prior to 1991. Mr. Tucker is also a director of
SunTrust Banks, Inc., Columbian Mutual Life Insurance Company and Valhi. He has
also been an executive officer and/or director of various companies related to
Valhi and Contran since 1982. Mr. Tucker's spouse is a first cousin of Donald A.
Sommer. Mr. Tucker's term as a director expires at Keystone's 1999 annual
meeting of stockholders.
THOMAS E. BARRY has been a director of Keystone since 1989 and is Vice
President for Executive Affairs at Southern Methodist University and has been a
Professor of Marketing in the Edwin L. Cox School of Business at Southern
Methodist University since prior to 1991. Mr. Barry's term as a director expires
at Keystone's 1997 annual meeting of stockholders.
PAUL M. BASS, JR. has been a director of Keystone since 1989 and is Vice
Chairman of First Southwest Company, a privately owned investment banking firm,
and has served as a director since prior to 1991. Mr. Bass is also Chairman of
Richman Gordman Half Price Stores, Inc., Chairman of MorAmerica Private Equities
Company, director of First Madison Bank and Chairman of the Audit Committee and
director of Source Services, Inc. Mr. Bass is currently serving as a member of
the Executive Committee of Zale-Lipshy University Hospital and as Chairman of
the Board of Trustees of Southwestern Medical Foundation. Mr. Bass' term as a
director expires at Keystone's 1998 annual meeting of stockholders.
DAVID E. CONNOR has been a director of Keystone since 1992 and is President
of David E. Connor and Associates, advisers to commerce and industry, in Peoria,
Illinois and has served in such capacity since prior to 1991. He is a director
of Cilcorp, Inc., Peoria, Illinois, and Chairman of the Board of First Midwest
Bankshares, Quincy, Illinois. He is also director of Heartland Community Health
Clinic, Peoria, Illinois,
64
<PAGE> 70
Museum Trustees of America, Washington, D.C., and a trustee of Bradley
University, Peoria, Illinois. Mr. Connor's term as a director expires at
Keystone's 1998 annual meeting of stockholders.
DONALD A. SOMMER has been a director of Keystone since 1962 and served as a
Vice President of Keystone prior to his retirement in 1982. Mr. Sommer is a
first cousin to the spouse of J. Walter Tucker, Jr. Mr. Sommer's term as a
director expires at Keystone's 1998 annual meeting of stockholders.
RICHARD N. ULLMAN has been a director of Keystone since 1992 and is
President of Federal Companies, a privately held commercial warehouse and
transportation company in Peoria, Illinois, and has served in such capacity
since prior to 1991. He is a director of First of America Bank -- Illinois, N.A.
and Cilcorp, Inc. and is also serving as director of Children's Hospital of
Illinois at St. Francis, director of St. Francis Medical Center, and a trustee
of Bradley University, all located in Peoria. Mr. Ullman's term as a director
expires at Keystone's 1997 annual meeting of stockholders.
ROBERT W. SINGER is President and Chief Operating Officer of the Company
and has served in that capacity since prior to 1991. He has served as Vice
President of Valhi and Contran since prior to 1991.
HAROLD M. CURDY is Vice President -- Finance and Treasurer of the Company
and has served in such capacities since prior to 1991.
BERT E. DOWNING, JR. is Corporate Controller of the Company and has served
in such capacity since December 1993. From prior to 1991 to December 1993, Mr.
Downing served as Senior Manager in the Dallas office of Ernst & Young, a public
accounting firm.
RALPH P. END has served as Vice President and General Counsel since 1991
and as the Corporate Counsel and Assistant Secretary of the Company since prior
to 1991.
BILL J. JOHNSON has served as President, Sherman Wire, a division of the
Company, since February 1995. Mr. Johnson served as Vice President & General
Manager, Sherman Wire, since prior to 1991.
SANDRA K. MYERS is Corporate Secretary of the Company and Executive
Secretary of Contran and has served in both capacities since prior to 1991.
All of the executive officers of Keystone serve at the pleasure of the
Keystone Board of Directors.
CERTAIN BUSINESS RELATIONSHIPS AND RELATED TRANSACTIONS
As set forth under the caption "-- Security Ownership of Certain Beneficial
Owners," Harold C. Simmons, through Contran and other entities, may be deemed to
own beneficially approximately 69% of Keystone Common Stock and, therefore, may
be deemed to control Keystone. Certain officers and directors of Keystone are
also officers and directors of Contran or of entities that may be deemed to be
controlled by or affiliated with Contran or Harold C. Simmons. Keystone and
other entities that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (i) intercorporate transactions with related
companies, including guarantees, management and expense sharing arrangements,
shared fee arrangements, joint ventures, partnerships, loans, options, advances
of funds on open account, and sales, leases and exchanges of assets, including
securities issued by both related and unrelated parties, and (ii) common
acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions may involve both related and unrelated parties and may
include transactions that result in the acquisition by one related party of a
publicly-held minority equity interest in another related party. Depending on
the business, tax and other objectives then relevant, it is possible that
Keystone might be a party to one or more of such transactions in the future. In
connection with these activities, Keystone may consider issuing additional
equity securities or incurring additional indebtedness. Keystone's acquisition
activities have in the past and may in the future include participation in the
acquisition or restructuring activities conducted by other companies that may be
deemed to be controlled by Harold C. Simmons. The foregoing relationships,
transactions and agreements may create potential conflicts of interest. It is
the policy of Keystone to engage in transactions with related parties on terms,
in the opinion of Keystone, no less favorable to Keystone than could be obtained
from unrelated parties.
65
<PAGE> 71
No specific procedures are in place that govern the treatment of
transactions among Keystone and its related entities, although such entities may
implement specific procedures as appropriate for particular transactions. In
addition, under applicable principles of law, in the absence of stockholder
ratification or approval by directors who may be deemed disinterested,
transactions involving contracts among companies under common control must be
fair to all companies involved. Furthermore, directors and officers owe
fiduciary duties of good faith and fair dealing to all stockholders of the
companies for which they serve.
Glenn R. Simmons, J. Walter Tucker, Jr., and Sandra K. Myers are not
salaried employees of Keystone. Keystone has contracted with Contran, on a fee
basis payable in quarterly installments, to provide certain administrative and
other services to Keystone in addition to the services of Mr. G. Simmons and Ms.
Myers, including consulting services of Contran executive officers pursuant to
the Intercorporate Services Agreement between Contran and Keystone, (the
"Intercorporate Services Agreement"). The fee incurred during 1995 was $500,000.
Keystone compensates Tucker & Branham, Inc. for certain consulting services of
Mr. Tucker on an hourly basis as his services are requested. The fees paid
Tucker & Branham, Inc. during 1995 were $50,000.
Certain of Keystone's property, liability and casualty insurance risks are
partially insured or reinsured by a captive insurance subsidiary of Valhi. The
premiums and claims paid in connection therewith were approximately $39,000 for
the year ended December 31, 1995.
Aircraft services were purchased from Valhi in the amount of $150,000 for
the year ended December 31, 1995.
In the opinion of Keystone management and the Keystone Board of Directors,
the terms of the transactions described above were no less favorable to Keystone
than those that could have been obtained from an unrelated entity.
CERTAIN LITIGATION
Harold C. Simmons, Glenn R. Simmons and certain companies related to
Keystone are parties to the litigation described below.
In November 1991, a purported derivative complaint was filed in the Court
of Chancery of the State of Delaware, New Castle County, (Alan Russell Kahn v.
Tremont Corporation, et al., No. 12339), in connection with the purchase by
Tremont of 7,800,000 shares of NL Common Stock from Valhi (the "NL Stock
Purchase"). In addition to Valhi, the complaint named as defendants Tremont and
the members of Tremont's Board of Directors, including Glenn R. Simmons and
Harold C. Simmons. The complaint alleged, among other things, that the NL Stock
Purchase constituted a waste of Tremont's assets and that Tremont's Board of
Directors had breached its fiduciary duties to Tremont's public stockholders. A
trial on this matter was held in June 1995 and in March 1996 the court issued
its opinion ruling in favor of the defendants and concluded that the NL Stock
Purchase did not constitute an overreaching by Valhi, that Tremont's purchase
price in the NL Stock Purchase was fair and that in all other respects the NL
Stock Purchase was fair to Tremont. The plaintiffs have filed an appeal of the
Court of Chancery's ruling.
66
<PAGE> 72
SECURITY OWNERSHIP OF MANAGEMENT
As of August 21, 1996, Keystone's directors, the executive officers named
in the Keystone Summary Compensation Table below, and the Keystone directors and
executive officers as a group, beneficially owned, as defined by the rules of
the Commission, the shares of Keystone Common Stock shown in the following
table.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL
OWNERSHIP
OF KEYSTONE PERCENT OF
NAME OF BENEFICIAL OWNER COMMON STOCK(1) CLASS(2)
--------------------------------------------------------- ----------------- ----------
<S> <C> <C>
Thomas E. Barry(3)....................................... 4,100 --
Paul M. Bass, Jr.(3)(4).................................. 6,500 --
David E. Connor(3)....................................... 4,500 --
Harold M. Curdy(3)....................................... 15,951 --
Ralph P. End(3).......................................... 3,414 --
Bill J. Johnson(3)....................................... 6,535 --
Glenn R. Simmons(3)(5)................................... 63,600 1.1%
Robert W. Singer(3)...................................... 28,770 --
Donald A. Sommer(3)...................................... 32,964 --
J. Walter Tucker, Jr. ................................... 153,450 2.7%
Richard N. Ullman(3)..................................... 4,500 --
All Keystone directors and executive officers as a group
(13 persons)(3)(4)(5).................................. 331,788 5.8%
</TABLE>
- ---------------
(1) All beneficial ownership is sole and direct except as otherwise set forth
herein. Information as to the beneficial ownership of Keystone Common Stock
has either been furnished to Keystone by or on behalf of the indicated
persons or is taken from reports on file with the Commission.
(2) Percentage omitted if less than 1%.
(3) Includes shares that such person or group could acquire upon the exercise
of options exercisable within 60 days of August 21, 1996 by Messrs. Barry,
Bass, Connor, Sommer and Ullman for the purchase of 4,000 shares each, and
named executive officers, Messrs. Curdy, End, Johnson, Simmons and Singer,
for the purchase of 3,000, 900, 2,340, 22,500, and 6,000 shares,
respectively, and the Keystone directors and executive officers as a group
for the purchase of 56,740 shares under Keystone's stock option plans.
(4) Includes 2,500 shares of Keystone Common Stock held in discretionary
accounts by First Southwest Company, a licensed broker-dealer, on behalf of
certain of its clients, as to which Mr. Bass has voting and dispositive
authority. Mr. Bass serves as Vice Chairman of First Southwest Company. As
a result of the foregoing, Mr. Bass may be deemed to be the beneficial
owner of such shares. However, Mr. Bass disclaims all such beneficial
ownership.
(5) Glenn R. Simmons is the brother of Harold C. Simmons. See footnote (1) to
the table under "-- Security Ownership of Certain Beneficial Owners."
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<PAGE> 73
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth the stockholders known to Keystone to be the
beneficial owners of more than 5% of the Keystone Common Stock outstanding as of
the Record Date.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP OF
NAME AND ADDRESS OF PERCENT
BENEFICIAL OWNER KEYSTONE COMMON STOCK OF CLASS
- ----------------------------------------------------------- --------------------- --------
<S> <C> <C>
Harold C. Simmons.......................................... 3,893,833(1)(2) 68.5%
5430 LBJ Freeway, Suite 1700
Dallas, Texas 75240
Killen Group, Inc.......................................... 337,500(3) 5.9%
1189 Lancaster Avenue
Berwyn, Pennsylvania 19312
</TABLE>
- ---------------
(1) The shares of Keystone Common Stock shown as beneficially owned by Harold C.
Simmons includes 3,161,733, 326,050, 250,000, 115,550 and 30,000 shares of
Keystone Common Stock held by Contran, NL, The Harold Simmons Foundation,
Inc. (the "Foundation"), The Contran Deferred Compensation Trust No. 2 (the
"Deferred Compensation Trust") and The Combined Master Retirement Trust (the
"Master Trust"), respectively.
Contran and NL directly hold approximately 55.6% and 5.7%, respectively, of
the outstanding Keystone Common Stock. Valhi and Tremont are the holders of
approximately 55.2% and 17.7%, respectively, of the outstanding common stock
of NL. Contran holds, directly or indirectly through related entities,
approximately 91.3% and 44.0% of the outstanding common stock of Valhi and
Tremont, respectively. Substantially all of Contran's outstanding voting
stock is held by trusts established for the benefit of Harold C. Simmons'
children and grandchildren (together, the "Trusts"), of which Mr. Simmons is
the sole trustee. As sole trustee of each of the Trusts, Mr. Simmons has the
power to vote and direct the disposition of the shares of Contran stock held
by each of the Trusts; however, Mr. Simmons disclaims beneficial ownership
thereof.
Harold C. Simmons is Chairman of the Board, President and Chief Executive
Officer of Valhi and Contran and Chairman of the Board and Chief Executive
Officer of certain related entities through which Contran may be deemed to
control Valhi. Additionally, he is Chairman of the Board of NL and is a
director of Tremont.
The Master Trust holds approximately 0.5% of the outstanding shares of
Keystone Common Stock. The Master Trust is a trust formed by Valhi to permit
the collective investment by trusts that maintain the assets of certain
employee benefit plans adopted by Valhi and related companies, including
Keystone. Harold C. Simmons is sole trustee of the Master Trust and sole
member of the Trust Investment Committee for the Master Trust. The trustee
and members of the Trust Investment Committee for the Master Trust are
selected by Valhi's board of directors. Harold C. Simmons and Glenn R.
Simmons are members of Valhi's board of directors and are both participants
in one or more of the employee benefit plans that invest through the Master
Trust; however, both such persons disclaim beneficial ownership of the
shares of Keystone Common Stock held by the Master Trust, except to the
extent of their respective vested beneficial interests therein.
The Foundation holds approximately 4.4% of the outstanding shares of
Keystone Common Stock. The Foundation is a tax-exempt foundation organized
and existing exclusively for charitable purposes. Harold C. Simmons is
Chairman of the Board and Chief Executive Officer of the Foundation.
The Deferred Compensation Trust holds approximately 2.0% of the outstanding
shares of Keystone Common Stock. NationsBank of Texas, N.A. serves as
trustee of the Deferred Compensation Trust (the "Trustee"). Contran
established the Deferred Compensation Trust as an irrevocable "rabbi trust"
to assist Contran in meeting certain deferred compensation obligations that
it owes to Harold C. Simmons. If the Deferred Compensation Trust assets are
insufficient to satisfy such obligations, Contran must satisfy the balance
of such obligations. Pursuant to the terms of the Deferred Compensation
Trust,
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<PAGE> 74
Contran (i) retains the power to vote the shares held by the Deferred
Compensation Trust, (ii) shares dispositive power over such shares with the
Trustee and (iii) may be deemed the indirect beneficial owner of such
shares.
By virtue of the holding of such offices, the stock ownership as described
above and his service as trustee as described above, Harold C. Simmons may
be deemed to control such entities and Mr. Simmons and such entities may be
deemed to possess indirect beneficial ownership of certain shares of
Keystone Common Stock held by such entities. However, Mr. Simmons disclaims
such beneficial ownership of the shares of Keystone Common Stock
beneficially owned, directly or indirectly, by such entities.
Certain information contained in this footnote is based on information
provided to Keystone by Valhi, Contran and certain of their affiliates.
(2) The shares of Keystone Common Stock shown as beneficially owned by Harold C.
Simmons also includes 10,500 shares of Keystone Common Stock held by Mr. H.
Simmons' wife, with respect to all of which Mr. Simmons disclaims beneficial
ownership.
(3) Based on Amendment No. 2 to Schedule 13G dated February 14, 1996, filed by
The Killen Group, Inc. (the "Killen Group") and Robert E. Killen. The Killen
Group has sole power to vote 95,425 shares of Keystone Common Stock and the
sole power to dispose of 335,000 shares of Keystone Common Stock. Robert E.
Killen, the president and sole stockholder of the Killen Group whose address
is the same as the Killen Group, has the sole power to vote and dispose of
2,500 shares of Keystone Preferred Stock.
DIRECTORS' COMPENSATION
Directors of Keystone who are not salaried employees of Keystone receive an
annual retainer of $12,000. Such directors also receive a fee of $450 per day
for each Keystone Board of Directors meeting and/or committee meeting requiring
attendance in person. Directors are also reimbursed for reasonable expenses
incurred in attending Keystone Board of Directors and/or committee meetings. On
May 5, 1992, the Keystone stockholders approved the Keystone Consolidated
Industries, Inc. 1992 Non-Employee Director Stock Option Plan ("Keystone
Director Plan"), which provides that each non-employee director will be granted
an option to purchase 1,000 shares of Keystone Common Stock on the third
business day after Keystone issues its press release summarizing Keystone's
annual financial results for the prior fiscal year. The exercise price of the
options will be equal to the last reported sale price of Keystone Common Stock
on the NYSE Composite Tape on the date of grant. Options granted pursuant to the
Keystone Director Plan become exercisable one year after the date of grant and
expire on the fifth anniversary following the date of grant.
Mr. G. Simmons' services as an executive officer are made available to
Keystone pursuant to the Intercorporate Services Agreement. In addition to
director services, Mr. Tucker provides certain consulting services to Keystone
for which Keystone pays a company related to Mr. Tucker. See "-- Certain
Business Relationships and Related Transactions."
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<PAGE> 75
EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to Keystone's chief
executive officer and to each of Keystone's four most highly compensated
executive officers other than the chief executive officer (collectively, the
"Keystone named executive officers") for services rendered in all capacities to
Keystone for the years ended December 31, 1995, 1994, and 1993.
KEYSTONE SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------------------
AWARDS
------------------------
RESTRICTED SECURITIES
ANNUAL COMPENSATION STOCK UNDERLYING ALL OTHER
----------------------------- AWARDS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) (#) ($)(2)
- ---------------------------------------------- ---- --------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Glenn R. Simmons(3) 1995 123,077 -- -- -- --
Chief Executive Officer 1994 175,000 -- -- -- --
1993 149,596 -- -- 12,500 --
Robert W. Singer(4) 1995 170,000 62,500 -- -- 7,425
President 1994 225,000 150,000 -- -- 6,690
1993 200,000 150,000 25,625 10,000 8,994
Harold M. Curdy 1995 132,000 60,000 -- -- 7,425
Vice President -- Finance & Treasurer 1994 132,000 125,000 -- -- 6,690
1993 125,000 56,250 19,475 5,000 8,362
Ralph P. End 1995 93,000 30,000 -- -- 6,559
Vice President and General Counsel 1994 93,000 35,000 -- -- 5,762
1993 90,000 30,000 10,250 1,500 5,353
Bill J. Johnson 1995 101,642 16,716 -- -- 7,425
President -- Sherman Wire Division 1994 96,560 70,500 -- 2,100 6,642
1993 93,404 20,976 21,525 2,500 6,695
</TABLE>
- ---------------
(1) The dollar value of the reported grants of restricted Keystone Common Stock
is based on the last reported sales price per share on the date of grant of
Keystone Common Stock as reported by the NYSE Composite Tape. The reported
shares of restricted Keystone Common Stock vest at a rate of 40% after six
months from the date of award, 30% after eighteen months from the date of
the award and 30% after thirty months from the date of the award. Dividends
on all shares of restricted Keystone Common Stock are paid at the same time
and at the same rate as dividends on unrestricted Keystone Common Stock, if
declared.
The total number of shares of restricted Keystone Common Stock awarded to
each Keystone named executive officer and the aggregate number and value of
each Keystone named executive officer's holdings of restricted Keystone
Common Stock as of December 31, 1995 (at which time the market value was
$11.50 per share based on the last reported sales price per share of
Keystone Common Stock as reported by the NYSE Composite Tape) were as
follows:
<TABLE>
<CAPTION>
NON-VESTED
SHARES OF VALUE OF NON-
RESTRICTED VESTED RESTRICTED
KEYSTONE COMMON KEYSTONE COMMON
STOCK AS OF STOCK AS OF
NAME OF EXECUTIVE OFFICER DECEMBER 31, 1995 DECEMBER 31, 1995
------------------------------------------- ----------------- -----------------
<S> <C> <C>
Glenn R. Simmons........................... -- $ --
Robert W. Singer........................... 750 8,625
Harold M. Curdy............................ 550 6,325
Ralph P. End............................... 300 3,450
Bill J. Johnson............................ 600 6,900
</TABLE>
(2) Amounts contributed by Keystone to Keystone's 401(k) Plan for the benefit
of such executive officer.
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<PAGE> 76
(3) Glenn R. Simmons, Chairman of the Board and Chief Executive Officer of
Keystone, is not a salaried employee of Keystone. The reported salary
represents an allocation of his time devoted to Keystone business under the
Intercorporate Services Agreement. See "-- Certain Business Relationships
and Related Transactions" above.
(4) The amounts shown in the table as compensation for Mr. Singer represent the
full amount paid by Keystone for services rendered to Keystone during 1995,
less the portion of such compensation that is either credited or reimbursed
to Keystone for services Mr. Singer rendered to Valhi pursuant to the
Intercorporate Services Agreement. Mr. Singer's Keystone compensation
excludes $55,000 as salary and $62,500 as bonus for services rendered by
Mr. Singer to Valhi during 1995.
The following table sets forth certain information with respect to the
Keystone named executive officers concerning unexercised Keystone stock options
at December 31, 1995. No Keystone stock options or Keystone stock appreciation
rights were exercised during 1995.
KEYSTONE OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
KEYSTONE OPTIONS/SARS KEYSTONE OPTIONS/SARS
AT FY-END(#) AT FY-END($)(2)
------------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE(1) EXERCISABLE UNEXERCISABLE
----------------------------------- ----------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Glenn R. Simmons................... 14,000 13,500 13,750 20,625
Robert W. Singer................... 4,000 6,000 11,000 16,500
Harold M. Curdy.................... 2,000 3,000 5,500 8,250
Ralph P. End....................... 600 900 1,650 2,475
Bill J. Johnson.................... 1,420 3,180 3,275 6,225
</TABLE>
- ---------------
(1) Options vest 20%, 40%, 60% and 100% on the first, second, third and fourth
anniversary of the date of grant, respectively.
(2) The values shown in the table are based on the $11.50 per share closing
price of the Keystone Common Stock on December 31, 1995 as reported by the
NYSE Composite Tape, less the exercise price of the options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Except for Mr. Sommer who retired as Vice President of Keystone in 1982, no
member of the Keystone Compensation Committee is or has been an officer or
employee of Keystone or any of its subsidiaries. In 1995, no executive officer
of Keystone served on the compensation committee or as a director of another
entity, one of whose executive officers served on the Keystone's Compensation
Committee or Board of Directors.
PENSION PLAN
Keystone maintains several qualified, noncontributory defined benefit plans
which provide defined retirement benefits to eligible employees including
executive officers. Normal retirement age under the Company's pension plans is
age 65. Under the plans covering salaried employees, including officers, the
defined benefit for an individual is based on a straight life annuity. An
individual's monthly benefit is the sum of the following: (i) for credited
service prior to January 1, 1981, the amount determined by his or her average
monthly cash compensation for the five years of his or her highest earnings
prior to January 1, 1981, multiplied by 1.1%, multiplied by the years of
credited service, plus (ii) for each year of service between 1980 and 1989, the
amount determined by the sum of 1.2% multiplied by his or her average monthly
cash compensation that year up to the social security wage base and 1.75%
multiplied by his or her average monthly cash compensation that year in excess
of the social security wage base, plus (iii) for each year subsequent to 1989,
the amount determined by 1.2% multiplied by his or her average monthly cash
compensation that year, but not less than $14.00 per month.
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<PAGE> 77
The estimated annual benefits payable upon retirement at normal retirement
age for each of the salaried Keystone named executive officers, assuming
continued employment with Keystone until normal retirement age at current salary
levels are: Harold M. Curdy, $46,786; Ralph P. End, $27,937; Robert W. Singer,
$27,401; and Bill J. Johnson, $28,145. Glenn R. Simmons does not participate in
the Keystone defined benefit pension plans.
COMPARISON OF RIGHTS OF STOCKHOLDERS OF
KEYSTONE AND DESOTO
The rights of Keystone's stockholders are governed by its Certificate of
Incorporation, its Bylaws ("Keystone Bylaws") and the laws of the State of
Delaware. The rights of DeSoto stockholders are governed by its Certificate of
Incorporation, its Bylaws ("DeSoto Bylaws") and the laws of the State of
Delaware. After the Effective Time of the Merger, the rights of DeSoto
stockholders who become Keystone stockholders will be governed by the Keystone
Certificate of Incorporation, Keystone Bylaws and the laws of the State of
Delaware. In most respects, the rights of Keystone stockholders and DeSoto
stockholders are similar. The following is a summary of the material differences
between the rights of Keystone stockholders and the rights of DeSoto
stockholders under their respective Certificates of Incorporation and Bylaws.
Amendment of Certificate of Incorporation and Bylaws
Amendments of the Certificate of Incorporation for each of Keystone and
DeSoto requires the affirmative vote of a majority of the respective outstanding
shares of common stock; provided, however, that any amendment to the Certificate
of Incorporation of DeSoto that adversely affects the powers, preferences or
special rights of the holders of DeSoto Preferred Stock requires the affirmative
vote of the holders of a majority of the Series A Junior Participating Preferred
Stock of DeSoto (the "Series A Preferred"), and the affirmative vote of seventy
five percent (75%) of each class or series of outstanding stock of DeSoto is
required to amend certain other provisions, including those relating to
classification of the Board of Directors, removal of directors only for cause,
and the prohibition on the taking of action by stockholders other than at a
meeting of stockholders. No shares of the Series A Preferred are outstanding.
The Keystone Bylaws and Certificate of Incorporation provide that the
Keystone Bylaws may be amended or repealed by the Board of Directors or by the
stockholders. The DeSoto Bylaws and Certificate of Incorporation also provide
that the DeSoto Bylaws may be amended or repealed by the Board of Directors or
by the stockholders.
Dividends and Distributions
Keystone. Subject to the rights of the holders of outstanding shares of
preferred stock, if any, the holders of shares of Keystone Common Stock shall be
entitled to receive such dividends if as and when declared by the Board of
Directors. In the event of the voluntary or involuntary liquidation of Keystone,
and subject to the rights of the holders of outstanding shares of preferred
stock, if any, the holders of shares of Keystone Common Stock shall be entitled
to receive pro rata all of the remaining assets of Keystone available for
distribution to its stockholders. No shares of Keystone preferred stock are
currently outstanding.
DeSoto. Subject to the rights of the holders of any series of preferred
stock ranking prior and superior to the shares of DeSoto Preferred Stock, if
any, the holders of DeSoto Preferred Stock shall be entitled to receive the
liquidation preference of each share of DeSoto Preferred Stock. If such
dividends are in arrears for four (4) quarterly periods at any time, dividends
for any subsequent quarterly periods are payable to holders of DeSoto Preferred
Stock at the rate of ten percent (10%) of the sum of the liquidation preference
of each share of DeSoto Preferred Stock, until dividend arrearages exist for
less than four (4) quarterly periods. Holders of DeSoto Common Stock are
entitled to receive dividends when, as and if declared by the DeSoto Board of
Directors out of funds legally available therefor.
In the event of the liquidation or dissolution of DeSoto, no distribution
shall be made to the holders of shares ranking junior to the DeSoto Preferred
Stock unless the holders of DeSoto Preferred Stock shall have
72
<PAGE> 78
received an amount equal to the liquidation preference to the date of such
payment. In the event DeSoto does not have sufficient assets to pay the
liquidation preference, the remaining assets of DeSoto shall be distributed pro
rata among the holders of DeSoto Preferred Stock.
Anti-Takeover Provisions
Neither the Keystone Certificate of Incorporation nor Bylaws contain
specific anti-takeover provisions; however, the Keystone Certificate of
Incorporation authorizes the issuance of 500,000 shares of preferred stock, the
rights, preferences, powers and restrictions of which may be determined by the
Board of Directors without stockholder approval. Pursuant to the terms of the
Merger, approximately 435,456 shares of Keystone Preferred Stock will be issued.
The Board of Directors has the ability to designate a series of preferred stock
with rights, preferences, powers and restrictions that would make a change in
control of Keystone not approved by the Board of Directors difficult and
therefore, less likely. In addition, on September 22, 1995, Keystone's
Certificate of Incorporation was amended and restated to increase the authorized
Keystone Common Stock from 9,000,000 to 12,000,000 shares. Shares of authorized
and unissued Keystone Common Stock could be issued in one or more transactions
which also would make a change in control of Keystone more difficult, and
therefore less likely. Any such issuance of additional stock could have the
effect of diluting the earnings per share and book value per share of
outstanding shares of Keystone Common Stock, and such additional shares could be
used to dilute the stock ownership or voting rights of persons seeking to obtain
control of Keystone. In addition, the Board of Directors of Keystone is divided
into three classes, which together with the provisions of the DGCL restricting
the removal of directors described below could delay a change in a majority of
the board for at least two annual meetings. Following consummation of the
Merger, the provisions in the Keystone Preferred Stock requiring redemption of
such stock following a change of control may also have an anti-takeover effect.
See "Description of Keystone Capital Stock."
DeSoto's Certificate of Incorporation authorizes 5,000,000 shares of
preferred stock, the rights, preferences, powers and restrictions of which may
be determined by the Board of Directors without stockholder approval. To date,
DeSoto has designated 583,333 shares of preferred stock as Series B Senior
Preferred Stock (defined above as "DeSoto Preferred Stock"), all of which are
outstanding. The dividends payable on the DeSoto Preferred Stock, as described
above under "Dividends and Distributions," as well as the required redemption of
such stock upon a change in control could make a change in control of DeSoto not
approved by the Board of Directors difficult and, therefore, less likely. In
connection with the Rights Plan described below, DeSoto designated 200,000
shares of Series A Preferred Stock, none of which are outstanding. In addition,
the Board of Directors has the ability to designate the rights, preferences,
powers and restrictions of the remaining shares of authorized preferred stock
that would make a change in control of DeSoto without the approval of the Board
of Directors even more difficult and less likely.
DeSoto's Certificate of Incorporation and Bylaws contain certain provisions
which might make a change of control of DeSoto which is not approved by the
Board of Directors more difficult. DeSoto's Board of Directors is divided into
three classes, which, as is the case with Keystone, could delay a change in a
majority of the Board. The Bylaws of DeSoto require stockholders wishing to
nominate persons for election as directors to satisfy certain advance notice and
disclosure requirements. DeSoto's Certificate of Incorporation contains a
provision permitting removal of directors only for cause. DeSoto's Certificate
of Incorporation also contains a provision that provides that certain business
combination transactions (each a "Business Combination"), including mergers, of
DeSoto with any person who is the beneficial owner of more than 10% of the
shares of DeSoto Common Stock (a "New Substantial Stockholder") or an affiliate
of such person, requires the affirmative vote of the holders of at least 75% of
DeSoto's voting stock (the "Supermajority Vote"), unless (i) the Business
Combination shall have been approved by three-fourths of the Whole Board (as
defined below) and by a majority of the Continuing Directors (as defined below)
of DeSoto (together, the "Required Approvals"), or (ii) the Price Requirement
and the Procedure Requirements (as defined below) are met. "Continuing Director"
is defined as any director who is unaffiliated with the New Substantial
Stockholder and (i) was a director prior to the time that the New Substantial
Stockholder became such, or (ii) who was designated as a Continuing Director by
at least a majority of Continuing Directors (but not less than one Continuing
Director) and three-fourths of the Whole Board. "Whole Board" is defined as the
total number of
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<PAGE> 79
directors which DeSoto would have if there were no vacancies. The Price
Requirement is that the consideration to be received per share of DeSoto Common
Stock by holders of shares in such Business Combination be at least equal to the
highest of the following: (i) the highest per share price (including brokerage
commissions, transfer taxes and soliciting dealers' fees and with appropriate
adjustments for reclassifications) paid by the New Substantial Stockholder of
any shares acquired by it; (ii) the highest fair market value per share at any
time after the New Substantial Stockholder became such; or (iii) the highest
preferential amount per share to which the holders of shares are entitled in the
event of a voluntary liquidation, dissolution or winding up of DeSoto. The
Procedure Requirements include the following, among others: (i) the
consideration payable to stockholders must be in cash or in the same form as was
previously paid by the Substantial Stockholder in its acquisition of shares; and
(ii) after the New Substantial Stockholder has become such and prior to the
consummation of the Business Combination, except as approved by at least a
majority of the Continuing Directors and three-fourths of the Whole Board (x)
there shall have been no failure to pay, at least once during each fiscal
quarter of the Company, dividends on the DeSoto Common Stock at a rate per share
at least equal to that paid per share during the fiscal quarter prior to the New
Substantial Stockholder becoming such and (y) an increase in such quarterly rate
of dividends as necessary to reflect any reclassification or similar transaction
which has the effect of reducing the number of outstanding shares. This
provision can be amended or repealed only by the affirmative vote of holders of
at least 75% of the voting stock of DeSoto, unless such amendment or repeal is
first approved by at least a majority of the Continuing Directors and
three-fourths of the Whole Board.
Accordingly, holders of DeSoto Common Stock who become holders of Keystone
Common Stock as a result of the Merger will no longer be afforded certain
protections afforded by, or be subject to, these provisions in DeSoto's
Certificate of Incorporation and Bylaws.
Stockholder Inspection Rights
The Bylaws of Keystone and DeSoto each provide that a complete list of
stockholders entitled to vote at any meeting of stockholders, arranged in
alphabetical order and showing the address of each stockholder and the number of
shares registered in his or her name, shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours for a period of at least ten days prior to the meeting. The stockholder
list shall also be open to examination during the meeting by any stockholder
present at the meeting.
Stockholder Meetings
The Bylaws of DeSoto provide that special meetings of stockholders may be
called by stockholders holding in the aggregate shares representing not less
than a majority of each class or series of stock issued and outstanding and
entitled to vote at the meeting. Under the Keystone Bylaws, special meetings of
stockholders may only be called by the Chairman of the Board, President or Board
of Directors of Keystone.
The Certificate of Incorporation of DeSoto prohibits the taking of
stockholder action without a meeting. The Certificate of Incorporation of
Keystone does not prohibit the taking of stockholder action without a meeting.
Director Nominations
The Keystone Bylaws currently provide for a five to nine member Board of
Directors; there are currently seven members of the Board of Directors which
shall be expanded to nine members effective upon consummation of the Merger. The
Directors are divided into three classes, with staggered three year terms. One
class of Directors shall be elected at each annual meeting of stockholders for a
three year term and until his or her successor is elected and qualified.
The DeSoto Bylaws provide that the number of directors shall be eleven,
which number may be changed by resolution adopted by the Board of Directors. The
DeSoto Board of Directors currently consists of seven members. The Directors are
divided into three classes, with staggered three year terms. One class of
Directors
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<PAGE> 80
shall be elected at each annual meeting of stockholders and each director shall
hold office for a three year term and until his or her successor is duly elected
and qualified.
State Antitakeover Statutes
Both Keystone and DeSoto are subject to Section 203 of the DGCL. Section
203 of the DGCL would prohibit a "business combination" (as defined in Section
203, generally including mergers, sales and leases of assets, issuances of
securities and similar transactions) by the subject company or a subsidiary with
an "interested stockholder" (as defined in Section 203, generally the beneficial
owner of 15 percent or more of the subject company's voting stock) within three
years after the person or entity becomes an interested stockholder, unless (i)
prior to the person or entity becoming an interested stockholder, the business
combination or the transaction pursuant to which such person or entity became an
interested stockholder shall have been approved by the Board of Directors of the
subject company, (ii) upon the consummation of the transaction in which the
person or entity became an interested stockholder, the interested stockholder
holds at least 85 percent of the voting stock of the subject company (excluding
for purposes of determining the number of shares outstanding, shares held by
persons who are both officers and directors of the subject company and shares
held by certain employee benefit plans), or (iii) the business combination is
approved by the Board of Directors of the subject company, and by the holders of
at least two-thirds of the outstanding voting stock of the subject company,
excluding shares held by the interested stockholder.
Rights Plan
Keystone does not have a rights plan.
On February 20, 1989, DeSoto's Board of Directors declared a dividend of
one Purchase Right for each outstanding share of DeSoto voting stock. The
dividend was payable to holders of record of shares on March 3, 1989, and the
board authorized the issuance of additional Purchase Rights for DeSoto Common
Stock issued after that date. Each Purchase Right entitles the holder thereof to
buy from DeSoto one one-hundredth of a share of Series A Preferred Stock at a
price of $140 per one one-hundredth of a Preferred Share (the "Purchase Price"),
subject to adjustment. As currently in effect, in the event that (i) any person
acquires 25% or more of the outstanding shares of DeSoto voting stock (an
"Acquiring Person"), (ii) DeSoto is the surviving corporation in a merger with
an Acquiring Person and the shares of DeSoto voting stock are not changed or
exchanged, (iii) an Acquiring Person engaged in one of a number of specified
self-dealing transactions, or (iv) during such time as there is an Acquiring
Person, an event occurs (including a reverse stock split) which results in such
Acquiring Person's ownership interest being increased by more than 1%, each
holder of a Purchase Right (other than Purchase Rights beneficially owned by the
Acquiring Person, which will thereafter be void) will thereafter have the right
to receive upon exercise of a Purchase Right that number of shares of DeSoto
Common Stock which, at that time, would have a market value of two times the
Purchase Price. In the event that DeSoto is acquired in a merger or other
business combination transaction, each Purchase Right will entitle its holder to
purchase, at the Purchase Price, that number of shares of common stock of the
acquiring company which at the time of such transaction would have a market
value of two times the Purchase Price.
DeSoto is entitled to redeem the Purchase Rights at $.01 per Purchase Right
at any time prior to a person becoming an Acquiring Person. The Purchase Rights
will not be exercisable until the earlier of (i) the tenth day after the public
announcement that a person has acquired beneficial ownership of 25% or more of
the outstanding shares of DeSoto voting stock, or (ii) the tenth business day
(or such later date as is determined by DeSoto's Board of Directors prior to
such time as any person becomes an Acquiring Person) after the commencement of,
or announcement of an intention to commence, an offer the consummation of which
would result in the beneficial ownership by a person or group of 25% or more of
the outstanding shares of DeSoto voting stock. The Purchase Rights are intended
to deter takeovers which are not in the best interests of DeSoto and its
stockholders. In connection with the Reorganization Agreement, the Board of
Directors took appropriate action to assure that the execution of the
Reorganization Agreement and the related agreements and the consummation of the
transactions contemplated thereby will not cause the Purchase Rights to become
exercisable or distributed.
75
<PAGE> 81
Indemnification
Section 145 of the DGCL provides that a corporation may, and the Keystone
Bylaws provide that Keystone shall, indemnify any person made a party to an
action by reason of the fact that he or she was a director, officer, employee or
agent of the corporation or was serving at the request of the corporation in a
similar capacity, against expenses actually and reasonably incurred by him or
her in connection with such action if he or she acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the corporation, and, with respect to any criminal action (other
than an action by or in the right of the corporation), has no reasonable cause
to believe his or her conduct was unlawful. Determination of indemnification
shall be made by (i) the corporation's Board of Directors by a majority vote of
a quorum consisting of directors who were not parties to such action or, (ii) if
such a quorum is not obtainable, or even if obtainable a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, or
(iii) by the corporation's stockholders.
The DGCL provides that a corporation may, and the Keystone Bylaws provide
that Keystone shall, indemnify any person made a party to an action by or in the
right of the corporation to procure a judgment in its favor by reason of the
fact that he or she was a director, officer, employee or agent of the
corporation or was serving at the request of the corporation in a similar
capacity, against expenses actually and reasonably incurred by him or her in
connection with such action if he or she acted in good faith and in a manner he
or she reasonably believed to be in, or not opposed to, the best interests of
the corporation and except that no indemnification shall be made in respect of
any matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery, or the
court in which such action was brought, shall determine that such person is
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
The DeSoto Certificate of Incorporation provides that directors, officers
and certain other persons will be indemnified to the fullest extent authorized
by Delaware law. The DeSoto Bylaws require DeSoto to pay all expenses incurred
by a director or officer in defending any proceeding within the scope of the
indemnification provisions as such expenses are incurred in advance of its final
disposition, subject to certain conditions. The Keystone Bylaws contain a
comparable provision regarding the advancement of expenses, except that such
advancement may only be made upon receipt of an undertaking by the affected
officer or director that he or she will repay such amounts advanced if it is
ultimately determined that he or she was not entitled to indemnification under
the Keystone Bylaws.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Keystone pursuant
to the foregoing provisions, Keystone has been informed that in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
Election of Directors
Under the Bylaws of each of Keystone and DeSoto, the Board of Directors has
the right to fill any vacancy created on the Board caused by death, resignation,
removal or otherwise, and newly created directorships. Under the provisions of
the DGCL and the Keystone Certificate of Incorporation, any director or the
entire Board of Directors of Keystone may be removed, with or without cause, by
the holders of a majority of the shares then entitled to vote at an election of
directors. Under the provisions of the DGCL and the DeSoto Certificate of
Incorporation, directors may be removed from office only for cause.
76
<PAGE> 82
EXPERTS
The consolidated balance sheets of Keystone at December 31, 1994 and 1995,
and the related consolidated statements of operations and changes in
stockholders' equity (deficit) and cash flows of Keystone for each of the three
years in the period ended December 31, 1995 (including the notes thereto),
incorporated by reference from Keystone's Annual Report on Form 10-K, have been
audited by Coopers & Lybrand, L.L.P., independent auditors, as set forth in
their report thereon appearing therein and incorporated by reference herein.
Such consolidated financial statements of Keystone are incorporated herein by
reference in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The consolidated balance sheets of DeSoto as of December 31, 1995 and 1994,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1995
included in this Joint Proxy Statement/Prospectus and elsewhere in this
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto. Reference
is made to said report which includes an explanatory paragraph that describes
matters impacting DeSoto's ability to continue as a going concern. Such
consolidated financial statements are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
Representatives of Coopers & Lybrand, L.L.P. are expected to be present at
the Keystone Meeting, and representatives of Arthur Andersen LLP are expected to
be present at the DeSoto Meeting. In each case, such representatives will have
the opportunity to make a statement if they desire to do so and are expected to
be available to respond to appropriate questions.
Richard Holmes of Arthur Andersen LLP, acting as a representative of
DeSoto's trade creditors, is required, pursuant to the terms of DeSoto's
agreement with its trade creditors, to agree on behalf of such trade creditors
to the terms of the Reorganization Agreement as such terms relate to such trade
creditors.
LEGAL MATTERS
The validity of the shares of Keystone Common Stock offered hereby and the
federal income tax consequences in connection with the Merger will be passed
upon for Keystone by Godwin & Carlton, P.C.
The federal income tax consequences in connection with the Merger will be
passed upon for DeSoto by Fried, Frank, Harris, Shriver & Jacobson.
STOCKHOLDER PROPOSALS
Keystone stockholders may submit proposals on matters appropriate for
stockholder action at Keystone's annual meetings, subject to regulations adopted
by the Securities and Exchange Commission. Keystone presently intends to call
the next annual meeting during May 1997. For such proposals to be considered for
inclusion in the Proxy Statement and form of proxy relating to the 1997 annual
meeting, they must be received by the Company not later than December 24, 1996.
Such proposals should be addressed to Secretary, Keystone Consolidated
Industries, Inc., Three Lincoln Centre, 5430 LBJ Freeway, Suite 1740, Dallas,
Texas 75240.
If the Merger is not consummated, any DeSoto stockholder who intends to
present a proposal at the 1996 Annual Meeting of Stockholders and have it
included in DeSoto's proxy statement for that meeting must submit it to DeSoto
by the close of business on the date which is 120 calendar days in advance of
the first anniversary of November 27, 1995, unless the date of the 1996 Annual
Meeting changes by more than 30 days from the date of the 1995 Annual Meeting,
in which case proposals must be received by DeSoto a reasonable time before the
release of the proxy statement. In addition, if the Merger is not consummated, a
stockholder who otherwise intends to present business at the 1996 Annual Meeting
must comply with the requirements set forth in DeSoto's bylaws. Among other
things, to bring business before an annual meeting, a stockholder must give
written notice complying with the bylaws to the Secretary of DeSoto sixty (60)
days in advance of the meeting if the meeting is to be held on the first Friday
of May or, if the meeting is to be held on some other date, no later than seven
days following the date on which notice of the meeting is first given to
stockholders.
77
<PAGE> 83
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The accompanying unaudited pro forma Keystone financial statements set
forth the pro forma Condensed Consolidated Balance Sheet of Keystone as of June
30, 1996, and the pro forma Condensed Consolidated Statements of Operations for
the year ended December 31, 1995 and the six months ended June 30, 1996. These
pro forma financial statements are presented to illustrate the effect of certain
adjustments to the historical consolidated financial statements that result from
the Merger between Keystone and DeSoto and the immediate, subsequent merger of
the two companies' defined benefit pension plans under the assumptions and
estimates set forth in the notes thereto. Keystone will account for the Merger
by the purchase method.
The accompanying unaudited pro forma DeSoto financial statements set forth
the pro forma Condensed Consolidated Statements of Operations for the year ended
December 31, 1995 and the six months ended June 30, 1996. These pro forma
financial statements are presented to illustrate the effect of certain
adjustments to the historical DeSoto consolidated financial statements that
result from recording the April 1996 sale of DeSoto's Union City, California
business and the 1995 sales of DeSoto's businesses in Thornton and South
Holland, Illinois under the assumptions and estimates set forth in the notes
thereto.
The accompanying Keystone and DeSoto pro forma condensed consolidated
financial statements should be read in conjunction with the respective
companies' historical consolidated financial statements and notes thereto. The
pro forma condensed consolidated financial statements are presented for
informational purposes only and are not necessarily indicative of actual results
had the foregoing transactions occurred as described in the preceding
paragraphs, nor do they purport to represent results of future operations of the
merged companies.
P-1
<PAGE> 84
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES
INDEX OF PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Keystone Consolidated Industries, Inc.:
Unaudited Pro Forma Condensed Consolidated Balance Sheet -- June 30, 1996........... P-3
Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet................... P-4
Unaudited Pro Forma Condensed Consolidated Statement of Operations -- Year ended
December 31, 1995................................................................ P-6
Unaudited Pro Forma Condensed Consolidated Statement of Operations -- Six months
ended June 30, 1996.............................................................. P-7
Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations........ P-8
DeSoto, Inc.:
Unaudited Pro Forma Condensed Consolidated Statement of Operations -- Year ended
December 31, 1995................................................................ P-9
Unaudited Pro Forma Condensed Consolidated Statement of Operations -- Six months
ended June 30, 1996.............................................................. P-10
Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations........ P-11
</TABLE>
P-2
<PAGE> 85
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL HISTORICAL --------------------- PRO FORMA
KEYSTONE DESOTO NOTE 2 ADJUSTMENTS CONSOLIDATED
---------- ---------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................................... $ -- $ 42 $ -- $ 42
Restricted cash and short-term investments.................. -- 1,180 -- 1,180
Notes and accounts receivable............................... 40,125 2,744 -- 42,869
Inventories................................................. 26,351 355 -- 26,706
Deferred income taxes....................................... 5,066 3,180 -- 8,246
Prepaid expenses and other.................................. 190 218 -- 408
-------- -------- --------- --------
Total current assets.................................. 71,732 7,719 -- 79,451
Property, plant and equipment, net............................ 86,713 589 (c) (589) 86,713
Unrecognized net pension obligation........................... 7,517 -- (d) (7,517) --
Prepaid pension cost.......................................... -- 50,710 (c) 40,162
(d) 11,422 102,294
Deferred income taxes......................................... 21,873 -- (e) (21,873) --
Restricted investments........................................ -- 3,877 -- 3,877
Other......................................................... 6,887 748 (c) (748)
(f) 250 7,137
Investment in DeSoto.......................................... 275 -- (a) 34,563
(b) 475
(c) (35,313) --
-------- -------- --------- --------
$194,997 $ 63,643 $ 20,832 $279,472
======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current long-term debt.................... $ 26,943 $ -- (b) $ 475
(f) 1,113 $ 28,531
Accounts payable............................................ 23,353 11,482 (f) (8,000) 26,835
Accrued pension cost........................................ 6,623 -- (d) (6,623) --
Accrued OPEB cost........................................... 7,776 435 -- 8,211
Other accrued liabilities................................... 19,618 10,220 (c) 590 30,428
-------- -------- --------- --------
Total current liabilities............................. 84,313 22,137 (12,445) 94,005
-------- -------- --------- --------
Noncurrent liabilities:
Long-term debt.............................................. 9,351 -- (f) 8,617 17,968
Deferred income taxes....................................... -- 12,256 (c) 14,378
(d) 5,990
(e) (21,873) 10,751
Accrued pension cost........................................ 26,650 -- (d) (26,650) --
Accrued OPEB cost........................................... 97,746 1,431 (c) 1,367 100,544
Negative goodwill........................................... -- -- (c) 1,885 1,885
Other....................................................... 9,166 8,131 -- 17,297
-------- -------- --------- --------
Total noncurrent liabilities.......................... 142,913 21,818 (16,286) 148,445
-------- -------- --------- --------
Keystone mandatory redeemable preferred stock, no par value,
500,000 shares authorized, none issued (pro
forma -- 435,458)........................................... -- -- (a) 4,684
(c) 296
(f) (1,480) 3,500
DeSoto mandatory redeemable preferred stock, no par value,
583,333 shares authorized, issued and outstanding (pro
forma -- none).............................................. -- 4,684 (a) (4,684) --
-------- -------- --------- --------
-- 4,684 (1,184) 3,500
-------- ------- --------- --------
Common stockholders' equity (deficit):
Keystone common stock, $1 par value, 12,000,000 shares
authorized; 5,687,858 shares issued at stated value (pro
forma -- 9,187,858)....................................... 6,413 -- (a) 3,500 9,913
DeSoto common stock......................................... -- 5,619 (c) (5,619) --
Additional paid-in capital.................................. 20,484 1,000 (a) 31,063
(c) (1,000) 51,547
Net pension liabilities adjustment.......................... (31,188) -- (d) 31,188 --
Retained earnings (accumulated deficit)..................... (27,926) 40,211 (c) (40,211) (27,926)
Keystone treasury stock -- 1,134 shares..................... (12) -- -- (12)
DeSoto treasury stock -- 930,751 shares (pro
forma -- none)............................................ -- (31,826) (c) 31,826 --
-------- -------- --------- --------
Total stockholders' equity (deficit).................. (32,229) 15,004 50,747 33,522
-------- -------- --------- --------
$194,997 $ 63,643 $ 20,832 $279,472
======== ======== ========= ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed
Consolidated Balance Sheet.
P-3
<PAGE> 86
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
NOTE 1 -- BASIS OF PRESENTATION:
The Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30,
1996 reflects the adjustments necessary to record the Merger of Keystone and
DeSoto and the immediate, subsequent merger of the two companies' defined
benefit pension plans as though such transactions had occurred on June 30, 1996.
The Merger is accounted for by the purchase method.
NOTE 2 -- PRO FORMA ADJUSTMENTS:
(a) Keystone issues 3,500,000 shares of Keystone Common Stock, at a price of
$9.875 per share in exchange for the 4,688,523 outstanding shares of DeSoto
Common Stock. In addition, Keystone issues 435,458 shares of Keystone
Preferred Stock ($8.0375 mandatory redemption value on July 1, 2000), in
exchange for the 583,333 outstanding shares of DeSoto Preferred Stock.
(b) Keystone incurs $750,000 in Merger related costs, $275,000 of which had
been incurred at June 30, 1996.
(c) Allocate purchase price as follows.
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
PURCHASE PRICE TO BE ALLOCATED
3,500,000 shares of Keystone common stock at $9.875 per share;................... $ 34,563
435,458 shares of Keystone preferred stock with mandatory redemption value of
$8.0375 per share.............................................................. 3,500
Estimated transaction costs...................................................... 750
--------
38,813
--------
PURCHASE PRICE ALLOCATION
Historical DeSoto common equity.................................................. 15,004
Eliminate historical DeSoto preferred stock...................................... 3,204
--------
18,208
Purchase price allocation adjustments:
Adjust DeSoto pension cost to excess of pension plan assets over related
projected benefit obligation.................................................. 40,162
Accrue DeSoto severance liability.............................................. (590)
Adjust DeSoto OPEB liability to accumulated benefit obligation................. (1,367)
Eliminate DeSoto net property, plant and equipment............................. (589)
Eliminate DeSoto other noncurrent assets....................................... (748)
Record related deferred tax liability, at effective federal and state rate of
39%,.......................................................................... (14,378)
--------
40,698
--------
Recorded negative goodwill................................................. $ (1,885)
========
</TABLE>
P-4
<PAGE> 87
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(d) Elimination of Keystone's additional minimum pension liability, unrecognized
net pension obligation, SFAS 87 equity adjustment and related deferred
income taxes and increase in the aggregate projected benefit obligation due
to conforming mortality assumptions, all as a result of merging Keystone's
and DeSoto's defined benefit pension plans. The merger of the pension plans
results in a pro forma funded status as follows.
<TABLE>
<CAPTION>
IMPACT OF MERGER OF
HISTORICAL ---------------------
-------------------- KEYSTONE/ PENSION
KEYSTONE DESOTO DESOTO PLANS PRO FORMA
-------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Plan assets.................................. $149,282 $160,229 $ -- $ -- $309,511
Projected benefit obligation................. 192,192 69,357 -- 18,255 279,804
-------- -------- ------- -------- --------
Plan assets in excess of (exceeded by)
projected benefit obligation............... (42,910 ) 90,872 -- (18,255) 29,707
Unrecognized net loss (gain) from experience
different from actuarial assumptions....... 46,869 (33,280) 33,280 18,255 65,124
Unrecognized net obligation (asset).......... 7,463 (7,506) 7,506 -- 7,463
Additional minimum liability................. (44,695 ) -- -- 44,695 --
Other........................................ -- 624 (624) -- --
-------- -------- ------- -------- --------
Prepaid (accrued) pension cost............. (33,273 ) 50,710 40,162 44,695 102,294
Less current portion......................... 6,623 -- -- (6,623) --
-------- -------- ------- -------- --------
Noncurrent prepaid (accrued) pension
cost..................................... $(26,650) $ 50,710 $40,162 $ 38,072 $102,294
======== ======== ======= ======== ========
</TABLE>
(e) Reclassification of net noncurrent deferred income taxes.
(f) Keystone's term loan is restructured and increased by $8,617,000 (to a total
of $20 million), at a cost of $250,000. The net term loan proceeds of
$8,367,000, along with $1,113,000 of additional borrowings under Keystone's
revolving credit facility, are used to fund $8 million of payments to
DeSoto's trade creditors and payment of the dividend arrearage on DeSoto
Preferred Stock of $1,480,000.
P-5
<PAGE> 88
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL DESOTO --------------------- PRO FORMA
KEYSTONE NOTE 2 (A) NOTE 2 ADJUSTMENTS CONSOLIDATED
--------- ---------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues and other income................ $ 345,924 $ 18,098 $ -- $364,022
--------- -------- ------- --------
Costs and expenses:
Cost of goods sold..................... 312,909 16,209 (c) (205)
(d) 966
(g) (3,882) 325,997
Selling, general and administrative.... 21,552 6,491 (b) (11)
(c) (178)
(d) 107
(g) (432) 27,529
Nonrecurring expense (income), net..... -- (6,360) -- (6,360)
Retirement security program............ -- (6,846) (d) 2,532
(g) 4,314 --
Interest............................... 3,385 83 (e) 475 3,943
--------- -------- ------- --------
337,846 9,577 3,686 351,109
--------- -------- ------- --------
Income before income taxes.......... 8,078 8,521 (3,686) 12,913
Provision for income taxes............... 3,191 3,315 (f) (1,475) 5,031
-------- ------- ------- --------
Net income............................... 4,887 5,206 (2,211) 7,882
Dividends on preferred stock............. -- 507 -- 507
--------- -------- ------- --------
Net income available for common shares... $ 4,887 $ 4,699 $(2,211) $ 7,375
========= ======== ======= ========
Net income per common and common
equivalent share....................... $ .86 $ .79
========= ========
Weighted average common and common
equivalent shares outstanding.......... 5,654 9,348
========= ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed
Consolidated Statements of Operations.
P-6
<PAGE> 89
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL DESOTO ---------------------- PRO FORMA
KEYSTONE NOTE 2 (A) NOTE 2 ADJUSTMENTS CONSOLIDATED
---------- ---------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues and other income............ $ 170,304 $ 7,434 $ -- $177,738
--------- -------- ------- --------
Costs and expenses:
Cost of goods sold................. 157,675 6,863 (c) (81)
(d) 483
(g) (1,645) 163,295
Selling, general and
administrative.................. 11,302 2,562 (b) (5)
(c) (40)
(d) 54
(g) (183) 13,690
Nonrecurring expense (income),
net............................. -- (676) -- (676)
Retirement security program........ -- (3,436) (d) 1,608
(g) 1,828 --
Interest........................... 1,869 -- (e) (207) 1,662
--------- -------- ------- --------
170,846 5,313 1,812 177,971
--------- -------- ------- --------
Income (loss) before income
taxes......................... (542) 2,121 (1,812) (233)
Provision (benefit) for income
taxes.............................. (215) 826 (f) (725) (114)
--------- -------- ------- --------
Net income (loss).................... (327) 1,295 (1,087) (119)
Dividends on preferred stock......... -- 283 -- 283
--------- -------- ------- --------
Net income (loss) available for
common shares...................... $ (327) $ 1,012 $(1,087) $ (402)
========= ======== ======= ========
Net income (loss) per common and
common equivalent share............ $ (.06) $ (.04)
========= ========
Weighted average common and common
equivalent shares outstanding...... 5,678 9,244
========= ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed
Consolidated Statements of Operations.
P-7
<PAGE> 90
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 AND
SIX MONTHS ENDED JUNE 30, 1996
NOTE 1 -- BASIS OF PRESENTATION:
The Unaudited Pro Forma Condensed Consolidated Statements of Operations for
the year ended December 31, 1995 and the six months ended June 30, 1996 have
been prepared assuming the Merger of Keystone and DeSoto and the immediate,
subsequent merger of the two companies' defined benefit pension plans occurred
on January 1, 1995. The Merger is accounted for by the purchase method.
NOTE 2 -- PRO FORMA ADJUSTMENTS:
(a) Includes pro forma adjustments to reflect the effect of certain DeSoto
businesses sold in 1995 and 1996 as if such sales had occurred on December
31, 1994. See DeSoto pro forma financial statements on pages P-9 to P-11.
(b) Amortization of negative goodwill and deferred financing costs by the
straight-line method over 20 years and 3 years, respectively.
(c) Reduction in depreciation expense resulting from amortization of purchase
accounting basis difference over average remaining life of two years.
(d) Increase in pension expense due to conforming Keystone and DeSoto mortality
assumptions and purchase accounting adjustments relating to DeSoto's
defined benefit pension plan.
(e) Impact on interest expense based on changes in average outstanding debt
levels using weighted average interest rates of 9.9% in 1995 and 9.3% in
1996, as follows.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Increase (decrease) in average outstanding debt
levels related to:
Payment to DeSoto trade creditors................ $ 8,000 $ 10,000
Payment of DeSoto preferred stock dividends...... 1,700 1,900
Reduced defined benefit pension contributions.... (6,600) (17,300)
Payment of financing and transaction costs....... 700 700
Other............................................ 900 300
-------- --------
$ 4,700 $ (4,400)
======== ========
</TABLE>
(f) Income tax expense of pro forma adjustments (c) through (e) at assumed
effective federal and state rate of 39%.
(g) Reclassification.
P-8
<PAGE> 91
DESOTO, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
--------------------- PRO FORMA
HISTORICAL NOTE 2 ADJUSTMENTS CONSOLIDATED
---------- ------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues and other income........................... $ 52,339 (d) $ (34,241) $ 18,098
-------- --------- --------
Costs and expenses:
Cost of goods sold................................ 54,069 (d) (37,860) 16,209
Selling, general and administrative............... 10,164 (b) (3,673) 6,491
Nonrecurring expense (income), net................ (201) (c) (6,159) (6,360)
Retirement security program....................... (6,846) -- (6,846)
Interest.......................................... 546 (a) (463) 83
-------- --------- --------
57,732 (48,155) 9,577
-------- --------- --------
Income (loss) before income taxes.............. (5,393) 13,914 8,521
Provision (benefit) for income taxes................ (758) (f) 4,073 3,315
-------- --------- --------
Net income (loss)................................... (4,635) 9,841 5,206
Dividends on preferred stock........................ 507 -- 507
-------- --------- --------
Net income (loss) available for common shares....... $ (5,142) $ 9,841 $ 4,699
======== ========= ========
Net income (loss) per common and common equivalent
share............................................. $ (1.10) $ 1.00
======== ========
Weighted average common and common equivalent shares
outstanding....................................... 4,677 4,677
======== ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed
Consolidated Statements of Operations.
P-9
<PAGE> 92
DESOTO, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
---------------------- PRO FORMA
HISTORICAL NOTE 2 ADJUSTMENTS CONSOLIDATED
---------- ------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues and other income........................ $ 9,481 (d) $(2,047) $ 7,434
------- --------
Costs and expenses:
Cost of goods sold............................. 8,383 (d) (1,520) 6,863
Selling, general and administrative............ 2,718 (b) (156) 2,562
Nonrecurring expense (income), net............. 2,746 (c) (1,562) (676)
(e) (1,860)
Retirement security program.................... (3,436) -- (3,436)
-------- ------- --------
10,411 (5,098) 5,313
-------- ------- --------
Income (loss) before income taxes........... (930) 3,051 2,121
Provision (benefit) for income taxes............. (351) (f) 1,177 826
-------- ------- --------
Net income (loss)................................ (579) 1,874 1,295
Dividends on preferred stock..................... 283 -- 283
-------- ------- --------
Net income (loss) available for common shares.... $ (862) $ 1,874 $ 1,012
======== ======= ========
Net income (loss) per common and common
equivalent share............................... $ (.18) $ .22
Weighted average common and common equivalent ======== ========
shares outstanding............................. 4,684 4,684
======== ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed
Consolidated Statements of Operations.
P-10
<PAGE> 93
DESOTO, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 AND
SIX MONTHS ENDED JUNE 30, 1996
NOTE 1 -- BASIS OF PRESENTATION:
The Unaudited Pro Forma Condensed Consolidated Statements of Operations for
the year ended December 31, 1995 and the six months ended June 30, 1996 have
been prepared by the management of DeSoto and reflect the adjustments necessary
to record the April 1996 sale of DeSoto's Union City, California business and
the 1995 sales of DeSoto's businesses in Thornton and South Holland, Illinois as
though such transactions had occurred on December 31, 1994.
NOTE 2 -- PRO FORMA ADJUSTMENTS:
(a) Sale proceeds used to reduce debt resulting in decreased interest expense.
(b) Selling, general and administrative expenses decreased due to reduced sales
personnel, facility expense, amortization of goodwill and corporate
overhead.
(c) Eliminate losses related to sale of facilities.
(d) Eliminate sales and cost of sales related to the sold facilities.
(e) Eliminate provision for uncollectible receivables related to the disposed
operations.
(f) Income tax expense calculated at an assumed rate of 39%.
NOTE 3 -- NONRECURRING EXPENSE (INCOME)
Pro forma nonrecurring income for the year ended December 31, 1995 and for
the six months ended June 30, 1996 consists principally of insurance
settlements. See "Information About DeSoto -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations."
P-11
<PAGE> 94
DESOTO CONSOLIDATED FINANCIAL STATEMENTS
DESOTO, INC. AND SUBSIDIARIES
INDEX TO DESOTO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Consolidated statements of operations................................................. F-3
Consolidated statements of stockholders' equity....................................... F-4
Consolidated balance sheets........................................................... F-5
Consolidated statements of cash flows................................................. F-6
Notes to consolidated financial statements............................................ F-7
Quarterly revenues and earnings data (1995 versus 1994)............................... F-21
SIX MONTHS ENDED JUNE 30, 1996
Consolidated condensed statements of operations....................................... F-22
Consolidated condensed balance sheets................................................. F-23
Consolidated condensed statements of cash flows....................................... F-24
Notes to consolidated condensed financial statements.................................. F-25
</TABLE>
F-1
<PAGE> 95
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of DeSoto, Inc.
We have audited the accompanying consolidated balance sheets of DeSoto,
Inc. (a Delaware corporation) and Subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of DeSoto's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 DeSoto, Inc. and
Subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
The accompanying financial statements for 1995 have been prepared assuming
that DeSoto will continue as a going concern. As discussed in Note B to the
financial statements, DeSoto has suffered recurring losses from operations and
negative operating and financing cash flows, and has contingent liabilities
related to environmental matters, income taxes and the 1992 acquisition of J.L.
Prescott Company, that collectively raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note B. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
ARTHUR ANDERSEN LLP
Chicago, Illinois,
March 25, 1996
F-2
<PAGE> 96
DESOTO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
-------- ------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
NET REVENUES................................................ $ 52,339 $87,182 $101,175
COSTS AND EXPENSES:
Cost of sales............................................. 54,069 84,800 96,309
Selling, administrative and general....................... 10,164 11,889 18,794
Retirement security program............................... (6,846) (6,495) (4,753)
Nonrecurring expense...................................... 6,159 -- 5,925
-------- ------- --------
TOTAL OPERATING COSTS AND EXPENSES................ 63,546 90,194 116,275
-------- ------- --------
LOSS FROM OPERATIONS........................................ (11,207) (3,012) (15,100)
-------- ------- --------
OTHER CHARGES AND CREDITS:
Interest expense.......................................... 546 575 642
Nonoperating expense...................................... -- -- 1,601
Nonoperating income....................................... (6,360) (1,303) (4,021)
-------- ------- --------
Loss before Income Taxes.................................... (5,393) (2,284) (13,322)
Benefit for Income Taxes.................................... (758) (649) (5,232)
-------- ------- --------
NET LOSS.................................................... (4,635) (1,635) (8,090)
Dividends on Preferred Stock................................ (507) (319) (302)
-------- ------- --------
Net Loss Available for Common Shares........................ $ (5,142) $(1,954) $ (8,392)
======== ======= ========
NET LOSS PER COMMON SHARE................................... $ (1.10) $ (0.42) $ (1.83)
======== ======= ========
Average Common Shares Outstanding........................... 4,677 4,657 4,598
======== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE> 97
DESOTO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON
STOCK RETAINED TREASURY
$1 PAR VALUE WARRANTS EARNINGS STOCK
------------ -------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
BALANCE, January 1, 1993............................ $5,619 $1,000 $ 61,722 $(36,868)
Net loss.......................................... -- -- (8,090) --
Accrued dividends -- redeemable preferred stock... -- -- (302) --
Accretion of redeemable preferred stock to
liquidation preference......................... -- -- (185) --
Shares issued under employee stock options........ -- -- (1,017) 1,262
------ ------ -------- --------
BALANCE, December 31, 1993.......................... 5,619 1,000 52,128 (35,606)
Net loss.......................................... -- -- (1,635) --
Accrued dividends -- redeemable preferred stock... -- -- (319) --
Accretion of redeemable preferred stock to
liquidation preference......................... -- -- (198) --
Shares issued under employee stock options and
other grants................................... -- -- (1,182) 1,442
------ ------ -------- --------
BALANCE, December 31, 1994.......................... 5,619 1,000 48,794 (34,164)
Net loss.......................................... -- -- (4,635) --
Accrued dividends -- redeemable preferred stock... -- -- (507) --
Accretion of redeemable preferred stock to
liquidation preference......................... -- -- (212) --
Shares issued under employee stock options and
other grants................................... -- -- (232) 271
------ ------ -------- --------
BALANCE, December 31, 1995.......................... $5,619 $1,000 $ 43,208 $(33,893)
====== ====== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 98
DESOTO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
CURRENT ASSETS:
Cash........................................................................................... $ 51 $ 1,702
Restricted cash................................................................................ 29 58
Restricted short-term investments, at cost (approximates market)............................... 1,180 710
Trade accounts and notes receivable, less allowance for doubtful accounts and notes of $367 in
1995 and $1,819 in 1994...................................................................... 4,764 11,848
Inventories, net:
Finished goods............................................................................... 405 4,331
Raw materials and work-in-process............................................................ 380 4,182
------- -------
785 8,513
Deferred income taxes.......................................................................... 2,049 3,295
Prepaid expenses and other assets.............................................................. 231 215
------- -------
Total Current Assets................................................................... 9,089 26,341
RESTRICTED INVESTMENTS, at cost (approximates market).......................................... 3,770 4,666
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land and improvements.......................................................................... -- --
Buildings and improvements..................................................................... -- 90
Machinery and equipment........................................................................ 14,440 22,783
------- -------
14,440 22,873
Less accumulated depreciation.................................................................. 11,830 14,905
------- -------
2,610 7,968
PREPAID PENSION COSTS.......................................................................... 46,913 39,319
OTHER NON-CURRENT ASSETS....................................................................... 2,586 4,818
------- -------
TOTAL ASSETS................................................................................... $64,968 $83,112
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................................... $14,263 $14,961
Revolving credit agreement..................................................................... -- 8,381
Waste site cleanup............................................................................. 2,025 2,522
Reserves and liabilities related to restructuring programs..................................... 3,226 1,884
Other liabilities.............................................................................. 4,500 5,725
------- -------
Total Current Liabilities.............................................................. 24,014 33,473
WASTE SITE CLEANUP -- LONG-TERM................................................................ 5,269 6,744
DEFERRED INCOME TAXES.......................................................................... 11,461 13,392
CONTINGENCIES AND LITIGATION (Note J).......................................................... -- --
POST RETIREMENT AND POST-EMPLOYMENT BENEFITS................................................... 1,223 1,510
LONG-TERM DEFERRED GAIN........................................................................ 2,779 3,175
REDEEMABLE PREFERRED STOCK; series B senior preferred, 583,333 shares authorized, issued and
outstanding, $6 per share liquidation preference............................................. 4,288 3,569
STOCKHOLDERS EQUITY:
Common stock, $1 par value, 20,000,000 shares authorized; issued -- 5,619,274.................. 5,619 5,619
Warrants....................................................................................... 1,000 1,000
Retained earnings.............................................................................. 43,208 48,794
------- -------
49,827 55,413
Less treasury stock, at cost (940,067 shares in 1995 and 947,567 shares in 1994)............... 33,893 34,164
------- -------
15,934 21,249
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................................... $64,968 $83,112
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 99
DESOTO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................... $(4,635) $(1,635) $(8,090)
Non-cash items:
Net (gain) loss on disposal of assets -- net of deferred
credit................................................... 4,177 (457) (1,434)
Depreciation and amortization............................... 1,397 2,920 4,148
Pension income.............................................. (7,594) (7,101) (5,094)
Deferred income taxes....................................... (685) 1,390 407
Other non-cash items........................................ 38 174 --
------- ------- -------
Net non-cash items....................................... (2,667) (3,074) (1,973)
Changes in assets and liabilities resulting from operating
activities:
Net (increase) decrease in trade accounts and notes
receivable............................................... 5,719 (406) 5,666
Net (increase) decrease in inventories...................... 4,585 1,933 (3,195)
Net decrease in other non-current assets.................... 1,344 1,102 1,237
Net increase (decrease) in other liabilities................ (2,142) (2,284) 2,930
Net increase (decrease) in accounts payable................. (698) (4,040) 2,422
Net (increase) decrease in other current assets............. (458) (185) 1,183
Net (increase) decrease in refundable income taxes.......... -- 6,697 (4,185)
Other....................................................... -- 16 (1)
------- ------- -------
Net cash flows from (used in) operating activities............ 1,048 (1,876) (4,006)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of liquid laundry detergent and fabric
softener sheet businesses................................ 5,305 -- --
Proceeds from sale of assets................................ 622 3,803 4,285
Additions to property, plant and equipment.................. (245) (1,021) (1,021)
Net cash from waste site escrow............................. -- -- 917
------- ------- -------
Net cash flows from investing activities...................... 5,682 2,782 4,181
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions (payments) under revolving credit agreement....... (8,381) 681 1,500
Proceeds from shares issued from treasury stock............. -- 70 245
Payment of mortgage loan.................................... -- -- (2,122)
------- ------- -------
Net cash flows from (used in) financing activities............ (8,381) 751 (377)
------- ------- -------
Net increase (decrease) in cash and cash equivalents.......... (1,651) 1,657 (202)
Cash and cash equivalents at beginning of the year............ 1,702 45 247
------- ------- -------
Cash and cash equivalents at the end of the year.............. $ 51 $ 1,702 $ 45
======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE> 100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the accounts of DeSoto and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Short-Term Investments. For purposes of the statements of cash flows,
DeSoto considers all investments purchased with a maturity of three months or
less to be cash equivalents.
Inventories. Inventories are valued at the lower of cost or market. Cost is
computed on the last-in, first-out (LIFO) method for all inventories. The cost
of products includes raw materials, direct labor and operating overhead. If the
first-in, first-out (FIFO) method of inventory accounting had been used for all
of DeSoto's inventories, inventories would have been $1,493,000 and $1,889,000
higher than reported at December 31, 1995 and 1994, respectively.
Property and Depreciation. Property is recorded at cost. Repairs and
maintenance are charged to expense. Depreciation of property, plant and
equipment is provided by charges to earnings based on the estimated useful lives
of the assets, computed primarily on accelerated methods. Useful lives are 10-40
years for buildings and improvements and 10 years for machinery and equipment.
Goodwill and Amortization. Goodwill represented the excess of cost over the
fair value of net assets acquired, and was being amortized by the straight-line
method over 40 years until the related businesses were sold in 1995. This
goodwill was written off in 1995 as a result of the disposition of the liquid
detergent and fabric softener sheet businesses in 1995.
Reclassifications. Certain reclassifications have been made to the 1994 and
1993 financial statements and footnotes to conform with current year
presentation.
Revenue. Revenue is recognized at the time goods are shipped.
Research and Development. Research and development costs are charged to
expense. These charges were $218,000 in 1995, $345,000 in 1994, and $665,000 in
1993.
Income Taxes. Income taxes are provided based on the liability method of
accounting pursuant to Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes." Deferred income taxes are recorded to
reflect the tax consequences on future years of differences between the tax
basis of assets and liabilities and their financial reporting amounts at each
year-end.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
B. LIQUIDITY AND CAPITAL RESOURCES
DeSoto's financial statements for the year ended December 31, 1995 have
been prepared on a going concern basis which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal course of
business. DeSoto has incurred operating losses of $11.2 million, $3.0 million,
and $15.1 million in 1995, 1994 and 1993, respectively; and cash flows from
operations have been $1.0 million, $(1.9) million and $(4.0) million in 1995,
1994 and 1993, respectively. Cash flows from operations in 1995, however,
included the cash proceeds from insurance settlements of $6.1 million, and $10.0
million from the reduction of working capital.
In addition to operating and financing cash flow losses, DeSoto continues
to be party to environmental exposures as discussed in Note I, has received a
notice of tax deficiencies from the IRS as discussed in Note F, and has a
contingent liability related to the 1992 Prescott acquisition as discussed in
Note L. Although management has used the best information available to record
the estimated liabilities for these
F-7
<PAGE> 101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
matters, actual outcomes could differ from recorded amounts. Additionally, the
timing of cash required to satisfy these obligations could significantly impact
DeSoto's cash flows in 1996.
As part of DeSoto's continuing effort to manage its accounts payable and
cash flow requirements, DeSoto has been negotiating a Trade Composition
Agreement and a related Security Agreement with its trade creditors as
represented by a committee of six major creditors of DeSoto. The proposed
agreements include a standstill agreement related to accounts payable existing
as of September 22, 1995. Also, as part of the proposed Trade Composition
Agreement, DeSoto initiated the termination of its overfunded pension plan to be
effective contingent upon the receipt of appropriate governmental approvals. For
further information regarding the plan termination, refer to Note C to the
Consolidated Financial Statements. Under the standstill agreement, if certain
conditions are met, the creditors who sign the agreement agree not to initiate
litigation or other efforts to collect amounts owed to them. DeSoto has agreed
to pay each Qualified Trade Creditor (as defined) the balance owed to that
creditor within 10 days of receipt of the reverted excess pension plan assets.
If payment is not made by July 1, 1996, interest would accrue from that date at
8% per annum on the outstanding balance. The proposed Security Agreement would
grant a security interest and lien on all of DeSoto's assets to secure the
obligations of DeSoto to the Qualified Trade Creditors. The proposed Trade
Composition Agreement further stipulates that DeSoto may suspend efforts to
terminate its pension plan if DeSoto enters into a binding agreement for a
merger, asset sale or similar transaction, involving substantially all of
DeSoto's assets, which provides that all Qualified Trade Creditors will be paid
in full. DeSoto and its creditors have been operating within the understanding
outlined above. The actual Standstill Agreement document was circulated for
signatures on March 11, 1996 and final execution of the documents has not yet
been completed. DeSoto is continuing to pursue, with the assistance of its
investment bankers, a possible business combination; however, there can be no
assurance as to the outcome of such efforts. For further information regarding a
possible business combination, refer to Note P to the Consolidated Financial
Statements.
C. PENSION AND EMPLOYEE INVESTMENT PLANS
DeSoto's retirement security program includes a noncontributory defined
benefit pension plan and an employee investment plan covering substantially all
employees except certain hourly-rated employees; DeSoto also contributes to
union sponsored plans. DeSoto's pension plan benefits are principally based on
the employee's compensation and years of service. DeSoto's funding policy is to
contribute annually at a rate that is intended to remain at a level percentage
of compensation for the covered employees. DeSoto was not required to make
contributions to DeSoto sponsored pension plan in 1995, 1994 and 1993 due to the
plan's overfunded status.
In January 1996, DeSoto announced that it had notified the Pension Benefit
Guaranty Corporation of its intention to terminate the pension plan to be
effective contingent upon the receipt of appropriate governmental approvals.
DeSoto further intends to use 25% of the excess assets in the pension plan to
fund a replacement plan and purchase an annuity contract to cover accrued plan
benefits. The remaining excess plan assets will be subject to a 20% federal
excise tax and federal and state income taxes. If more than 75% of the excess
assets were reverted to DeSoto from the plan, such reversion would be subject to
a 50% federal excise tax and federal and state income taxes. DeSoto intends to
utilize the reversionary funds to satisfy, among other things, various creditor
obligations and stabilize ongoing operations. As an alternative to termination
of the pension plan, DeSoto is also continuing to pursue a possible business
combination, in its ongoing efforts to preserve and maximize shareholder values;
however, there can be no assurance as to the outcome of such efforts. For
further information regarding the possible business combination, refer to Note P
to the Consolidated Financial Statements.
DeSoto makes contributions to the employee investment plan in cash or
Company stock in an amount equal to 30% of employee deposits up to 5% of such
employee's gross pay.
F-8
<PAGE> 102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The costs of the pension and employee investment plans are summarized as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
-------- -------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Noncontributory Retirement plans:
Service cost -- benefits earned during the period..... $ 527 $ 671 $ 492
Interest cost on projected benefit obligation......... 5,089 4,978 5,012
Actual return on assets -- (favorable) unfavorable.... (30,841) 3,962 (8,652)
Net amortization and deferral......................... 17,803 (16,824) (2,053)
-------- -------- -------
(7,422) (7,213) (5,201)
Employee Investment Plan.............................. 35 84 47
Contributions to Union Sponsored Plans................ 242 313 288
-------- -------- -------
Total income from pension and employee investment
plans............................................... $ (7,145) $ (6,816) $(4,866)
======== ======== =======
</TABLE>
The change in the net amortization and deferral from 1993 to 1994 and from
1994 to 1995 was primarily due to the difference between the actual return on
Plan assets, which was favorable in 1995 and unfavorable in 1994, versus the
expected return on Plan assets. Under Statement of Financial Accounting
Standards No. 87, the difference between the actual and expected return on
assets is deferred and amortized over subsequent periods.
The pension plans assets at December 31, 1995 are invested in United States
Treasury Notes, corporate bonds and notes, investment partnerships, United
States Treasury Securities, time deposits, commercial paper, interest rate
futures, forward exchange contracts, foreign currency, certain real estate
operated by DeSoto, various mutual funds invested in bonds, equity and real
estate, mortgages and other short-term investments. The pension plan's funded
status and amounts recognized in DeSoto's balance sheets at December 31 are
presented below:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Actuarial present value of vested benefit obligation........... $ 65,719 $ 57,540
======== ========
Accumulated benefit obligation................................. $ 65,877 $ 57,702
======== ========
Plan assets at fair value...................................... $162,017 $135,764
Actuarial present value of projected benefit obligation........ 66,832 59,471
-------- --------
Plan assets in excess of projected benefit obligation.......... 95,185 76,293
Unrecognized net gain.......................................... (40,595) (27,707)
Prior service costs............................................ 2,064 2,259
Unrecognized net asset......................................... (9,741) (11,526)
-------- --------
Prepaid pension cost recognized on the balance sheet........... $ 46,913 $ 39,319
======== ========
</TABLE>
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.5% in 1995 and 8.9% in
1994. The rate of increase in future compensation levels used in determining the
actuarial present value of the projected benefit obligation was 5.0% in 1995 and
1994. The expected long-term rate of return on assets used in determining
pension income was 8.0% in 1995 and 7.0% in 1994.
In October 1992, DeSoto completed the sale of its real properties in
Joliet, Illinois, Columbus, Georgia, and Union City, California, to a real
property trust created by DeSoto's pension plan. This trust paid approximately
$6.5 million in cash for the properties and entered into a ten-year lease of the
properties to DeSoto. DeSoto's initial annualized rental obligation was
$707,000. The amount paid to DeSoto by the trust
F-9
<PAGE> 103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and DeSoto's annual rental obligation were based upon an independent appraisal
and approved by DeSoto's Board of Directors.
Effective January 1, 1994, the DeSoto Salaried Plan, Hourly Plan and J. L.
Prescott Plan were merged into the DeSoto Employee Retirement Plan. This action
resulted in a combination of the assets of each of these plan into one trust
fund. The method of calculating benefits under each of these plans remained
unchanged.
In March 1994, DeSoto ceased operations at the Columbus, Georgia facility.
Effective October 1, 1994, DeSoto entered into an agreement to sublease the
facility for a term of three years. The subtenant makes monthly rental payments
directly to the pension trust; DeSoto continues to make monthly rental payments
to the pension trust for the amount by which DeSoto's initial rental obligation
exceeds the subtenant's rental obligation.
In December 1994, DeSoto sold its real property located in South Holland,
Illinois, to the real property trust of DeSoto's pension plan. The trust paid
$4,117,000 in cash for the properties and has entered into a ten-year lease of
the properties to DeSoto. DeSoto's annualized rental obligation (net of receipts
from subtenants) is approximately $898,000 including the South Holland facility.
The amount paid to DeSoto by the trust and DeSoto's annual rental obligation
were based upon an independent appraisal and approved by DeSoto's Board of
Directors.
D. POST RETIREMENT AND OTHER POST EMPLOYMENT BENEFITS
DeSoto provides certain health care and life insurance benefits for retired
employees on a contributory basis. Substantially all of DeSoto's employees,
except certain hourly-rated employees, may become eligible for such benefits if
they reach qualifying retirement age while working for DeSoto. Such benefits and
similar benefits for active employees are administered by two outside companies
whose administrative fees are based upon number of participants and claims
processed. The health care program is self funded by DeSoto with purchased stop
loss coverage for claims over certain levels. Life insurance benefits are funded
by policies for which DeSoto pays premiums. In certain cases the participants
also contribute to the premium payment. The following table presents the costs
of accruing the postretirement insurance benefits in 1995, 1994, and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C> <C>
Service cost -- benefits attributed to service during the
period...................................................... $ 31 $ 14 $ 4
Interest cost on accumulated postretirement benefit
obligation.................................................. 289 130 109
Amortization of unrecognized net loss......................... 115 7 --
---- ---- ----
Net periodic postretirement benefit cost...................... $435 $151 $113
==== ==== ====
</TABLE>
The following table presents the components of DeSoto's post-retirement
benefit obligation and the amount recognized in DeSoto's balance sheets at
December 31,
<TABLE>
<CAPTION>
1995 1994
------ ------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Current retirees................................................. $2,831 $2,819
Active plan participants......................................... 373 393
------ ------
Total.................................................... 3,204 3,212
Unrecognized net loss.............................................. 1,621 1,687
------ ------
Accrued post-retirement liability recognized on the balance
sheet............................................................ $1,583 $1,525
====== ======
</TABLE>
F-10
<PAGE> 104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The assumed health care cost trend rate used to measure the expected cost
of benefits covered by the plan was 7% and 8% as of December 31, 1995 and 1994,
respectively. The weighted average discount rate used to measure the accumulated
post-retirement insurance obligation was 7.5% for 1995 and 9.0% for 1994. A one
percentage point increase in the assumed health care cost trend rate for each
future year would have resulted in additional obligation of $288,000 at December
31, 1995 and would have increased the aggregate service and interest cost by
$29,000 in 1995.
DeSoto adopted Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" effective January 1, 1994.
The impact of adoption was not material to DeSoto's financial position or
results of operations.
E. REVOLVING CREDIT AGREEMENT AND OTHER DEBT
On November 12, 1992, in conjunction with the acquisition of J. L. Prescott
Company ("Prescott"), DeSoto entered into an amended credit agreement with
Harris Trust and Savings Bank and two additional banks. The agreement had
originally provided for a two-year revolving credit facility of up to
$20,000,000. Effective October 1, 1993, the credit facility was reduced to
$15,000,000 per conditions set in the November 12, 1992 amendment. The
termination date of this amended agreement was originally October 31, 1994. In
March 1994, the facility was further amended setting a termination date of
January 1, 1995. Effective with the March 1994 amendment, DeSoto paid $2,700,000
of the outstanding debt upon the receipt of its income tax refund for fiscal
year 1993. Up to the March 1994 amendment, the revolver carried an interest rate
equal to either the prime rate of Harris Trust and Savings Bank plus 1 1/4% or
the IBOR rate plus 3 1/2% (as amended in the third quarter of 1993). Effective
in March 1994, the interest rate became the prime rate of Harris Trust and
Savings plus 2%.
On December 7, 1994, DeSoto entered into a revolving credit facility with
CIT. The agreement provided for up to $14,000,000 under a revolving credit
facility. The funds available for borrowing were based on a formula which
included specified percents of accounts receivable and inventory. The interest
rate on the facility was prime plus 1 1/4%. Commitment fees under the revolving
credit facility were calculated at 1/4 of one percent per annum of the average
unused and available portion of the facility. The facility was collateralized by
substantially all of DeSoto's assets. A portion of the line of credit was
available in the form of letters of credit. As of September 30, 1995, the
revolving credit agreement was terminated and DeSoto had no outstanding
borrowing as of that date.
Cash payments for interest were $546,000 in 1995, $575,000 in 1994 and
$535,000 in 1993.
F. INCOME TAXES
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
The benefit for income taxes is comprised of:
Federal Income Taxes:
Currently Refundable..................................... $ -- $ -- $(4,808)
Deferred................................................. (608) (493) 249
----- ----- -------
Federal Income Taxes..................................... (608) (493) (4,559)
State and Local Income Taxes............................. (150) (156) (673)
----- ----- -------
Total Income Tax Benefit......................... $(758) $(649) $(5,232)
===== ===== =======
</TABLE>
Net cash refunds of income taxes were $0 in 1995, $8,742,000 in 1994 and
$1,446,000 in 1993.
F-11
<PAGE> 105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the statutory federal income tax rate to the effective
tax rate is presented below:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Statutory Federal Income Tax Rate........................... (35.0)% (35.0)% (34.0)%
Effect of:
Write off of Goodwill..................................... 22.0 -- --
Effect of Tax Rate Changes on Deferred Taxes.............. (0.9) 7.6 --
State Income Taxes, Net................................... (0.9) (3.6) (3.4)
E.P.A. Fine............................................... -- 0.3 0.3
Other..................................................... 0.7 2.3 (2.2)
----- ----- -----
Effective Rate.............................................. (14.1)% (28.4)% (39.3)%
===== ===== =====
</TABLE>
The components of the net deferred income tax asset and liability were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
Current Deferred Tax Asset:
Restructuring and Cost Containment............................. $ 1,899 $ 917
Inventory...................................................... 531 1,989
Retirement Security Program.................................... 272 315
Insurance...................................................... 210 441
Valuation Reserves............................................. 144 844
Vacation Pay................................................... 137 225
Other.......................................................... (1,144) (1,436)
------- -------
Total Current Deferred Tax Asset....................... $ 2,049 $ 3,295
======= =======
Long Term Deferred Tax Liability:
Prepaid Pension................................................ $18,390 $15,570
Other Reserves................................................. 3,919 3,092
Restricted Investments......................................... 1,773 2,129
Depreciation................................................... 1,287 2,413
Net Operating Loss Carryforward................................ (7,681) (3,889)
Waste Site Cleanup............................................. (2,859) (3,669)
Deferred Gain -- Sale of Assets................................ (1,091) (1,255)
Post Retirement Insurance...................................... (658) (624)
State and Local Income Taxes................................... (459) (480)
Valuation Reserves............................................. (377) (404)
Other.......................................................... (783) 509
------- -------
Total Long-Term Deferred Tax Liability................. $11,461 $13,392
======= =======
</TABLE>
At December 31, 1995, DeSoto had net operating loss carryforwards of
approximately $22.0 million. These carryforwards expire between 2007 and 2010.
DeSoto has received a Report of Tax Examination Changes from the Internal
Revenue Service that proposes adjustments resulting in additional taxes due of
$6.5 million and penalties of $1.4 million, as well as an unspecified amount of
interest for the years 1990 through 1993. DeSoto has filed a formal appeal of
the proposed adjustments. DeSoto believes that the resolution of this matter
will not have a material adverse effect on DeSoto's financial position or
results of operations, although the timing of cash required to settle any
amounts ultimately due could have a significant impact on DeSoto's cash flows.
F-12
<PAGE> 106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
G. LEASE COMMITMENTS
DeSoto leases certain facilities and equipment under lease agreements which
are classified as operating leases. These leases are for remaining periods
ranging from one to ten years and in some instances include renewal provisions
at the option of DeSoto. Rental expense was $1,592,000 in 1995, $1,652,000 in
1994 and $2,107,000 in 1993.
RENTAL COMMITMENTS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
TOTAL
------
<S> <C>
1996.............................................. $1,267
1997.............................................. 1,263
1998.............................................. 1,101
1999.............................................. 1,098
2000.............................................. 1,098
2001-2004......................................... 2,978
------
$8,805
======
</TABLE>
H. SEGMENT REPORTING
DeSoto operates in one industry segment, the manufacture of detergent.
DeSoto also performs contract manufacturing and packaging of detergents.
DeSoto's products are sold in retail stores, including mass merchants and
service centers, throughout the United States. DeSoto's revenues are derived
from several customers. There are five customers which each have accounted for
more than 10% of DeSoto's revenues as indicated below. DeSoto no longer does
business with Kmart or Benckiser as a result of the transactions disclosed in
Note O to the Consolidated Financial Statements.
<TABLE>
<CAPTION>
% OF CONSOLIDATED NET
REVENUES
--------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Sears, Roebuck & Co........................................ 20% 16% 14%
Kmart...................................................... 10% 15% 10%
Procter & Gamble........................................... 13% 10% *
Benckiser.................................................. 12% * *
Lever Brothers............................................. * * 11%
</TABLE>
- ---------------
* Less than 10% of consolidated net sales.
From time to time, DeSoto enters into manufacturing and packaging
agreements with its contract packaging customers. These contracts include
product specifications, production procedures and other general terms. The
contracts do not obligate the customer to make any purchases.
I. ENVIRONMENTAL MATTERS
DeSoto has been identified by government authorities as one of the parties
potentially responsible for the cleanup costs of waste disposal sites, many of
which are on the U.S. EPA's Superfund priority list, and for certain alleged
contamination. In addition, damages are being claimed against DeSoto in private
actions for alleged personal injury or property damage in the case of certain
other waste disposal sites. The waste disposal sites relate to DeSoto's
discontinued operations. DeSoto's potential responsibility in connection with
these sites generally depends upon, among other things, whether it, directly or
through third parties, engaged in the business of waste disposal or storage,
shipped waste to the sites and, in those cases in which DeSoto did so ship
waste, the relative amount and/or composition of waste material attributable to
DeSoto as compared to the
F-13
<PAGE> 107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
waste material attributable to other solvent parties. Typically, DeSoto is one
of numerous parties involved in actions or proceedings relating to these waste
disposal sites and its obligations in connection with its share of cleanup and
other costs extend over a number of years rather than being payable at one time.
DeSoto believes that it has made adequate provisions for the costs it may
incur with respect to the sites. DeSoto provides a reserve for the lower end of
an estimated range of total loss from $7.3 to $21.6 million (after considering
information provided by independent legal counsel). These estimates are subject
to numerous variables, the effects of which are difficult to measure, including
the stage of the investigations, the nature of potential remedies, the joint and
several liability with other potentially responsible parties and other issues.
Accordingly, the reserves represent DeSoto's best estimates of its potential
exposure at this time. The reserve balance was $7.3 million as of December 31,
1995 and $9.3 million as of December 31, 1994. In 1995, DeSoto paid out
approximately $2.3 million on waste site related liabilities, excluding legal
and administrative costs; of this amount $1.1 million was disbursed from the
trust discussed below and $29,000 was disbursed from the restricted cash account
discussed below.
Actual costs to be incurred in future periods may vary from the estimates.
DeSoto's potential liability may be materially impacted in the future as a
result of final determinations of the extent of environmental damage, the share
of the cost of cleanup technology which is ultimately chosen, the extent of the
cleanup required, the solvency of other potentially responsible parties, changes
in law and unanticipated awards of damages for personal injury or property
damages. In addition, DeSoto has not reduced its estimates of liability to
reflect the possible proceeds of insurance coverage which may be applicable to
these costs. DeSoto from time to time engages in discussions with insurance
carriers regarding Company claims in this regard and DeSoto may pursue
litigation if no satisfactory resolution of the claims is reached. DeSoto
reached settlements with two insurance carriers in 1995 regarding the cost of
cleanup at certain waste disposal sites. As a result of these settlements,
DeSoto received proceeds in 1995 totaling approximately $6.1 million.
In connection with DeSoto's acquisition of Prescott in November 1992,
DeSoto assumed the cleanup obligations of Prescott under New Jersey's
Environmental Cleanup and Responsibility Act ("ECRA"). Pursuant to an agreement
with certain former owners of Prescott, DeSoto in 1993 received funds to offset
the cost of the cleanup previously held in escrow for the benefit of Prescott.
(DeSoto has placed these funds in a restricted cash account to secure its
cleanup obligations.) DeSoto currently expects that these funds will fully cover
the costs of cleanup required by New Jersey. The remaining liability related to
this site is included in the ranges above. The remaining funds are shown on the
balance sheet under the caption, restricted cash.
Under the terms of the 1990 consumer paint asset purchase agreement with
Sherwin-Williams, $6.0 million of the sale's proceeds were used to establish a
trust fund to fund potential clean-up liabilities. The trust agreement expires
on October 26, 2000, or when the trust is depleted, whichever occurs first. A
portion of the trust has been set aside with respect to a specific site; the
agreement governing that portion of the trust expires on October 26, 2008.
DeSoto has access to the trust fund, subject to the other party's approval, for
any expenses or liabilities incurred by DeSoto regarding environmental claims
relating to the sites identified in the trust agreement. Sherwin-Williams has
access to the trust fund, subject to the other party's approval, for any
expenses or liabilities incurred as a result of DeSoto's failure to meet its
obligations relating to the sites identified in the agreement. DeSoto was
reimbursed $1,095,000 in 1995 and $145,000 in 1994 from the trust to cover waste
site payments. The balance in the trust fund, primarily invested in United
States Treasury securities and classified as a restricted investment on the
balance sheet, as of December 31, 1995 was $4,524,000. Of the estimated range of
total loss noted above, $2.3 to $5.0 million relate to sites which are covered
by the escrow account. The accrued waste site cleanup liability that was covered
by the trust at December 31, 1995 was $2,346,000 of which $755,000 was
classified as current.
Under the terms of the 1990 industrial coatings business purchase
agreement, DeSoto had delivered to the Valspar Corporation an irrevocable
standby letter of credit in the amount of $2.0 million. The letter of credit was
delivered to secure DeSoto's obligation to indemnify Valspar for certain
environmental matters. DeSoto reached a settlement with Valspar in 1994 under
which the letter of credit was terminated.
F-14
<PAGE> 108
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1993, DeSoto transferred approximately $9.0 million of
liabilities for certain of its clean-up costs and related expenses at certain
waste disposal sites to DeSoto Environmental Management, Inc. (DEMI), a
subsidiary of DeSoto. DeSoto remains liable for the potential environmental
clean-up costs if DEMI is unable to satisfy the obligations. The purpose of DEMI
is to provide focused, strategic management of the environmental liabilities and
the related clean-up costs. DeSoto and certain members of DeSoto's management
and consultants are stockholders in DEMI. Refer to Note K of the Notes to
Consolidated Financial Statements for further information.
It is the opinion of management, after evaluating the variables discussed
above as well as the anticipated time frame for remediation, that the resolution
of the waste site liability will not have a material adverse effect on DeSoto's
financial position, cash flows or results of operations.
J. CONTINGENCIES & LITIGATION
As previously reported, there are several shareholder actions still pending
in the Delaware courts relating to various proposals of Sutton Holding Corp. to
acquire DeSoto in the period 1989 to 1991. These actions, all of which
consolidated, have not been actively pursued and it appears the case was removed
from the courts calendar; however, the plaintiffs recently served a discovery
request upon DeSoto. DeSoto believes that these actions are not material.
See Note L to the Consolidated Financial Statements for information
regarding the Contingent Value Rights ("CVR's") which were issued by DeSoto to
the sellers in connection with DeSoto's acquisition of J.L. Prescott Company in
November 1992.
DeSoto is also a party to other litigation arising out of the ordinary
conduct of its business or results of current and discontinued operations.
DeSoto believes that the disposition of all such actions, individually and
in the aggregate, will not have a material adverse effect on DeSoto's financial
position, cash flows, or results of operations.
K. RELATED PARTY TRANSACTIONS
In December 1993, DeSoto completed a number of transactions involving
certain of its subsidiaries and officers and directors. J.L. Prescott Company, a
wholly-owned subsidiary of DeSoto, paid off a portion of intercompany
obligations to DeSoto by means of the issuance of a ten-year, $9 million
principal amount, promissory note. DeSoto used this note to purchase 100 shares
of a non-voting class of common stock of another of its subsidiaries, DeSoto
Environmental Management, Inc. ("DEMI"). (This class of common stock is entitled
to 15% of the dividends or other distributions made to all classes of common
stock.) As part of the sale of stock to DeSoto, DEMI assumed up to a maximum of
$9 million of certain of DeSoto's possible clean-up costs and related expenses
at waste disposal sites. DeSoto remains liable for these possible environmental
clean-up costs if DEMI is unable to satisfy these obligations. DeSoto
subsequently sold at a price of $1 per share the shares of non-voting common
stock of DEMI to Anders Schroeder (Vice Chairman) (33 shares), William Spier
(Chairman and Chief Executive Officer) (33 shares), Anne Eisele (President and
Chief Financial Officer) (20 shares), and Irving Kagan (Special Counsel) (14
shares). Messrs. Schroeder and Spier subsequently sold 8 shares and 9 shares,
respectively, of their common stock to John Phillips upon his becoming President
and Chief Executive Officer in 1994. Mr. Phillips sold his shares back to
Messrs. Spier and Schroeder upon his resignation in 1995. Each of these persons
agreed that upon complete satisfaction of DeSoto's existing environmental
clean-up liabilities or when that person ceases to be an officer, director or
consultant of DeSoto, the DEMI shares held by that person would be repurchased
by DeSoto at the greater of $1 per share or the per share book value of DEMI. As
a general matter, the value of this DEMI stock will be dependent upon the
ability of DEMI, which has no other significant business or assets, to satisfy
DeSoto's existing environmental liabilities for less than $9 million, which was
the approximate minimum amount included in the 1994 estimated range of
environmental liability. Consequently, the holders of this DEMI stock have a
direct incentive to minimize the costs of satisfying environmental liabilities.
In any event, DeSoto will
F-15
<PAGE> 109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
retain 85% of the savings below the 1994 estimated minimum costs and savings
which do not reduce the liabilities below such estimated minimum will accrue
entirely to DeSoto. This transaction was approved by a unanimous vote of all
disinterested directors.
In November 1992, DeSoto announced the completion of the sale of certain
real properties to a trust created by DeSoto's Pension Plans. In 1993, certain
of these assets were repurchased from the Pension Plans by DeSoto and then sold
to an unrelated third party. In 1994, DeSoto's facility in South Holland,
Illinois, was sold to the real property trust of DeSoto's Pension Plans. Refer
to Note C of the Notes to Consolidated Financial Statements for further
information.
In July 1992, DeSoto entered into an agreement with parties related to
Sutton Holding Corp. ("Sutton"), which as of December 31, 1995 and in
conjunction with parties related to Sutton, owns 14% of DeSoto's outstanding
common stock and approximately 23% of all of DeSoto's outstanding voting stock,
providing for a cash purchase of newly issued DeSoto securities. The investment
resulted in Sutton's acquiring 583,333 shares of a new series of DeSoto senior
preferred stock and warrants to acquire 1.2 million shares of common stock.
Refer to Note L of the Notes to Consolidated Financial Statements, for further
information regarding this transaction.
L. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
As of December 31, 1995, there were 5,619,274 shares of common stock issued
of which 940,067 shares were held as treasury stock. DeSoto's common stock has a
$1 par value per share, and there are 20,000,000 shares authorized.
In July 1992, DeSoto entered into an agreement with parties related to
Sutton Holding Corp. ("Sutton"), providing for a $3.5 million cash purchase of
newly issued DeSoto securities. The investment resulted in Sutton's acquisition
of 583,333 shares of a new series of DeSoto senior preferred stock and warrants
to acquire 1.2 million shares of common stock per approval of DeSoto's
stockholders at the 1993 Annual Meeting.
The DeSoto senior preferred pays 8% quarterly cumulative dividends (which
increase to 10% if dividends earned remain unpaid for more than one year), has
one vote per share (voting with common stock as a single class), has a
liquidation preference of $6.00 per share, must be redeemed by DeSoto at
liquidation preference after eight years and may be redeemed at DeSoto's option
after five years. The carrying amount of the preferred shares on the balance
sheet represents the proceeds received upon issuance (net of related expenses)
plus accretion to the redemption value of the shares in five years. The carrying
value has also been increased by cumulative dividends not currently declared.
The warrants have a term of six years and are exercisable at $7.00 per share of
common stock.
Dividends have not been paid on the preferred stock since the date of
issuance. In addition, dividends may not be declared on the common stock while
dividends on the preferred stock are in arrears. At December 31, 1995 unpaid
dividends on the preferred totaled approximately $1,197,000.
The purchase price of $3.5 million for the new securities was allocated by
DeSoto, upon the advice of an independent financial advisor, as $2.5 million for
the preferred stock and $1.0 million for the warrants. The valuation took into
account the terms of the purchase agreement and applied customary financial
analyses used in such transactions to those terms.
The agreement with Sutton resulted from negotiations between Sutton and a
Special Committee of DeSoto's Board of Directors comprised of persons
unaffiliated with Sutton. The Special Committee was represented by independent
legal counsel and received an opinion from an independent financial advisor,
selected by the Committee, that the arrangements with Sutton are fair, from a
financial point of view, to the stockholders of DeSoto (other than those related
to Sutton).
F-16
<PAGE> 110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Sutton includes entities affiliated with William Spier, Chairman and Chief
Executive Officer of DeSoto, and Anders Schroeder, Vice Chairman of DeSoto, and
entities represented by David Tobey, a director of DeSoto.
In 1992, DeSoto also amended the terms of its stockholder rights plan to
permit the parties related to Sutton to increase their ownership of common
shares and other voting securities to approximately 38.2% of DeSoto's
outstanding voting power (whether by exercise of warrants or acquisitions of
common shares in the market or otherwise). In addition, the plan was amended to
permit any stockholder to acquire up to 25% of DeSoto's outstanding voting power
(as compared to the previous 20% limit).
As a result of the $3.5 million purchase of senior preferred stock, parties
related to Sutton now hold securities representing approximately 23% of DeSoto's
currently outstanding voting securities. If securities issuable upon exercise of
warrants are included, parties related to Sutton would own approximately 38% of
the outstanding voting power of DeSoto.
In connection with the 1992 Prescott acquisition, DeSoto also issued
522,775 shares of DeSoto common stock, which were held in treasury, and agreed
to make a per share payment at the end of three years equal to the difference,
if any, between $12 and the highest 60-day average trading price, if lower than
$12 per share, of DeSoto common stock during the second and third years
following the acquisition, with a maximum obligation of $6 per share (the
"Contingent Value Rights" or "CVR's"). The payment shall be subject to reduction
as provided by the Agreement which governs the payment (the "Agreement"). Per
the Agreement, the payment, if any, shall be made in cash to the extent not
prohibited (as defined in the Agreement). Any payment not made in cash is to be
made by issuance of DeSoto securities and/or DeSoto common stock in that order.
As of the measurement date of the Agreement (November 12, 1995), the amount
calculated as payable under the terms of the Agreement, before the deduction of
amounts DeSoto believes are appropriate and permitted under the terms of the
Agreement, is $1,934,000; after applying such deductions DeSoto believes it is
not required to make any payment, although certain CVR holders contend
otherwise, and accordingly, no obligation has been recorded related to the
Agreement. DeSoto intends to vigorously defend its position in this matter,
which may include additional claims by DeSoto. DeSoto has reached agreement with
the holder of one-half of the outstanding CVRs which, among other things,
provides that no amounts are owed by DeSoto in respect of the CVRs owned by that
holder.
M. STOCK OPTIONS AND STOCK GRANTS
Shares of stock and stock options have been granted to certain employees,
consultants, and nonemployee directors under the stock plan adopted in 1992. The
options granted to employees and consultants are qualified stock options (ISO)
and the options granted to non employee directors are nonqualified options. The
ISO options vest equally over the three years subsequent to the first
anniversary of the grant date and are exercisable for a period of 10 years from
the grant date. The nonqualified options are exercisable immediately upon grant
and are exercisable for a period of 10 years from the grant date. All options
have been granted at the prices equal to the fair market value of the stock on
the dates the options were granted. At December 31, 1995, 50,500 of the 400,000
shares of stock available for options or grants under DeSoto's stock option plan
remained available for grants. Options which are terminated, lapsed or expired
shall again become available for issuance under the stock option plan.
F-17
<PAGE> 111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock options have been granted and exercised as set forth below:
<TABLE>
<CAPTION>
OUTSTANDING OPTION PRICE EXERCISABLE
OPTIONS PER SHARE-RANGE OPTIONS
----------- --------------- -----------
<S> <C> <C> <C>
December 31, 1993.......................... 181,500 5.875 - 10.125 83,833
Options granted.......................... 122,000 5.50 - 7.00 27,000
Options that became exercisable.......... -- 7.00 - 9.00 60,333
Options exercised........................ (10,000) 7.00 (10,000)
Options lapsed and canceled.............. (29,000) 5.875 - 9.00 (19,000)
December 31, 1994.......................... 264,500 5.50 - 10.125 142,166
Options granted.......................... 27,000 4.375 - 4.750 27,000
Options that became exercisable.......... -- 6.625 - 9.00 122,334
Options lapsed and cancelled............. (35,000) 6.625 - 9.00 (35,000)
-------- --------
December 31, 1995.......................... 256,500 4.375 - 10.125 256,500
======== ========
</TABLE>
During 1994, 30,000 shares of common stock were granted to an officer of
DeSoto at no cost. All granted shares vested in 1994. The average market price
of the common stock at the close of business on the vesting dates in 1994 was
$5.81. An additional 20,000 shares of common stock were granted to officers of
DeSoto in 1994. Of those shares, 7,500 shares vested in 1995 and 5,000 shares
were canceled in 1995; the remaining shares vest over the period from 1996 to
1998. The average market price of the common stock at the close of business on
the vesting date in 1995 was $5.13.
F-18
<PAGE> 112
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
N. OTHER INCOME AND EXPENSE
The following are components of the respective captions in the statements
of operations:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Nonrecurring expense:
Provision for restructuring due to disposition of
liquid laundry and fabric softener sheet
businesses......................................... $ 3,100 $ -- $ --
Loss on disposition of liquid laundry detergent and
fabric softener sheet businesses................... 3,059 -- --
Provision for shutdown of Columbus, Georgia Plant..... -- -- 2,000
Loss on disposition of Jean Sorelle................... -- -- 1,331
Write-down of machinery and equipment held for
resale............................................. -- -- 1,194
Provision for manufacturing and product
rationalization.................................... -- -- 900
Settlement of lawsuit (including plaintiff's legal
fees).............................................. -- -- 369
Other................................................. -- -- 131
------- ------- -------
Total......................................... $ 6,159 $ -- $ 5,925
======= ======= =======
Nonoperating expense:
Provision for waste site cleanup...................... $ -- $ -- $ 1,467
Other................................................. -- -- 134
------- ------- -------
Total......................................... $ -- $ -- $ 1,601
======= ======= =======
Nonoperating income:
Insurance settlements................................. $(6,067) $ -- $ (232)
Royalties............................................. (244) (222) (53)
Arbitration settlement -- discontinued operations..... -- (837) --
Reimbursement of legal fees........................... -- (244) --
Sale of land and building............................. -- -- (3,235)
Pension settlement -- discontinued operations......... -- -- (454)
Other................................................. (49) (47)
------- ------- -------
Total......................................... $(6,360) $(1,303) $(4,021)
======= ======= =======
</TABLE>
O. DISPOSITIONS
On July 21, 1995, DeSoto announced the transfer and assignment of various
operations and assets involved in its liquid detergent and fabric softener dryer
sheet businesses to two separate buyers. DeSoto assigned the rights to certain
customers with respect to these businesses. DeSoto also sold other assets which
included certain accounts receivable, inventory and machinery and equipment. The
proceeds of these transactions were utilized to reduce DeSoto's senior debt owed
to CIT. Both transactions also provide for DeSoto to receive royalties and other
earn-out opportunities over a three-year period in one case and over a four-year
period in the other case.
DeSoto recorded a net loss on the sale of the liquid detergent and fabric
softener sheet businesses (including the write-off of related goodwill). DeSoto
also recorded a charge of $3.1 million in the third quarter relative to costs
associated with the closure of operating facilities relative to these
transactions. Significant components of the charge included severance, rent,
real estate taxes and amounts to reduce assets to their net realizable value.
The non-recurring expense of $6,159,000 reflects the net impact of these
transactions.
F-19
<PAGE> 113
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following information is provided on a pro forma basis to illustrate
the effect of certain adjustments to the historical consolidated financial
statements that would have resulted from the above dispositions if such
transactions had occurred on January 1, 1994. The results are not necessarily
indicative of actual results had the foregoing transactions occurred as
described above, nor do they purport to represent results of future operations
of DeSoto.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31,
---------------------
1995 1994
------- -------
(IN THOUSANDS
EXCEPT PER SHARE
AMOUNTS -- UNAUDITED)
<S> <C> <C>
Net revenues................................................... $25,082 $35,424
======= =======
Net earnings................................................... $ 2,682 $ 1,037
======= =======
Net earnings per common share.................................. $ 0.47 $ 0.21
======= =======
</TABLE>
The following table summarizes the non-cash aspects of the sale of the
liquid detergent and fabric softener sheet businesses:
<TABLE>
<S> <C>
Net selling prices of businesses sold....................................... $6,782
Minimum royalty to be paid over a four-year period.......................... 1,477
------
Cash received as part of the transactions................................... $5,305
======
</TABLE>
P. SUBSEQUENT EVENT
On March 13, 1996, DeSoto announced that it was discussing a proposed
merger with Keystone Consolidated Industries, Inc. which, as presently
contemplated, would involve an exchange of all of DeSoto's shares of outstanding
stock for 3.5 million shares of Keystone common stock, in a tax-free
transaction.
Merger discussions are ongoing, and are subject to mutual due diligence by
the parties, the negotiation and signing of a definitive agreement, the approval
of DeSoto's and Keystone's boards of directors and shareholders and Keystone's
primary lender, as well as the requisite governmental review. Additionally, the
prospective transaction would require a satisfactory resolution of the payout
plan with DeSoto's trade creditors.
The merger with Keystone would provide an alternative to the prospective
termination of DeSoto's overfunded pension plan. The termination will not occur
if the proposed merger is completed. Additionally, Keystone has an underfunded
pension plan with certain funding waivers relating to prior years and has
preliminarily discussed the possible merger with the Pension Benefit Guaranty
Corporation.
There can be no assurance as to the outcome of the merger discussions; or,
in this connection, the resolution of DeSoto's trade creditor plan.
Keystone, headquartered in Dallas, Texas, is engaged in the manufacture and
distribution of fencing and wire products, carbon steel rods, industrial wire,
nails and construction products.
F-20
<PAGE> 114
QUARTERLY REVENUES AND EARNINGS DATA (1995 VERSUS 1994)
<TABLE>
<CAPTION>
1995
---------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net Revenues.................................. $18,927 $16,314 $11,132 $ 5,966 $52,339
======= ======= ======= ====== =======
Gross Profit.................................. $ (516) $ (58) $(1,093) $ (63) $(1,730)
======= ======= ======= ====== =======
Net Earnings (Loss)........................... $(1,022) $ 2,897 $(6,146) $ (364) $(4,635)
======= ======= ======= ====== =======
Net Earnings (Loss) Per Common Share.......... $ (0.24) $ 0.60 $ (1.33) $ (0.13) $ (1.10)
======= ======= ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
1994
---------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net Revenues.................................. $23,640 $22,286 $21,394 $19,862 $87,182
======= ======= ======= ======= =======
Gross Profit.................................. $ 977 $ 639 $ 543 $ 223 $ 2,382
======= ======= ======= ======= =======
Net Earnings (Loss)........................... $ 51 $ (744) $ (782) $ (160) $(1,635)
======= ======= ======= ======= =======
Net Earnings (Loss) Per Common Share.......... $ (0.01) $ (0.18) $ (0.19) $ (0.05) $ (0.42)
======= ======= ======= ======= =======
</TABLE>
- ---------------
NOTES: In the third quarter of 1995, DeSoto completed the transfer and
assignment of various operations and assets involved in its liquid
detergent and fabric softener dryer sheet businesses to two separate
buyers.
The results for the second quarter of 1995 include $6.1 million of
non-operating income.
The results for the fourth quarter of 1994 include $2.9 million of
income from DeSoto's retirement plans. The results for the first
quarter of 1994 include $1.1 million of nonoperating income.
The quarterly information presented above is unaudited.
F-21
<PAGE> 115
DESOTO, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1996 1995
------- -------
(IN THOUSANDS
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
NET REVENUES.............................................................. $ 9,481 $35,241
COSTS AND EXPENSES:
Cost of sales........................................................... 8,383 35,815
Selling, administrative and general..................................... 2,718 5,729
Retirement security program............................................. (3,436) (3,382)
Nonrecurring expense.................................................... 1,562 --
------- -------
TOTAL OPERATING COSTS AND EXPENSES........................................ 9,227 38,162
------- -------
EARNINGS (LOSS) FROM OPERATIONS........................................... 254 (2,921)
OTHER CHARGES AND CREDITS:
Interest expense........................................................ -- 459
Nonoperating expense (income)........................................... 1,184 (6,360)
------- -------
Earnings (Loss) before Income Taxes....................................... (930) 2,980
Provision (Benefit) for Income Taxes...................................... (351) 1,105
------- -------
NET EARNINGS (LOSS)....................................................... (579) 1,875
Dividends on Preferred Stock.............................................. (283) (168)
------- -------
Net Earnings (Loss) Available for Common Shares........................... $ (862) $ 1,707
======= =======
NET EARNINGS (LOSS) PER COMMON SHARE...................................... $ (.18) $ .37
======= =======
Average Common Shares Outstanding......................................... 4,684 4,674
======= =======
Dividends Declared per Common Share....................................... -- --
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-22
<PAGE> 116
DESOTO, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
1996 DECEMBER 31,
(UNAUDITED) 1995
----------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Current Assets:
Cash............................................................ $ 42 $ 51
Restricted cash................................................. -- 29
Restricted short-term investments............................... 1,180 1,180
Trade accounts and notes receivable-net......................... 2,744 4,764
Inventories -- net:
Finished goods............................................... 25 405
Raw materials and work-in-process............................ 330 380
------- --------
355 785
Deferred income taxes........................................... 3,180 2,049
Prepaid expenses and other current assets....................... 218 231
------- --------
Total Current Assets.................................... 7,719 9,089
Restricted Investments............................................ 3,877 3,770
Property, Plant and Equipment -- net.............................. 589 2,610
Prepaid Pension................................................... 50,710 46,913
Other Non-Current Assets.......................................... 748 2,586
------- --------
$63,643 $ 64,968
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................ $11,482 $ 14,263
Reserves and liabilities related to restructuring programs...... 4,242 3,226
Waste site clean-up............................................. 2,025 2,025
Other........................................................... 4,388 4,500
------- --------
Total Current Liabilities............................... 22,137 24,014
Waste site clean-up -- long-term.................................. 5,550 5,269
Post Retirement and Post Employment Insurance..................... 1,431 1,223
Deferred Income Taxes............................................. 12,256 11,461
Long-Term Deferred Gain........................................... 2,581 2,779
Redeemable Preferred Stock........................................ 4,684 4,288
Common Stock and Other Stockholders' Equity....................... 15,004 15,934
------- --------
$63,643 $ 64,968
======= ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-23
<PAGE> 117
DESOTO, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1996 1995
------- -------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss).................................................... $ (579) $ 1,875
Non-cash items:
Net gain on disposal of property, plant and equipment................ 636 (17)
Depreciation and amortization........................................ 175 881
Pension income....................................................... (3,797) (3,746)
Deferred income taxes................................................ (336) 1,107
Amortization of deferred gain........................................ (198) (198)
Other non-cash items................................................. 45 38
------- -------
Net non-cash items................................................... (3,475) (1,935)
Changes in assets and liabilities resulting from operating activities:
Net (increase) decrease in trade accounts and notes receivable....... 2,020 (599)
Net decrease in inventories.......................................... 430 47
Net decrease in other current assets................................. 42 608
Net decrease in other non-current assets............................. 1,731 178
Net increase (decrease) in accounts payable.......................... (2,781) 1,569
Net increase (decrease) in other liabilities......................... 1,393 (1,847)
Other................................................................ -- (4)
------- -------
Net cash flows from operating activities............................... (1,219) (108)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant and equipment.................. 1,210 500
Additions to property, plant and equipment........................... -- (197)
------- -------
Net cash flows from investing activities............................... 1,210 303
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under Revolving Credit Agreement.............................. -- (1,369)
------- -------
Net decrease in cash and cash equivalents.............................. (9) (1,174)
Cash and cash equivalents at beginning of period....................... 51 1,702
------- -------
Cash and cash equivalents at end of period............................. $ 42 $ 528
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-24
<PAGE> 118
DESOTO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the results of
operations for the periods indicated.
The results of operations for the six months ended June 30, 1996 are not
necessarily indicative of the results to be expected for the full year.
A. ACCOUNTING POLICIES
The reader is directed to Note A of the Notes to DeSoto's Consolidated
Financial Statements for the year ended December 31, 1995 included in this Joint
Proxy Statement/Prospectus for details of the accounting policies followed by
DeSoto.
B. INCOME TAXES
The provision (benefit) for income taxes is computed at the current
estimated effective income tax rate for the year.
C. INVENTORY VALUATION
Inventory at June 30, 1996 is valued at the last-in, first-out (LIFO)
method of inventory accounting. If the first-in, first-out (FIFO) method of
inventory accounting had been used for all of DeSoto's inventories, inventories
would have been $520,000 and $1,493,000 higher than reported at June 30, 1996
and December 31, 1995, respectively.
D. ACCOUNTS RECEIVABLE
During the six months ended June 30, 1996, DeSoto sold certain of its
accounts receivable to fund short-term cash requirements. Proceeds of $4,291,000
were received during the six-month period of which $1,335,000 related to
invoices due after June 30, 1996. The accounts receivable sold were excluded
from Trade Accounts and Notes Receivable on the balance sheet as of June 30,
1996. DeSoto has retained the risk of loss in the event of nonpayment of the
receivables. DeSoto does not believe, however, that there is significant risk in
the collectibility of the receivables.
E. DISPOSITIONS
On July 21, 1995, DeSoto announced the transfer and assignment of various
operations and assets involved in its liquid detergent and fabric softener dryer
sheet businesses to two separate buyers. DeSoto assigned the rights to certain
customers with respect to these businesses. DeSoto also sold other assets which
included certain accounts receivable, inventory and machinery and equipment. The
proceeds of these transactions were utilized to reduce DeSoto's senior debt owed
to CIT. Both transactions also provide for DeSoto to receive royalties and other
earn-out opportunities over a three-year period in one case and over a four-year
period in the other case. The statement of operations for the six months ended
June 30, 1995 includes the results of operations of these businesses.
On April 11, 1996, DeSoto announced that it had sold the domestic business
and assets of its laundry detergent manufacturing and distribution operations,
at its Union City, California, plant, to Star Pacific, Inc. The buyer will
continue production under a sublease of the plant from DeSoto. DeSoto will
retain its international detergent business at the Union City facility, under a
production arrangement with Star Pacific.
A charge of $1.6 million was recorded in the 1996 first quarter related to
the costs associated with the Union City disposition. This provision included
the write-down of fixed assets to net realizable value, future rental
commitments on a leased warehouse, and severance pay. The provision is reflected
on the statement of
F-25
<PAGE> 119
DESOTO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
operations as nonrecurring expense and the accrual is included with
restructuring reserves on the balance sheet. The statement of operations for the
six months ended June 30, 1995 includes the results of operations of this
business. The reader is directed to the DeSoto pro forma financial statements on
pages P-9 to P-11 for the pro forma effect of these business dispositions.
F. NONOPERATING EXPENSE (INCOME)
Nonoperating expense during the first six months of 1996 resulted primarily
from a provision for uncollectible receivables related to prior operations.
Nonoperating income during the first six months of 1995 included approximately
$6.1 million from insurance settlements and approximately $244,000 of royalty
income related to technology sold by DeSoto in 1990.
G. KEYSTONE MERGER
As previously reported, DeSoto, on June 27, 1996, entered into a definitive
merger agreement with Keystone Consolidated Industries, Inc. The consummation of
the merger is subject to certain conditions, including approval by the
shareholders of both companies and Keystone's obtaining the additional financing
necessary to consummate the merger.
F-26
<PAGE> 120
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
BETWEEN
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND
DESOTO, INC.
DATED AS OF
JUNE 26, 1996
A-CP
<PAGE> 121
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
1. PLAN OF REORGANIZATION............................................................ A-1
1.1 The Merger................................................................ A-1
(a) Conversion of Shares of DSO Common Stock.............................. A-1
(b) Conversion of Shares of DSO Preferred Stock........................... A-2
(c) Adjustments for Capital Changes....................................... A-2
(d) Dissenting Shares..................................................... A-2
(e) Conversion of KCI Sub Common Stock.................................... A-2
1.2 Fractional Shares......................................................... A-2
1.3 DSO Options............................................................... A-2
(a) Conversion............................................................ A-2
(b) Registration.......................................................... A-3
1.4 Effects of the Merger..................................................... A-3
1.5 Registration on Form S-4.................................................. A-3
2. REPRESENTATIONS AND WARRANTIES OF DSO............................................. A-3
2.1 Organization; Good Standing; Qualification and Power...................... A-4
2.2 Capital Structure......................................................... A-4
(a) Stock and Options..................................................... A-4
(b) DEMI.................................................................. A-4
(c) Warrants.............................................................. A-4
(d) No Other Commitments.................................................. A-4
2.3 Authority................................................................. A-5
(a) Corporate Action...................................................... A-5
(b) No Conflict........................................................... A-5
(c) Governmental Consents................................................. A-5
2.4 SEC Documents............................................................. A-6
(a) SEC Reports........................................................... A-6
(b) Financial Statements.................................................. A-6
2.5 Information Supplied...................................................... A-6
2.6 Compliance with Applicable Law............................................ A-6
2.7 Litigation and Legal Matters.............................................. A-7
2.8 ERISA and Other Compliance................................................ A-7
2.9 Labor Matters............................................................. A-9
2.10 Absence of Undisclosed Liabilities........................................ A-10
2.11 Absence of Certain Changes or Events...................................... A-10
2.12 No Default................................................................ A-11
2.13 Certain Agreements........................................................ A-11
2.14 Taxes..................................................................... A-11
2.15 Intellectual Property..................................................... A-12
2.16 Fees and Expenses......................................................... A-12
2.17 Environmental Matters..................................................... A-13
2.18 Interested Party Transactions............................................. A-14
2.19 Contracts................................................................. A-14
2.20 Title to Properties....................................................... A-15
2.21 Insurance................................................................. A-15
2.22 Board Approval............................................................ A-15
2.23 Vote Required............................................................. A-15
2.24 Disclosure................................................................ A-15
2.25 Fairness Opinion.......................................................... A-16
2.26 Restrictions on Business Activities....................................... A-16
</TABLE>
A-i
<PAGE> 122
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
2.27 DSO Rights Agreement...................................................... A-16
2.28 Propriety of Past Payments................................................ A-16
3. REPRESENTATIONS AND WARRANTIES OF KCI............................................. A-16
3.1 Organization; Good Standing; Qualification and Power...................... A-16
3.2 Capital Structure......................................................... A-16
(a) Stock and Options..................................................... A-16
(b) No Other Commitments.................................................. A-17
3.3 Authority................................................................. A-17
(a) Corporate Action...................................................... A-17
(b) No Conflict........................................................... A-17
(c) Governmental Consents................................................. A-18
3.4 SEC Documents............................................................. A-18
(a) SEC Reports........................................................... A-18
(b) Financial Statements.................................................. A-18
3.5 Information Supplied...................................................... A-18
3.6 Compliance with Applicable Law............................................ A-19
3.7 Litigation and Legal Matters.............................................. A-19
3.8 ERISA and Other Compliance................................................ A-19
3.9 Labor Matters............................................................. A-21
3.10 Absence of Undisclosed Liabilities........................................ A-22
3.11 Absence of Certain Changes or Events...................................... A-22
3.12 No Default................................................................ A-23
3.13 Certain Agreements........................................................ A-23
3.14 Taxes..................................................................... A-23
3.15 Intellectual Property..................................................... A-24
3.16 Fees and Expenses......................................................... A-24
3.17 Environmental Matters..................................................... A-24
3.18 Interested Party Transactions............................................. A-25
3.19 Contracts................................................................. A-25
3.20 Title to Properties....................................................... A-26
3.21 Insurance................................................................. A-26
3.22 Board Approval............................................................ A-26
3.23 Vote Required............................................................. A-26
3.24 Disclosure................................................................ A-26
3.25 Fairness Opinion.......................................................... A-27
3.26 Restrictions on Business Activities....................................... A-27
3.27 Propriety of Past Payments................................................ A-27
4. DSO COVENANTS..................................................................... A-27
4.1 Advice of Changes......................................................... A-27
4.2 Maintenance of Business................................................... A-27
4.3 Conduct of Business....................................................... A-27
4.4 Stockholder Approval...................................................... A-28
4.5 Prospectus/Proxy Statement................................................ A-28
4.6 Regulatory Approvals...................................................... A-28
4.7 Necessary Consents........................................................ A-28
4.8 Access to Information..................................................... A-28
4.9 Satisfaction of Conditions Precedent...................................... A-30
4.10 No Other Negotiations..................................................... A-30
</TABLE>
A-ii
<PAGE> 123
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
5. KCI COVENANTS..................................................................... A-31
5.1 Advice of Changes......................................................... A-31
5.2 Maintenance of Business................................................... A-31
5.3 Conduct of Business....................................................... A-31
5.4 Stockholder Approval...................................................... A-33
5.5 Prospectus/Proxy Statement................................................ A-33
5.6 Regulatory Approvals...................................................... A-33
5.7 Necessary Consents........................................................ A-33
5.8 Access to Information..................................................... A-33
5.9 Satisfaction of Conditions Precedent...................................... A-33
5.10 Listing................................................................... A-33
5.11 Nomination of Directors................................................... A-33
5.12 Executive Committee....................................................... A-34
5.13 Director and Officer Indemnification...................................... A-34
5.14 DSO Trade Debt............................................................ A-34
6. CLOSING MATTERS................................................................... A-34
6.1 The Closing............................................................... A-34
6.2 Exchange of Certificates.................................................. A-34
(a) Exchange Agent........................................................ A-34
(b) Exchange Procedures................................................... A-35
(c) Distributions with Respect to Unsurrendered Certificates.............. A-35
(d) No Further Ownership Rights to DSO Stock.............................. A-35
(e) Termination of Exchange Fund.......................................... A-36
(f) No Liability.......................................................... A-36
6.3 Assumption of Options..................................................... A-36
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF DSO........................................ A-36
7.1 Accuracy of Representations and Warranties................................ A-36
7.2 Covenants................................................................. A-36
7.3 Absence of Material Adverse Change........................................ A-36
7.4 Compliance with Law....................................................... A-36
7.5 Government Consents....................................................... A-36
7.6 The Form S-4.............................................................. A-36
7.7 Documents................................................................. A-36
7.8 Stockholder Approval...................................................... A-37
7.9 KCI Approval.............................................................. A-37
7.10 No Legal Action........................................................... A-37
7.11 Election of DSO Designees to Board of Directors of KCI.................... A-37
7.12 Tax Opinions.............................................................. A-37
7.13 Legal Opinion............................................................. A-37
7.14 Listing................................................................... A-37
7.15 PBGC...................................................................... A-37
7.16 Financing................................................................. A-37
7.17 Fairness Opinion.......................................................... A-37
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF KCI........................................ A-37
8.1 Accuracy of Representations and Warranties................................ A-37
8.2 Covenants................................................................. A-38
8.3 Absence of Material Adverse Change........................................ A-38
8.4 Compliance with Law....................................................... A-38
8.5 Government Consents....................................................... A-38
8.6 Form S-4.................................................................. A-38
</TABLE>
A-iii
<PAGE> 124
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
8.7 Documents................................................................. A-38
8.8 Stockholder Approval...................................................... A-38
8.9 DSO Approval.............................................................. A-38
8.10 No Legal Action........................................................... A-38
8.11 Tax Opinions.............................................................. A-38
8.12 Legal Opinion............................................................. A-39
8.13 Agreement of Warrantholders............................................... A-39
8.14 Financing................................................................. A-39
8.15 Amendment of DSO Retirement Plan.......................................... A-39
8.16 No Pending Termination.................................................... A-39
8.17 PBGC...................................................................... A-39
8.18 Approval of Change of Control............................................. A-39
8.19 Preferred Stockholders Consents........................................... A-39
8.20 Prescott Obligation....................................................... A-39
8.21 Fairness Opinion.......................................................... A-39
8.22 Lender Consent............................................................ A-39
8.23 Trade Creditor Agreement.................................................. A-39
8.24 Merger of Pension Plans................................................... A-39
9. TERMINATION OF AGREEMENT; BREAK UP FEES........................................... A-39
9.1 Termination............................................................... A-39
9.2 Notice of Termination..................................................... A-40
9.3 Effect of Termination..................................................... A-40
9.4 Breakup Fee............................................................... A-40
10. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS............................. A-41
11. MISCELLANEOUS..................................................................... A-41
11.1 Governing Law............................................................. A-41
11.2 Assignment; Binding Upon Successors and Assigns........................... A-41
11.3 Severability.............................................................. A-41
11.4 Counterparts.............................................................. A-41
11.5 Other Remedies............................................................ A-41
11.6 Amendment and Waivers..................................................... A-41
11.7 Expenses.................................................................. A-41
11.8 Attorney's Fees........................................................... A-42
11.9 Notices................................................................... A-42
11.10 Construction of Agreement................................................. A-42
11.11 No Joint Venture.......................................................... A-42
11.12 Further Assurances........................................................ A-43
11.13 Absence of Third Party Beneficiary Rights................................. A-43
11.14 Public Announcement....................................................... A-43
11.15 Entire Agreement.......................................................... A-43
</TABLE>
A-iv
<PAGE> 125
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is entered
into as of this 26th day of June, 1996, by and between KEYSTONE CONSOLIDATED
INDUSTRIES, INC., a Delaware corporation ("KCI"), and DESOTO, INC., a Delaware
corporation ("DSO").
RECITALS
A. The parties intend that, subject to the terms and conditions of this
Agreement, DSO will consolidate with a wholly owned subsidiary of KCI (the "KCI
Sub") in a statutory merger (the "Merger") with DSO being the surviving
corporation of the Merger (the "Surviving Corporation"), all pursuant to the
terms and conditions of this Agreement and the applicable provisions of the
Delaware General Corporation Law, as amended (the "Delaware Law"). Upon the
effectiveness of the Merger, all the capital stock of DSO outstanding
immediately prior to the Effective Time (as defined in Section 1.1) will be
converted into capital stock of KCI, and KCI will assume all outstanding options
to purchase shares of common stock of DSO, as provided in this Agreement.
B. The Merger is intended to be treated as a tax-free reorganization
pursuant to the provisions of Section 368(a) of the Internal Revenue Code of
1986, as amended (the "Code").
C. It is the intention and desire of KCI and DSO, immediately after the
Effective Time to cause a merger of the pension plans of KCI and DSO.
The parties hereto hereby agree as follows:
1. PLAN OF REORGANIZATION
1.1 The Merger. Subject to the terms and conditions of this
Agreement, the Merger will occur pursuant to this Agreement and in
accordance with applicable provisions of the Delaware Law as follows:
(a) Conversion of Shares of DSO Common Stock. Each share of DSO
Common Stock, $1.00 par value, including the associated rights (the
"Associated Rights") issued pursuant to the Rights Agreement (the
"Rights Agreement") between DSO and Harris Trust and Savings Bank
(collectively the "DSO Common Stock"), issued and outstanding
immediately prior to the date and time of filing of a Certificate of
Merger (the "Certificate of Merger") with the Secretary of State of
Delaware (the "Effective Time") will by virtue of the Merger and at the
Effective Time, and without further action on the part of any holder
thereof, be converted into the right to receive .7465 of a share (the
"Exchange Ratio") of validly issued, fully paid and nonassessable KCI
Common Stock, $1.00 par value (the "KCI Common Stock"). Shares of DSO's
capital stock held by DSO in its treasury will not be deemed outstanding
for purposes of this Agreement and will not be converted into shares of
KCI Common Stock, cash or any other property and will be cancelled as of
the Effective Time. No holder of shares of DSO Common Stock shall have
any rights as a stockholder of KCI prior to the date of issuance to such
holder of a certificate or certificates representing shares of KCI
Common Stock.
(b) Conversion of Shares of DSO Preferred Stock. Each share of DSO
Series B Senior Preferred Stock, $1.00 par value (the "DSO Preferred
Stock" and collectively with the DSO Common Stock, the "DSO Stock"),
issued and outstanding immediately prior to the Effective Time will by
virtue of the Merger and at the Effective Time, and without further
action on the part of any holder thereof, be converted into the right to
receive the Exchange Ratio of a share of validly issued, fully paid and
nonassessable KCI Series A Senior Preferred Stock, no par value, as
contemplated by the Preferred Stockholder Waiver and Consent Agreement
of even date herewith (the "KCI Preferred Stock" and collectively with
the KCI Common Stock, the "KCI Stock"). No holder of shares of DSO
Preferred Stock shall have any rights as a stockholder of KCI prior to
the date of issuance to such holder of a certificate or certificates
representing shares of KCI Preferred Stock.
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(c) Adjustments for Capital Changes. If, prior to the Effective
Time, DSO or KCI recapitalizes through a subdivision of its outstanding
shares into a greater number of shares, or a combination of its
outstanding shares into a lesser number of shares, or reorganizes,
reclassifies or otherwise changes its outstanding shares into the same
or a different number of shares of other classes, or declares a dividend
on its outstanding shares payable in shares of its capital stock or
securities convertible into shares of its capital stock, then the
Exchange Ratio, as applicable, will be adjusted appropriately so as to
maintain the relative proportionate interests of the holders of the
shares of DSO Stock and the holders of the shares of KCI Stock.
(d) Dissenting Shares. Holders of shares of DSO Common Stock who
dissent from the Merger are not entitled to rights of appraisal under
Section 262 of the Delaware Law by virtue of Section 262(b)(1) of the
Delaware Law.
(e) Conversion of KCI Sub Common Stock. Each share of common stock
of KCI Sub issued and outstanding immediately prior to the Effective
Time will by virtue of the Merger and at the Effective Time, and without
further action on the part of any holder hereof, be converted into one
share of validly issued, fully paid and nonassessable common stock of
the Surviving Corporation.
1.2 Fractional Shares. No fractional shares of KCI Common Stock will
be issued in connection with the Merger, but in lieu thereof each holder of
DSO Common Stock who would otherwise be entitled to receive a fraction of a
share of KCI Common Stock will receive from the Exchange Agent (as defined
in Section 6.2), at such time as such holder shall receive a certificate
representing shares of KCI Common Stock as contemplated by Section 6.2, an
amount of cash equal to the per share market value of KCI Common Stock
(based on the average of the closing sale prices of KCI Common Stock during
the ten (10) trading day period ending on the Closing Date (as defined in
Section 6.1) as reported in the Wall Street Journal) multiplied by the
fraction of a share of KCI Common Stock to which such holder would
otherwise have been entitled. The fractional interests of each DSO
stockholder will be aggregated so that no DSO stockholder will receive cash
in an amount equal to or greater than the value of one full share of KCI
Common Stock (other than those holding shares as nominees or in similar
capacity, in which case, each interest of a beneficial owner shall be
aggregated separately). KCI shall provide sufficient funds to the Exchange
Agent to make the payments contemplated by this Section 1.2.
1.3 DSO Options.
(a) Conversion. At the Effective Time, each of the then outstanding
options to purchase DSO Common Stock (the "DSO Options") will by virtue
of the Merger, and without any further action on the part of any holder
thereof, be converted into an option to purchase that number of shares
of KCI Common Stock determined by multiplying the number of shares of
DSO Common Stock subject to such DSO Option at the Effective Time by the
Exchange Ratio, at an exercise price per share of KCI Common Stock equal
to the exercise price per share of such DSO Option immediately prior to
the Effective Time divided by the Exchange Ratio and rounded up to the
nearest whole cent (provided, however, in the case of any DSO Options to
which Section 421 of the Code applies by reason of its qualification
under Section 422 or Section 423 of the Code, the option price, the
number of shares purchasable pursuant to such DSO Options and the terms
and conditions of exercise of such DSO Options shall be determined in
order to comply with Section 424 of the Code). If the foregoing
calculation results in an assumed DSO Option being exercisable for a
fraction of a share of KCI Common Stock, then the number of shares of
KCI Common Stock subject to such option will be rounded up to the
nearest whole number of shares. The term, exercisability, vesting
schedule, status as an "incentive stock option" under Section 422 of the
Code, if applicable, and all other terms and conditions of the DSO
Options shall be as set forth in the DSO Disclosure Schedule (as defined
in Article 2). Continuous employment with DSO or any of the DSO
Subsidiaries (as defined in Section 2.1) will be credited to an optionee
of DSO for purposes of determining the number of shares of KCI Common
Stock subject to exercise under DSO Options converted into options to
purchase KCI Common Stock (the "KCI Converted Options"). Each
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KCI Converted Option shall otherwise be subject to the terms and
conditions as were applicable to such converted DSO Option under the
applicable DSO Plan (as defined in Section 2.2).
(b) Registration. To the extent a registration statement on Form
S-8 is available, KCI will cause the KCI Common Stock issuable upon
exercise of the KCI Converted Options to be registered on Form S-8
promulgated by the Securities and Exchange Commission (the "SEC") as
soon as practicable after the Effective Time and will use its best
efforts to maintain the effectiveness of such registration statement or
registration statements for so long as the KCI Converted Options shall
remain outstanding. With respect to those individuals who subsequent to
the Merger will be subject to the reporting requirements under Section
16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), KCI shall administer, to the extent reasonably practicable, the
DSO Plans (as defined in Section 2.2(a)) assumed pursuant to the Merger
and this Section 1.3 in a manner that complies with the rules
promulgated by the SEC under the Exchange Act. KCI will reserve a
sufficient number of shares of KCI Common Stock for issuance upon
exercise of the KCI Converted Options.
1.4 Effects of the Merger. At the Effective Time, the Certificate of
Merger shall be filed as contemplated by Section 1.1(a), the effect of
which shall be as follows: (a) each share of KCI Common Stock outstanding
immediately prior to the Effective Time will continue to be an identical
outstanding share of KCI Common Stock; (b) each share of DSO Stock and each
DSO Option outstanding immediately prior to the Effective Time will be
converted as provided in Sections 1.1, 1.2 and 1.3 hereof; (c) each share
of KCI Sub Common Stock outstanding immediately prior to the Effective Time
will be converted as provided in Section 1.1(e) hereof; (d) the Certificate
of Incorporation, Bylaws, directors and officers of the Surviving
Corporation will be as provided in the Certificate of Merger; and (e) the
Merger will, from and after the Effective Time, have all of the effects
provided by applicable law, including, without limitation, the Delaware
Law.
1.5 Registration on Form S-4. The KCI Stock to be issued in the
Merger shall be registered under the Securities Act of 1933, as amended
(the "Securities Act"), on a Form S-4 registration statement promulgated by
the SEC (the "Form S-4"). As promptly as practicable after the date of this
Agreement, KCI and DSO shall prepare and file with the SEC the Form S-4,
together with the prospectus/joint proxy statement to be included therein
(the "Prospectus/Proxy Statement") and any other documents required by the
Securities Act or the Exchange Act, in connection with the Merger. Each of
KCI and DSO shall use its best efforts to respond promptly to any comments
of the SEC and to have the Form S-4 declared effective under the Securities
Act as promptly as practicable after such filing and to cause the
Prospectus/Proxy Statement to be mailed to each company's stockholders at
the earliest practicable time. Each party shall as promptly as practicable
furnish to the other party all information concerning such party and its
stockholders as may be reasonably required in connection with any action
contemplated by this Section 1.5. The Prospectus/Proxy Statement and Form
S-4 shall comply in all material respects with all applicable requirements
of law. Each of KCI and DSO will notify the other promptly of the receipt
of any comments from the SEC or its staff and of any request by the SEC or
its staff for amendments or supplements to the Form S-4 or the
Prospectus/Proxy Statement or for additional information and will supply
the other with copies of all correspondence with the SEC or its staff with
respect to the Form S-4, the Prospectus/Proxy Statement or any amendments
or supplements thereto. Whenever any event occurs which should be set forth
in an amendment or supplement to the Form S-4 or the Prospectus/Proxy
Statement, KCI or DSO, as the case may be, shall promptly inform the other
of such occurrence and cooperate in filing as promptly as practicable with
the SEC or its staff, and/or mailing to stockholders of KCI and DSO, such
amendment or supplement.
2. REPRESENTATIONS AND WARRANTIES OF DSO
Except as set forth in a schedule dated the date of this Agreement and
delivered by DSO to KCI concurrently herewith (the "DSO Disclosure
Schedule") or as disclosed in the Recent DSO SEC Documents (as defined in
Section 2.4), DSO represents and warrants to KCI as set forth below. In
this Agreement, any reference to any event, change or effect being
"material" with respect to any entity or
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group of entities means any material event, change or effect related to the
condition (financial or otherwise), properties, assets, liabilities,
businesses, operations, results of operations or prospects of such entity
or group of entities taken as a whole. In this Agreement, the term
"Material Adverse Effect" used in connection with a party or any of such
party's subsidiaries means any event, change or effect that is materially
adverse to the condition (financial or otherwise), properties, assets,
liabilities, businesses, operations, results of operations or prospects of
such party and its subsidiaries, taken as a whole.
2.1 Organization; Good Standing; Qualification and Power. DSO and
each of its subsidiaries, including corporations, partnerships, trusts or
any other type of entity (the "DSO Subsidiaries") is duly organized,
validly existing and in good standing under the laws of the state of its
incorporation or organization, has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its
business as now being conducted, and is duly qualified and in good standing
to do business in each jurisdiction in which the nature of its business or
the ownership or leasing of its properties makes such qualification
necessary or where the failure to so qualify would not have a Material
Adverse Effect. The DSO Disclosure Schedule sets forth a complete and
correct list of the DSO Subsidiaries. DSO has made available to KCI or its
counsel complete and correct copies of the Certificates or Articles of
Incorporation and Bylaws of DSO and each of the DSO Subsidiaries, in each
case as amended to the date of this Agreement.
2.2 Capital Structure.
(a) Stock and Options. The authorized capital stock of DSO consists
of 20,000,000 shares of DSO Common Stock, and 583,333 shares of DSO
Preferred Stock. At the close of business on June 17, 1996, 4,688,523
shares of DSO Common Stock were issued and outstanding, 583,333 shares
of DSO Preferred Stock were issued and outstanding, 930,751 shares of
DSO Common Stock were held by DSO in its treasury, and 120,500 shares of
DSO Common Stock were reserved for issuance upon the exercise of the
outstanding DSO Options. All outstanding shares of DSO Stock are validly
issued, fully paid and nonassessable and not subject to preemptive
rights. All outstanding shares of DSO Common Stock, including treasury
shares, and all shares reserved for issuance have been listed on the New
York Stock Exchange (the "NYSE"). All outstanding shares of the capital
stock of each of the DSO Subsidiaries are validly issued, fully paid and
nonassessable and are owned by DSO or one of the DSO Subsidiaries free
and clear of any liens, security interests, pledges, agreements, claims,
charges or encumbrances . DSO has made available to KCI, a true and
correct copy of its 1992 Stock Plan and the DeSoto Stock Ownership Plus
Plan (collectively, the "DSO Plans"), and a complete and correct list of
each DSO Option outstanding as of the date hereof, including the name of
the holder of each such DSO Option, the DSO Plan pursuant to which each
such DSO Option was issued, the security and number of shares covered by
each such DSO Option, the per share exercise price of each such DSO
Option and the vesting schedule applicable to each such DSO Option.
(b) DEMI. As of the date hereof, the authorized capital stock of
DeSoto Environmental Management, Inc. ("DEMI") consists of one hundred
(100) shares of Class A Common Stock, one hundred (100) shares of Class
B Common Stock, and one hundred (100) shares of preferred stock. At the
close of business on June 12, 1996, one (1) share of Class A Common
Stock was held by DSO, one hundred (100) shares of Class B Common Stock
were held by directors and officers of DSO as set forth on the
Disclosure Schedule, and no shares of preferred stock were outstanding.
(c) Warrants. As of the date hereof warrants to purchase an
aggregate of 1,200,000 shares of DSO Common Stock (the "DSO Warrants")
were outstanding. As of the date hereof, 1,200,000 shares of DSO Common
Stock were reserved for issuance upon exercise of the DSO Warrants.
(d) No Other Commitments. Except for the DSO Options, the DSO
Warrants and the Contingent Value Rights issued in connection with the
acquisition of J.L. Prescott Company, there are no options, warrants,
calls, rights, commitments, conversion rights or agreements of any
character to which DSO or any of the DSO Subsidiaries is a party or by
which DSO or any of the DSO Subsidiaries is bound, obligating DSO or any
of the DSO Subsidiaries to issue, deliver or sell,
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or cause to be issued, delivered or sold, any shares of capital stock of
DSO or any of the DSO Subsidiaries or securities convertible into or
exchangeable for shares of capital stock of DSO or any of the DSO
Subsidiaries, or obligating DSO or any of the DSO Subsidiaries to grant,
extend or enter into any such option, warrant, call, right, commitment,
conversion right or agreement. Except for the parties affiliated with
Sutton Holding Corp. who have previously filed a Schedule 13-D with
respect to DSO, there are no voting trusts or other agreements or
understandings to which DSO or any DSO Subsidiary is a party or, as of
the date hereof, of which DSO has knowledge, with respect to the voting
of the capital stock of DSO or any of the DSO Subsidiaries.
2.3 Authority.
(a) Corporate Action. DSO has the requisite corporate power and
authority to enter into this Agreement and, subject to approval of this
Agreement and the Merger by the stockholders of DSO, to perform its
obligations hereunder and to consummate the Merger and the other
transactions contemplated by this Agreement. The execution and delivery
of this Agreement by DSO and, subject to approval of this Agreement and
the Merger by the stockholders of DSO, the consummation by DSO of the
Merger and the other transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of DSO. This
Agreement has been duly executed and delivered by DSO, and this
Agreement is a valid and binding obligation of DSO, enforceable in
accordance with its terms, except that such enforceability may be
subject to (i) bankruptcy, insolvency, reorganization or other similar
laws affecting or relating to enforcement of creditors' rights generally
and (ii) general equitable principles.
(b) No Conflict. Subject to approval of this Agreement and the
Merger by the stockholders of DSO, neither the execution, delivery and
performance of this Agreement or the Certificate of Merger, nor the
consummation of the transactions contemplated hereby or thereby, nor
compliance with the provisions hereof or thereof will conflict with, or
result in any violation of, or cause a default (with or without notice
or lapse of time, or both) under, or give rise to a right of
termination, amendment, cancellation or acceleration of any obligation
contained in, or the loss of any benefit under, or result in the
creation of any lien, security interest, charge or encumbrance upon any
of the properties or assets of DSO or any of the DSO Subsidiaries under
any term, condition or provision of (i) the Certificates or Articles of
Incorporation or Bylaws of DSO or any of the DSO Subsidiaries or (ii)
any agreement, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to DSO or any of the DSO Subsidiaries or their
respective properties or assets, other than any such conflicts,
violations, defaults, losses, liens, security interests, charges, or
encumbrances which, individually or in the aggregate, would not have a
Material Adverse Effect.
(c) Governmental Consents. No consent, approval or authorization
of, or registration, declaration or filing with, any court,
administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign (each a "Governmental Entity"), is
required to be obtained by DSO or any of the DSO Subsidiaries in
connection with the execution and delivery of this Agreement or the
Certificate of Merger or the consummation of the transaction
contemplated hereby or thereby except for (i) the filing with the SEC of
(A) the Form S-4, (B) the Prospectus/Proxy Statement relating to the
meeting of the stockholders of DSO (the "DSO Stockholders Meeting") to
be held with respect to the approval by DSO's stockholders of this
Agreement and the Merger, and (C) such reports and information under the
Exchange Act and the rules and regulations promulgated by the SEC
thereunder, as may be required in connection with this Agreement and the
transactions contemplated hereby; (ii) the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware and
appropriate documents with relevant authorities of other states in which
DSO is qualified to do business; (iii) such filings, authorizations,
orders and approvals as may be required under state "control share
acquisition," "anti-takeover" or other similar statutes and regulations
(collectively, the "State Anti-Takeover Laws"); (iv) such filings,
authorizations, orders and approvals as may be required under foreign
laws, state securities laws and the rules of the NYSE; (v) such filings
and notifications as may be necessary under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"); and
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(vi) such consents, approvals, etc. the failure of DSO to so obtain
would not prevent or delay the consummation of the Merger or otherwise
prevent DSO from performing its obligations under this Agreement and
would not reasonably be expected to have a Material Adverse Effect.
2.4 SEC Documents.
(a) SEC Reports. DSO has made available to KCI or its counsel
complete and correct copies of each report, schedule, registration
statement and definitive proxy statement filed by DSO with the SEC on or
after January 1, 1991 (the "DSO SEC Documents"), which are all the
documents (other than preliminary material) that DSO was required to
file with the SEC on or after such date. As of their respective dates
or, in the case of registration statements, their effective dates (and
if amended or superseded by a filing prior to the date of this
Agreement, then also on the date of such filing), none of the DSO SEC
Documents (including all exhibits and schedules thereto and documents
incorporated by reference herein) contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading, and the
DSO SEC Documents were timely filed and complied when filed, in form and
content, in all material respects with the then applicable requirements
of the Securities Act or the Exchange Act, including the timeliness of
the filing as the case may be, and the rules and regulations promulgated
by the SEC thereunder. DSO has filed all documents and agreements which
were required to be filed as exhibits to the DSO SEC Documents. For
purposes hereof, "Recent DSO SEC Documents" shall mean the most recent
annual report on Form 10-K of DSO, together with the most recent
quarterly report on Form 10-Q of DSO for any quarter subsequent to the
annual period covered by such Form 10-K, together with any current
reports on Form 8-K filed by DSO subsequent to such most recent Form
10-Q.
(b) Financial Statements. The financial statements of DSO included
in the DSO SEC Documents complied as to form in all material respects
with the then applicable accounting requirements and the published rules
and regulations of the SEC with respect thereto, were prepared in
accordance with generally accepted accounting principles applied on a
consistent basis during the periods involved or at the applicable dates
(except as may have been indicated in the notes thereto or, in the case
of the unaudited statements, as permitted by Form 10-Q promulgated by
the SEC) and fairly present (subject, in the case of the unaudited
statements, to normal, year-end audit adjustments) the consolidated
financial position of DSO and its consolidated DSO Subsidiaries as at
the respective dates thereof and the consolidated results of their
operations and cash flows for the respective periods then ended.
2.5 Information Supplied. None of the information supplied or to be
supplied by DSO for inclusion or incorporation by reference in the Form S-4
and Prospectus/Proxy Statement will, at the time the Form S-4 is declared
effective, at the date the Prospectus/Proxy Statement is mailed to the
stockholders of DSO and at the time of the KCI and DSO Stockholders
Meetings, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are
made, not misleading. The material to be supplied by DSO in respect of the
Form S-4 and the Prospectus/Proxy Statement will comply as to form in all
material respects with the provisions of the Securities Act, Exchange Act,
and the rules and regulations promulgated by the SEC thereunder.
2.6 Compliance with Applicable Law. The businesses of DSO and the DSO
Subsidiaries are not being conducted in violation of any law, ordinance,
regulation, rule or order of any Governmental Entity where such violation
would have a Material Adverse Effect. Except as disclosed in the Recent DSO
SEC Documents filed prior to the date of this Agreement or where such
notification would not reasonably be expected to result in a Material
Adverse Effect, DSO has not been notified by any Governmental Entity that
any investigation or review with respect to DSO or any of the DSO
Subsidiaries is pending or threatened, nor has any Governmental Entity
notified DSO of its intention to conduct the same. DSO and each of the DSO
Subsidiaries have all permits, licenses and franchises from Governmental
Entities
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required to conduct their businesses as now being conducted, except for
those the absence of which would not have a Material Adverse Effect.
2.7 Litigation and Legal Matters. There is no suit, action,
arbitration, demand, claim or proceeding pending or threatened against DSO
or any of the DSO Subsidiaries, or any of their officers, directors,
employees or agents involving, affecting or relating to any assets,
operations or properties of DSO or the DSO Subsidiaries, or any DSO
Employee Plans (as defined in Section 2.8), nor is there any judgment,
decree, injunction, rule or order of any Governmental Entity or arbitrator
outstanding against DSO or any of the DSO Subsidiaries that, individually
or in the aggregate, could reasonably be expected to have a Material
Adverse Effect. DSO has made available to KCI or its counsel complete and
correct copies of all correspondence prepared by its counsel for DSO's
auditors in connection with the last five (5) completed audits of DSO's
financial statements and any such correspondence since the date of the last
such audit.
2.8 ERISA and Other Compliance.
(a) DSO has made available to KCI a list of all employees of DSO
and of any DSO Subsidiary, and their salaries as of the date of this
Agreement. DSO has made available to KCI (i) a copy of each "employee
benefit plan," as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and (ii) a copy of
all other written or formal plans or agreements involving direct or
indirect compensation or benefits (including any employment agreements
entered into by DSO or any of the DSO Subsidiaries, but excluding
workers' compensation, unemployment compensation and other
government-mandated programs) currently maintained, contributed to or
entered into by DSO or any of the DSO Subsidiaries under which DSO or
any of the DSO Subsidiaries or any ERISA Affiliate (as defined below)
thereof has any present or future obligation or liability (collectively,
the "DSO Employee Plans"). For purposes of this Agreement, "ERISA
Affiliate" shall mean any entity which is a member of (A) a "controlled
group of corporations," as defined in Section 414(b) of the Code, (B) a
group of entities under "common control," as defined in Section 414(c)
of the Code, or (C) an "affiliated service group," as defined in Section
414(c) of the Code, or treasury regulations promulgated under Section
414(o) of the Code, any of which includes DSO or any of the DSO
Subsidiaries. Copies of all DSO Employee Plans (and, if applicable,
related trust agreements) and all amendments thereto and all summary
plan descriptions, other than plans which are multi-employer plans
within the meaning of Title IV of ERISA, have been made available to KCI
or its counsel, together with the three (3) most recent annual reports
(Forms 5500) prepared in connection with any such DSO Employee Plan.
Each DSO Pension Plan (as defined below) operates in accordance with the
reporting and disclosure requirements imposed under ERISA and the Code
except for such noncompliance which would not have a Material Adverse
Effect. Copies of all DSO Employee Plans which individually or
collectively would constitute an "employee pension benefit plan," as
defined in Section 3(2) of ERISA (collectively, the "DSO Pension
Plans"), have been made available to KCI. Except for funding waivers
which have been obtained, all contributions due from DSO or any of the
DSO Subsidiaries through March 31, 1996 with respect to any of the DSO
Employee Plans have been made as required under ERISA or have been
accrued in accordance with generally accepted accounting principles on
DSO's or any such DSO Subsidiary's financial statements as of March 31,
1996. Each DSO Employee Plan has been maintained since May 19, 1991 in
substantial compliance with its terms and with the requirements
prescribed by any and all statutes, orders, rules and regulations,
including, without limitation, ERISA and the Code, which are applicable
to such DSO Employee Plans except for such noncompliance which would not
have a Material Adverse Effect, and all such plans which are DSO Pension
Plans are fully funded on a termination basis.
(b) No DSO Pension Plan constitutes, or has since May 19, 1991
constituted, a "multiemployer plan," as defined in Section 3(37) of
ERISA. No DSO Pension Plans other than the DeSoto Employees' Retirement
Plan which is the result of the merger of the DeSoto Hourly Employees'
Pension Plan and the J.L. Prescott Company Employees' Retirement Plan
into the DeSoto Salaried Employees' Pension Plan, effective January 1,
1994, all of which together currently constitute the
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DeSoto Employees' Retirement Plan (the "DSO Retirement Plan") are
subject to Title IV of ERISA. To the best of the knowledge of the
officers of DSO, no "prohibited transaction," as defined in Section 406
of ERISA or Section 4975 of the Code, has occurred with respect to any
DSO Employee Plan which is covered by Title I of ERISA which would
result in a material liability to DSO and the DSO Subsidiaries taken as
a whole, excluding transactions effected pursuant to a statutory or
administrative exemption. To the best of the knowledge of the officers
of DSO, nothing done or omitted to be done and no transaction or holding
of any asset under or in connection with any DSO Employee Plan has or
will make DSO or any officer or director of DSO subject to any material
liability under Title I of ERISA or liable for any material tax or
penalty pursuant to Sections 4972, 4975, 4976 or 4979 of the Code or
Section 502 of ERISA. No DSO Pension Plan is liable for any federal,
state or local taxes other than unrelated business taxable income as
defined in Section 512 of the Code.
(c) To the best of the knowledge of the officers of DSO, each DSO
401(a) Plan is qualified under Section 401(a) of the Code and has been
so qualified during the period from May 19, 1991 to date, and the trust
forming a part thereof is exempt from tax pursuant to Section 501(c) of
the Code. Each DSO 401(a) Plan operates in accordance with its terms
and, to DSO's knowledge, there exists no fact which would adversely
affect its qualified status. Except for pending requests for favorable
determination letters on qualification filed with the Internal Revenue
Service (the "IRS") on March 29, 1995 for the DSO Retirement Plan and
the DeSoto Stock Ownership Plan, no DSO 401(a) Plan is currently under
investigation, audit or review by the IRS, nor is such action
contemplated, and the IRS has not asserted that any DSO Pension Plan is
not qualified under Section 401(a) of the Code or that any trust
established under a DSO Pension Plan is not exempt under Section 501(a)
of the Code.
(d) With respect to each DSO Pension Plan which is a defined
benefit plan under Section 414(j) of the Code and each defined
contribution plan under Section 414(i) of the Code:
(i) no liability to the Pension Benefit Guaranty Corporation
(the "PBGC") under Sections 406-4064 of ERISA has been incurred by
DSO or the DSO Subsidiaries since May 19, 1991 and all premiums due
and owing to the PBGC have been timely paid;
(ii) the PBGC has notified neither DSO, any of the DSO
Subsidiaries nor any DSO Pension Plan of the commencement of
proceedings under Section 4042 of ERISA to terminate any such plan;
(iii) since May 19, 1991 no event has occurred, or to DSO's
knowledge is threatened or is about to occur which would constitute a
reportable event within the meaning of Section 4043(c) of ERISA for
which reporting has not been made;
(iv) no DSO Pension Plan has any "accumulated funding
deficiency" (as defined in Section 302 of ERISA and Section 412 of
the Code for which a waiver has not been obtained); and
(v) no withdrawal liability has been incurred with respect to
any DSO Pension Plan which is a multi-employer plan.
(e) DSO has made available to KCI a list of each employment,
severance or other similar contract, arrangement or policy and each plan
or arrangement (written or oral) providing for insurance coverage
(including any self-insured arrangements), workers' benefits, vacation
benefits, severance benefits, disability benefits, death benefits,
hospitalization benefits, retirement benefits, deferred compensation,
profit-sharing, bonuses, stock options, stock purchases, phantom stock,
stock appreciation rights or other forms of incentive compensation or
post-retirement insurance, compensation or benefits for employees,
consultants or directors which (i) is not a DSO Employee Plan, (ii) is
entered into, maintained or contributed to, as the case may be, by DSO
or any of the DSO Subsidiaries and (iii) covers any employee or former
employee of DSO or any of the DSO Subsidiaries. Such contracts, plans
and arrangements as are described in this Section 2.8(e) are
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herein referred to collectively as the "DSO Benefit Arrangements." To
DSO's knowledge, each DSO Benefit Arrangement has been maintained since
May 19, 1991 in material compliance with its terms and with the
requirements prescribed by any and all statutes, orders, rules and
regulations which are applicable to such DSO Benefit Arrangement, is not
currently under investigation, audit or review by the IRS or any other
federal or state agency and no such actions are contemplated or under
consideration, has no liability for any federal, state, local or foreign
taxes and has no claim subject to dispute or litigation. DSO has made
available to KCI or its counsel a complete and correct copy or
description of each DSO Benefit Arrangement.
(f) There has been no amendment to, written interpretation by or
announcement (whether or not written) by DSO or any of the DSO
Subsidiaries relating to, or change in employee participation or
coverage under, any DSO Employee Plan or DSO Benefit Arrangement that
would increase materially the expense of maintaining such DSO Employee
Plan or DSO Benefit Arrangement above the level of the expense incurred
in respect thereof from the fiscal year ended December 31, 1995.
(g) DSO has provided, or will have provided prior to the Effective
Time, to individuals entitled thereto all required notices and coverage
pursuant to Section 4980B of the Code and the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended ("COBRA"), with respect to
any "qualifying event" (as defined in Section 4980B(f)(3) of the Code)
occurring prior to and including the Effective Time, and, to DSO's
knowledge, no material tax payable on account of Section 4980B of the
Code has been incurred with respect to any current or former employees
(or their beneficiaries) of DSO or any of the DSO Subsidiaries.
(h) No benefit payable or which may become payable by DSO or any of
the DSO Subsidiaries pursuant to any DSO Employee Plan or any DSO
Benefit Arrangement or as a result of or arising under this Agreement
shall constitute an "excess parachute payment" (as defined in Section
280G(b)(1) of the Code) which is subject to the imposition of an excise
tax under Section 4999 of the Code or which would not be deductible by
reasons of Section 280G of the Code.
(i) No DSO Retirement Plan is the subject of any investigation,
audit or inquiry by the United States Department of Labor or the PBGC
and, at the Effective Time, all items on the Disclosure Schedule with
respect to this Section 2.8(i) shall not be required to remain on the
Disclosure Schedule in order to make this representation true and
correct.
2.9 Labor Matters.
(a) DSO and each of the DSO Subsidiaries has paid or made provision
for the payment of all salaries, accrued wages and accrued vacation pay
in the ordinary course of business and has complied in all material
respects with all applicable laws, agreements, rules and regulations
relating to the employment of labor, including those relating to wages,
hours, collective bargaining and the payment and withholding of taxes,
and has withheld and paid to the appropriate governmental authority, or
is holding for payment not yet due to such authority, all amounts
required by law or agreement to be withheld from the wages or salaries
of its employees.
(b) Neither DSO nor any of the DSO Subsidiaries is a party to any
(i) outstanding employment agreements or contracts with officers or
employees that are not terminable at will, or that provide for the
payment of any bonus or commission, (ii) agreement, policy or practice
that requires it to pay termination or severance pay to any employees
(other than as required by law), (iii) collective bargaining agreement
or other labor union contract applicable to persons employed by DSO or
any DSO Subsidiary, nor, to the knowledge of DSO are there any
activities or proceedings of any labor union to organize any such
employees. DSO and the DSO Subsidiaries have made available to KCI
complete and correct copies of all such agreements (the "Employment and
Labor Agreements"). Neither DSO nor any of the DSO Subsidiaries has
breached or otherwise failed to comply with any provisions of any of the
Employment and Labor Agreement, and there are no grievances outstanding
thereunder which would have a Material Adverse Effect.
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(c) With respect to DSO and the DSO Subsidiaries, (i) there is no
unfair labor practice, charge or complaint pending before the National
Labor Relations Board (the "NLRB"), (ii) there is no labor strike,
material slowdown or material work stoppage or lockout actually pending
or threatened against or affecting DSO or the DSO Subsidiaries, and
neither DSO nor any of the DSO Subsidiaries has experienced any strike,
material slowdown or material work stoppage, lockout or other collective
labor action by or with respect to employees of DSO or the DSO
Subsidiaries, (iii) there is no representation, claim or petition
pending before the NLRB or a similar agency and no question concerning
representation exists relating to the employees of DSO or the DSO
Subsidiaries, (iv) there are no charges with respect to or relating to
DSO or DSO Subsidiaries pending before the Equal Employment Opportunity
Commission or any state, local, or foreign agency responsible for the
prevention of unlawful employment practices, (v) neither DSO nor any of
the DSO Subsidiaries has received formal notice from any federal, state,
local or foreign agency responsible for the enforcement of labor or
employment laws of an intention to conduct an investigation of DSO or
the DSO Subsidiaries and no such investigation is in progress and (vi)
the consents of the unions that are parties to any Employment and Labor
Agreements are not required to complete the transactions contemplated by
this Agreement.
(d) Neither DSO nor any of the DSO Subsidiaries has caused any
"plant closing" or "mass layoff" as such actions are defined in the
Worker Adjustment and Retraining Notification Act, as codified at 29
U.S.C. sec.sec. 2101-2109, and the regulations promulgated thereunder,
where DSO or the DSO Subsidiaries have failed to comply with the
provisions of such act.
2.10 Absence of Undisclosed Liabilities. Except as and to the extent
reflected, reserved against or otherwise disclosed in DSO's consolidated
balance sheet (including the notes thereto) at December 31, 1995 (the "DSO
Balance Sheet Date"), as disclosed in the Recent DSO SEC Documents or
otherwise disclosed pursuant to this Agreement, neither DSO nor any of the
DSO Subsidiaries had, at December 31, 1995, any liabilities or obligations
of any nature (matured or unmatured, fixed or contingent) which would have
a Material Adverse Effect on DSO. All reserves established by DSO and set
forth in the consolidated balance sheet of DSO (including the notes
thereto) at December 31, 1995 (the "DSO Balance Sheet") were reasonably
adequate as required by generally accepted accounting principles.
2.11 Absence of Certain Changes or Events. Since the DSO Balance
Sheet Date (and other than in compliance with Section 4.3) there has not
occurred:
(a) any change in the condition (financial or otherwise),
properties, assets, liabilities, businesses, operations or results of
operations of DSO and the DSO Subsidiaries, that constitutes or could
reasonably be expected to result in a Material Adverse Effect;
(b) any amendments or changes in the Certificate of Incorporation
or Bylaws of DSO;
(c) any damage, destruction or loss, whether covered by insurance
or not, that constitutes or could reasonably be expected to result in a
Material Adverse Effect;
(d) any redemption, repurchase or other acquisition of shares of
DSO Stock by DSO, or any declarations, setting aside or payment of any
dividend or other distribution (whether in cash, stock or property) with
respect to DSO Stock;
(e) any increase in or modification of the compensation or benefits
payable or to become payable by DSO to any of its directors or
employees, except pursuant to agreements or arrangements existing as of
the DSO Balance Sheet Date;
(f) any increase in or modification of any bonus, pension,
insurance, DSO Employee Plan or DSO Benefit Arrangement (including, but
not limited to, the granting of stock options, restricted stock awards
or stock appreciation rights) made to, for or with any of its employees,
other than pursuant to agreements or arrangements existing as of the DSO
Balance Sheet Date;
(g) any acquisition or sale of a material amount of property or
assets of DSO, other than in the ordinary course of business consistent
with past practice;
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(h) any alteration in any term of any outstanding security of DSO;
(i) any (A) incurrence, assumption or guarantee by DSO of any debt
for borrowed money or other obligation; (B) issuance or sale of any
security convertible into or exchangeable for debt securities of DSO; or
(C) issuance or sale of options or other rights to acquire from DSO,
directly or indirectly, debt securities of DSO or any securities
convertible into or exchangeable for any such debt securities;
(j) any creation or assumption by DSO of any mortgage, pledge,
security interest, lien or other encumbrance on any asset, except as
would not have a Material Adverse Effect;
(k) any making of any loan, advance or capital contribution to or
investment in any person (as defined in Section 2.18) other than (i)
travel loans or advances made in the ordinary course of business of DSO,
(ii) other loans and advances in an aggregate amount which does not
exceed $25,000 outstanding at any time and (iii) purchases on the open
market of liquid, publicly traded securities;
(l) any entering into or amendment, relinquishment, termination or
non-renewal by DSO of any contract, lease transaction, commitment or
other right or obligation other than in the ordinary course of business,
except as would not have a Material Adverse Effect;
(m) any transfer or grant of a right of any Intellectual Property
Rights (as defined in Section 2.15 below) of DSO, other than those
transferred or granted in the ordinary course of business; or
(n) any agreement or arrangement made by DSO to take any action
which, if taken prior to the date hereof, would have made any
representation or warranty set forth in this Agreement untrue or
incorrect as of the date when made unless otherwise disclosed.
2.12 No Default. Neither DSO nor any of the DSO Subsidiaries is in
default under, and there exists no event, condition or occurrence which,
after notice or lapse of time, or both, would constitute such a default by
DSO or any of the DSO Subsidiaries under, any contract or agreement to
which DSO or any of the DSO Subsidiaries is a party and which would, if
terminated or modified, have, insofar as can reasonably be foreseen, a
Material Adverse Effect.
2.13 Certain Agreements. Other than the DSO Options, neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any payment (including,
without limitation, severance, unemployment compensation, golden parachute,
bonus or otherwise) becoming due to any director or employee of DSO or any
of the DSO Subsidiaries from DSO or any of the DSO Subsidiaries, under any
DSO Employee Plan, DSO Benefit Arrangement or otherwise, (ii) increase any
benefit otherwise payable under any DSO Employee Plan, DSO Benefit
Arrangement or otherwise or (iii) result in the acceleration of the time of
payment or vesting of any such benefits.
2.14 Taxes.
(a) DSO and each of the DSO Subsidiaries have (i) duly and timely
filed with the appropriate governmental authorities all Tax Returns (as
defined in subsection (c) below) required to be filed by it, and has not
filed for an extension to file any Tax Returns and such Tax Returns are
true, complete and correct in all material respects, and (ii) duly paid
in full or made adequate provision for the payment of all Taxes (as
defined in subsection (b) below) shown to be due on such Tax Returns.
Tax Returns referred to in clause (i) hereinabove have been examined by
the IRS or the appropriate governmental authority through the returns
for the year ending December 31, 1990 or the period of assessment of the
Taxes in respect of which such Tax Returns were required to be filed has
expired, all deficiencies asserted or assessments made as a result of
such examination have been paid in full and no proceeding or examination
by or in front of the relevant governmental authority in connection with
the examination of any of the Tax Returns referred to in clause (i)
hereinabove is currently pending. No claim has been made in writing to
them by any authority in a jurisdiction where they do not file a Tax
Return that they are or may be subject to Tax in such jurisdiction. No
waivers of
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statutes of limitations have been given by or requested in writing to
them with respect to any Taxes. They have not agreed to any extension of
time with respect to any Tax deficiency. The liabilities and reserves
for Taxes reflected in the DSO Balance Sheet as of March 31, 1996 will
be adequate to cover all Taxes for all periods ending on or prior to
such date, except for the payment of such Taxes which, alone or in the
aggregate, would not have a Material Adverse Effect on them, and there
are no liens for Taxes upon any property or asset of DSO or DSO
Subsidiaries, except for liens for Taxes not yet due. There are no
unresolved issues of law or fact arising out of a notice of deficiency,
proposed deficiency or assessment from the IRS or any other governmental
taxing authority with respect to their Taxes which, if decided
adversely, singly or in the aggregate, would have a Material Adverse
Effect on them. They are not parties to any agreement providing for the
allocation or sharing of Taxes with any entity. They have not, with
regard to any asset or property held, acquired or to be acquired by
them, filed a consent to the application of Section 341(f) of the Code.
They have withheld and paid all Taxes required to have been withheld and
paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder, or other third party,
except for such taxes which, alone or in the aggregate, would not have a
Material Adverse Effect on them. No Tax is required to be withheld by
them pursuant to Section 1445 of the Code as a result of the transfer
contemplated by this Agreement. As a result of the Merger, they will not
be obligated to make a payment to any individual that would be a
"parachute payment" to a "disqualified individual" as those terms are
defined in Section 280G of the Code without regard to whether such
payment is reasonable compensation for personal services performed or to
be performed in the future.
(b) For purposes of this Agreement, the term "Taxes" shall mean all
taxes, charges, fees, levies or other assessments, including, without
limitation, income, gross receipts, excise, property, sales,
withholdings, social security, occupation, use, service, service use,
license, payroll, franchise, transfer and recording taxes, fees and
charges, imposed by the United States or any state, local or foreign
government or subdivision or agency thereof whether computed on a
separate, consolidated, unitary, combined or any other basis; and such
term shall include any interest, fines, penalties or additional amounts
attributable to or imposed with respect to any such taxes, charges,
fees, levies or other assessments.
(c) For purposes of this Agreement, the term "Tax Return" shall
mean any return, report or other document or information required to be
supplied to a taxing authority in connection with Taxes.
2.15 Intellectual Property. DSO and the DSO Subsidiaries own, or have
the right to use, sell or license all material Intellectual Property Rights
(as defined below) necessary or required for the conduct of their
respective businesses as presently conducted and such rights to use, sell
or license are reasonably sufficient for such conduct of their respective
businesses. To DSO's knowledge, neither DSO nor any DSO Subsidiary is
infringing or otherwise violating Intellectual Property Rights of any
person, which infringement or violation would subject DSO or any DSO
Subsidiary to a liability which, individually or in the aggregate, would
have a Material Adverse Effect. No claim has been made or, to DSO's
knowledge, threatened against DSO or any DSO Subsidiary alleging any such
violation which will have a Material Adverse Effect. As used herein, the
term "Intellectual Property Rights" shall mean all worldwide industrial and
intellectual property rights, including, without limitation, patents,
patent applications, patent rights, trademarks, trademark applications,
trade names, service marks, service mark applications, copyrights,
copyright applications, franchises, licenses, inventories, know-how, trade
secrets, customer lists, proprietary processes and formulae, all source and
object codes, algorithms, architecture, structures, display screens,
layouts, inventions, development tools and all documentation and media
constituting, describing or relating to the above, including, without
limitation, manuals, memoranda, and records.
2.16 Fees and Expenses. Except for Salomon Brothers, Inc., neither
DSO nor any of the DSO Subsidiaries has paid or become obligated to pay any
fee or commission to any broker, finder or intermediary in connection with
the transactions contemplated by this Agreement.
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2.17 Environmental Matters.
(a) DSO and the DSO Subsidiaries have duly complied with, and the
real property, equipment, businesses, operations and assets of each are
in compliance with, the provisions of the Comprehensive Environmental
Response Compensation and Liability Act of 1980, the Resource
Conservation and Recovery Act of 1976, the Clean Air Act, the Federal
Water Pollution Control Act of 1972, the Toxic Substances Control Act,
the Safe Drinking Water Act, the Pollution Prevention Act of 1990, the
National Environmental Policy Act and any other law, statute, ordinance
or regulation relating to the protection of the public health and/or the
environment, whether promulgated by the United States, any state,
municipality and/or other governmental body, each as amended
(hereinafter collectively referred to as "Environmental Laws"), except
where any such failures to comply, when taken in the aggregate, will not
have a Material Adverse Effect.
(b) To the best of the knowledge of DSO, with respect to DSO and
the DSO Subsidiaries, there are no conditions presently existing which
may reasonably be expected to lead to: (i) responsibilities or
liability, or an assertion thereunder by any governmental entity or
private person, pursuant to any Environmental Law the subject of which
is the management and disposal of toxic or hazardous substances or
wastes (intended hereby and hereafter to include any and all such
materials listed in any foreign, federal, state or local law, statute,
code or ordinance and all rules and regulations promulgated thereunder,
as hazardous or potentially hazardous and, if not so listed, asbestos,
lead and petroleum) or (ii) tort claims based on an action or inaction
of DSO or any of the DSO Subsidiaries relating to the management and
disposal of toxic or hazardous substances or wastes prior to the
Effective Time, except where any such failures to comply, when taken in
the aggregate, will not have a Material Adverse Effect.
(c) DSO and the DSO Subsidiaries have been issued, will maintain
until the Effective Time and will cause to remain in effect immediately
thereafter, all required foreign, federal, state and local permits,
licenses, certificates and approvals relating to (i) air emissions, (ii)
discharges to surface water or ground water, (iii) noise emissions, (iv)
solid or liquid waste disposal, (v) the use, generation, storage,
transportation or disposal of toxic or hazardous substances or wastes
and (vi) any other environmental, health or safety matters, except where
any such failures to comply, when taken in the aggregate, will not have
a Material Adverse Effect.
(d) DSO and the DSO Subsidiaries have neither received notice of,
nor know of, nor have any reason to suspect, any fact(s) which might
constitute violation(s) of any Environmental Laws which remain uncured,
except where the failure to cure any such violation(s), when taken in
the aggregate, will not have a Material Adverse Effect.
(e) To the best of the knowledge of DSO, with respect to DSO and
the DSO Subsidiaries, there has been, no emission, spill, release or
discharge in violation of Environmental Laws, whether on real property,
adjacent sites or at any other location or disposal site, into or upon
(i) the air, (ii) soils or improvements, (iii) surface water or ground
water, or (iv) the sewer, septic system or waste treatment, storage or
disposal system servicing real property, of any toxic or hazardous
substances or wastes used, stored, generated, treated or disposed at or
from the real property (any of which events is hereafter referred to as
a "Hazardous Discharge"), which, when taken in the aggregate, will have
a Material Adverse Effect. To the best of the knowledge of DSO, there is
not located on the real property used by DSO and the DSO Subsidiaries
toxic or hazardous substances or wastes in violation of Environmental
Laws, which, when taken in the aggregate, will have a Material Adverse
Effect.
(f) With respect to DSO and the DSO Subsidiaries, there has been no
complaint, order, directive, claim, citation or notice received from any
governmental authority or any other person or entity with respect to (i)
air emissions, (ii) spills, releases or discharges to soil or any
improvements located thereon, surface water, ground water or the sewer,
septic system or waste treatment, storage or disposal systems servicing
the real property and the business conducted thereon, (iii) noise
emissions, (iv) solid or liquid waste disposal, (v) the use, generation,
storage, transportation or
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disposal of toxic or hazardous substances or wastes or (vi) other
environmental, health or safety matters affecting DSO or any DSO
Subsidiary, the real property used by DSO and the DSO Subsidiaries, any
improvements located thereon or the business conducted thereon (any of
which is hereafter referred to as an "Environmental Complaint") which,
when taken in the aggregate, will result in a Material Adverse Effect.
(g) With respect to DSO and the DSO Subsidiaries, there has been no
lien asserted or created by any foreign, federal, state or local
authority upon any or all of the assets, equipment, real property or
other facilities of DSO and the DSO Subsidiaries by reason of a
Hazardous Discharge or Environmental Complaint initiated or occurring
prior to the Effective Time, except any which, when taken in the
aggregate, will not have a Material Adverse Effect.
(h) For the purposes of this Section 2.17, the term "DSO and DSO
Subsidiaries" shall also mean subsidiaries or other properties
previously owned or operated by DSO or a DSO Subsidiary, either directly
or indirectly, which would create liability for DSO or the DSO
Subsidiary by virtue of their prior ownership.
(i) DSO has made available to KCI all environmental studies and
reports pertaining or relating in any way to the real property or
equipment owned, occupied or leased by DSO or the DSO Subsidiaries or
otherwise relating or pertaining to the business, operations or assets
of DSO and the DSO Subsidiaries.
2.18 Interested Party Transactions.
(a) As of the date hereof, neither DSO nor any of the DSO
Subsidiaries is a party to any oral or written (i) consulting or similar
agreement with any present or former director, officer or employee or
any entity controlled by any such person not terminable on thirty days'
or less notice involving the payment of more than $100,000 per annum,
(ii) agreement with any executive officer or other key employee, the
benefits of which are contingent or the terms of which are materially
altered, upon the occurrence of a transaction involving it of the nature
contemplated by this Agreement, (iii) agreement with respect to any
executive officer or other key employee of it providing any term of
employment or compensation guarantee extending for a period longer than
one year or for the payment in excess of $100,000 per annum, or (iv)
except for the DSO Options, agreement or plan, including any stock
option plan, stock appreciation right plan, restricted stock plan or
stock purchase plan, any of the benefits of which will be increased, or
the vesting of the benefits of which will be accelerated, by the
occurrence of any of the transactions contemplated by this Agreement or
the value of any of the benefits of which will be calculated on the
basis of the transactions contemplated by this Agreement.
(b) Neither DSO nor any of the DSO Subsidiaries is indebted for
money borrowed, either directly or indirectly from any of its officers,
directors, or any Affiliate (as defined below) in any amount whatsoever,
nor are any of its officers, directors, or Affiliates indebted for money
borrowed from it; nor are there any transactions of a continuing nature
between it and any of its officers, directors, or Affiliates (other than
the regular employment of such persons) which will continue beyond the
Effective Time, including, without limitation, use of its assets for
personal benefit with or without adequate compensation. For the purpose
of this Agreement, the term "Affiliate" shall mean any person that,
directly or indirectly, through one or more intermediaries, controls or
is controlled by, or is under common control with, the person specified.
As used in the foregoing definition, the term (i) "control" shall mean
the power through the ownership of voting securities, contract or
otherwise to direct the affairs of another person and (ii) "person"
shall mean an individual, firm, trust, association, corporation,
partnership, government (whether federal, state, local or other
political subdivision, or any agency or bureau of any of them) or other
entity.
2.19 Contracts.
(a) Neither DSO nor any of the DSO Subsidiaries is a party to any
contracts, agreements, commitments and other instruments (whether oral
or written), other than current insurance policies,
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that (i) involve an expenditure by such party or require the performance
of services or delivery of goods to, by, through, on behalf of or for
the benefit of such party, which in each case, relates to a contract,
commitment or instrument that requires payments in excess of $25,000 per
year and (ii) involve an obligation for the performance of services or
delivery of goods by such party that cannot, or in reasonable
probability will not be performed within thirty days from the dates as
of which these representations are made, except for arrangements for the
manufacture or supply of products and for the purchase or sale of
merchandise or services entered into the ordinary course of business.
(b) All of the material contracts, agreements, commitments and
other instruments that either DSO or any of the DSO Subsidiaries is a
party to, or by which any of them is bound, are valid and binding upon
such party and the other parties thereto and are in full force and
effect and enforceable in accordance with their terms, and neither such
party nor any other party to any such contract, agreement, commitment or
other instrument has breached any provision thereof, and no event has
occurred, in each case, which, with the lapse of time or action by a
third party, could result in a default under the terms thereof which,
alone or in the aggregate, would have a Material Adverse Effect, and
there are no existing facts or circumstances which would prevent such
party's contracts and agreements for the sale of goods from maturing in
due course into fully collectible accounts receivable, except where such
failure would have a Material Adverse Effect.
2.20 Title to Properties. DSO and the DSO Subsidiaries have good and
marketable title to all of their real and other properties and assets,
tangible and intangible, as reflected in the DSO Balance Sheet, except as
since sold or otherwise disposed of in the ordinary course of business,
free and clear of all claims and encumbrances other than (i) specifically
disclosed in the DSO Balance Sheet, (ii) any liens for taxes not yet due
and payable or being contested, and (iii) such imperfections of title,
covenants, restrictions, easements and encumbrances, if any, as do not
materially detract from the value or materially interfere with the present
use of any of the properties or otherwise materially impair the business
operations or the financial condition of DSO and the DSO Subsidiaries taken
as a whole.
2.21 Insurance. DSO and the DSO Subsidiaries have insurance covering
casualty, fire, liability, worker's compensation and disability (the "DSO
Policies") providing coverage and having limitations and deductibles that
are customary for a business of the type operated by them and sufficient
for compliance in all material respects with all requirements of law and of
all agreements to which DSO and the DSO Subsidiaries are a party, and such
DSO Policies will be in full force and effect for all periods up to and
including the Effective Time, and no notice of cancellation or termination
has been received with respect to any of the DSO Policies. There are no
pending claims under or relating to any of the DSO Policies, which,
individually or in the aggregate, would have a Material Adverse Effect.
2.22 Board Approval. The Board of Directors of DSO has, as of the
date hereof, unanimously (i) approved this Agreement and the Merger, (ii)
approved the Voting Agreement between DSO and Contran Corporation, (iii)
determined that the Merger is in the best interests of the stockholders of
DSO and is on terms that are fair to such stockholders and (iv) resolved to
recommend that the stockholders of DSO approve this Agreement and the
Merger.
2.23 Vote Required. Except as required by applicable law, the
affirmative vote of holders of a majority of the outstanding shares of DSO
Stock voting as a single class is the only vote of the holders of any class
or series of DSO's capital stock necessary to approve this Agreement and
the Merger.
2.24 Disclosure. No representation or warranty made by DSO in this
Agreement, nor any document, written information, statement, financial
statement, certificate or exhibit prepared and furnished or to be prepared
and furnished by DSO or its representatives pursuant hereto or in
connection with the transactions contemplated hereby, when taken together,
contains any untrue statement of a material fact, or omits to state a
material fact necessary to make the statements or facts contained herein or
therein, not misleading in light of the circumstances under which they are
furnished.
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2.25 Fairness Opinion. DSO's Board of Directors has received a
written opinion from Salomon Brothers, Inc. that as of the date hereof the
Exchange Ratio is fair to DSO's stockholders from a financial point of
view.
2.26 Restrictions on Business Activities. There is no agreement,
judgment, injunction, order or decree binding upon DSO or any of the DSO
Subsidiaries that has or could reasonably be expected to have the effect of
prohibiting or impairing any business practice of DSO or any of the DSO
Subsidiaries, any acquisition of property by DSO or any of the DSO
Subsidiaries or the conduct of business by DSO or any of the DSO
Subsidiaries as currently conducted, which would have a Material Adverse
Effect.
2.27 DSO Rights Agreement. The Rights Agreement, dated as of February
20, 1989, between the Company and Harris Trust & Savings Bank, as amended
(the "Rights Agreement"), shall be amended so as to provide (i) that the
execution of the Merger Agreement and the consummation of the transactions
contemplated thereby shall not cause any of the rights (as defined in the
Rights Agreement) to become exercisable in accordance with the terms of the
Rights Agreement, and (ii) that the Rights Agreement shall terminate at the
Effective Time.
2.28 Propriety of Past Payments. No funds or assets of DSO or any of
the DSO Subsidiaries have been used for an illegal purpose, nor have any
unrecorded funds or assets of DSO or the DSO Subsidiaries been established
for any purposes. No accumulation or use of DSO's or the DSO Subsidiaries'
corporate funds or assets has been made without being properly accounted
for in their respective books and records and all payments by or on behalf
of DSO or the DSO Subsidiaries have been duly and properly recorded and
accounted for in their respective books and records. No false or artificial
entry has been made in the books and records of DSO or the DSO Subsidiaries
for any reason (except in the case of unaudited financial statements, for
year-end adjustments). No payment has been made by or on behalf of DSO or
the DSO Subsidiaries with the understanding that any part of such payment
is to be used for any purpose other than that described in the document
supporting such payment, and neither DSO nor any of the DSO Subsidiaries
has made, directly or indirectly, any illegal contributions to any
political party or candidate, either domestic or foreign. Neither the IRS
nor any other federal, state, local or foreign government agency or entity
has initiated or threatened any investigation of any payment made by DSO or
the DSO Subsidiaries of, or alleged to be of, the type described in this
Section 2.28.
3. REPRESENTATIONS AND WARRANTIES OF KCI
Except as set forth in a schedule dated the date of this Agreement and
delivered by KCI to DSO concurrently herewith (the "KCI Disclosure
Schedule") or as disclosed in the Recent KCI SEC Documents (as defined in
Section 3.4), KCI represents and warrants to DSO as set forth below.
3.1 Organization; Good Standing; Qualification and Power. KCI and each
of its subsidiaries, including corporations, partnerships, trusts or any
other type of entity (the "KCI Subsidiaries") is duly organized, validly
existing and in good standing under the laws of the state of its
incorporation or organization, has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its
business as now being conducted, and is duly qualified and in good standing
to do business in each jurisdiction in which the nature of its business or
the ownership or leasing of its properties makes such qualification
necessary or where the failure to so qualify would not have a Material
Adverse Effect. The KCI Disclosure Schedule sets forth a complete and
correct list of the KCI Subsidiaries. KCI has made available to DSO or its
counsel complete and correct copies of the Certificates or Articles of
Incorporation and Bylaws of KCI and each of the KCI Subsidiaries, in each
case as amended to the date of this Agreement.
3.2 Capital Structure.
(a) Stock and Options. The authorized capital stock of KCI consists
of 12,000,000 shares of KCI Common Stock, and 500,000 shares of
preferred stock, no par value. At the close of business on June 17,
1996, 5,688,558 shares of KCI Common Stock were issued and outstanding,
no shares of
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KCI Preferred Stock were issued and outstanding, 1,134 shares of KCI
Common Stock were held by KCI in its treasury, and 348,100 shares of KCI
Common Stock were reserved for issuance upon the exercise of outstanding
options to purchase KCI Common Stock (the "KCI Options"). All
outstanding shares of KCI Stock are validly issued, fully paid and
nonassessable and not subject to preemptive rights. All outstanding
shares of the capital stock of each of the KCI Subsidiaries are validly
issued, fully paid and nonassessable and are owned by KCI or one of the
KCI Subsidiaries free and clear of any liens, security interests,
pledges, agreements, claims, charges or encumbrances. KCI has made
available to DSO, a true and correct copy of the Keystone Consolidated
Industries, Inc. 1992 Incentive Compensation Plan and the Keystone
Consolidated Industries, Inc. 1992 Non-Employee Director Stock Option
Plan (collectively, the "KCI Plans"), and a complete and correct list of
each KCI Option outstanding as of the date hereof, including the name of
the holder of each such KCI Option, the KCI Plan pursuant to which each
such KCI Option was issued, the security and number of shares covered by
each such KCI Option, the per share exercise price of each such KCI
Option and the vesting schedule applicable to each such KCI Option.
(b) No Other Commitments. Except for the KCI Options, there are no
options, warrants, calls, rights, commitments, conversion rights or
agreements of any character to which KCI or any of the KCI Subsidiaries
is a party or by which KCI or any of the KCI Subsidiaries is bound,
obligating KCI or any of the KCI Subsidiaries to issue, deliver or sell,
or cause to be issued, delivered or sold, any shares of capital stock of
KCI or any of the KCI Subsidiaries or securities convertible into or
exchangeable for shares of capital stock of KCI or any of the KCI
Subsidiaries, or obligating KCI or any of the KCI Subsidiaries to grant,
extend or enter into any such option, warrant, call, right, commitment,
conversion right or agreement. There are no voting trusts or other
agreements or understandings to which KCI is a party or, as of the date
hereof, of which KCI has knowledge, with respect to the voting of the
capital stock of KCI or any of the KCI Subsidiaries.
3.3 Authority.
(a) Corporate Action. KCI has the requisite corporate power and
authority to enter into this Agreement and, subject to approval of this
Agreement and the Merger by the stockholders of KCI, to perform its
obligations hereunder and to consummate the Merger and the other
transactions contemplated by this Agreement. The execution and delivery
of this Agreement by KCI and, subject to approval of this Agreement and
the Merger by the stockholders of KCI, the consummation by KCI of the
Merger and the other transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of KCI. This
Agreement has been duly executed and delivered by KCI, and this
Agreement is a valid and binding obligation of KCI, enforceable in
accordance with its terms, except that such enforceability may be
subject to (i) bankruptcy, insolvency, reorganization or other similar
laws affecting or relating to enforcement of creditors' rights generally
and (ii) general equitable principles.
(b) No Conflict. Subject to approval of this Agreement and the
Merger by the stockholders of KCI, neither the execution, delivery and
performance of this Agreement or the Certificate of Merger, nor the
consummation of the transactions contemplated hereby or thereby, nor
compliance with the provisions hereof or thereof will conflict with, or
result in any violation of, or cause a default (with or without notice
or lapse of time, or both) under, or give rise to a right of
termination, amendment, cancellation or acceleration of any obligation
contained in, or the loss of any material benefit under, or result in
the creation of any lien, security interest, charge or encumbrance upon
any of the material properties or assets of KCI or any of the KCI
Subsidiaries under any term, condition or provision of (i) the
Certificates or Articles of Incorporation or Bylaws of KCI or any of the
KCI Subsidiaries or (ii) any material agreement, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to KCI or
any of the KCI Subsidiaries or their respective properties or assets,
other than any such conflicts, violations, defaults, losses, liens,
security interests, charges, or encumbrances which, individually or in
the aggregate, would not have a Material Adverse Effect.
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(c) Governmental Consents. No consent, approval or authorization
of, or registration, declaration or filing with any Governmental Entity
is required to be obtained by KCI or any of the KCI Subsidiaries in
connection with the execution and delivery of this Agreement or the
Certificate of Merger or the consummation of the transaction
contemplated hereby or thereby except for (i) the filing with the SEC of
(A) the Form S-4 and the declaration of its effectiveness, (B) the
Prospectus/Proxy Statement relating to the meeting of the stockholders
of KCI (the "KCI Stockholders Meeting") to be held with respect to the
approval by KCI's stockholders of this Agreement and the Merger, (C) the
filing contemplated by Section 1.3(b) hereof, and (D) such reports and
information under the Exchange Act and the rules and regulations
promulgated by the SEC thereunder, as may be required in connection with
this Agreement and the transactions contemplated hereby; (ii) the filing
of the Certificate of Merger with the Secretary of State of the State of
Delaware and appropriate documents with relevant authorities of other
states in which KCI is qualified to do business; (iii) such filings,
authorizations, orders and approvals as may be required under the State
Anti-Takeover Laws; (iv) such filings, authorizations, orders and
approvals as may be required under foreign laws, state securities laws
and the rules of the NYSE; (v) such filings and notifications as may be
necessary under the HSR Act; and (vi) where the failure to obtain such
consents, approvals, etc. would not prevent or delay the consummation of
the Merger or otherwise prevent KCI from performing its obligations
under this Agreement and would not reasonably be expected to have a
Material Adverse Effect.
3.4 SEC Documents.
(a) SEC Reports. KCI has made available to DSO or its counsel
complete and correct copies of each report, schedule, registration
statement and definitive proxy statement filed by KCI with the SEC on or
after January 1, 1991 (the "KCI SEC Documents"), which are all the
documents (other than preliminary material) that KCI was required to
file with the SEC on or after such date. As of their respective dates
or, in the case of registration statements, their effective dates (or if
amended or superseded by a filing prior to the date of this Agreement,
then on the date of such filing), none of the KCI SEC Documents
(including all exhibits and schedules thereto and documents incorporated
by reference herein) contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, and the KCI
SEC Documents complied when filed in all material respects with the then
applicable requirements of the Securities Act or the Exchange Act, as
the case may be, and the rules and regulations promulgated by the SEC
thereunder. KCI has filed all documents and agreements which were
required to be filed as exhibits to the KCI SEC Documents. For purposes
hereof, "Recent KCI SEC Documents" shall mean the most recent annual
report on Form 10-K of KCI, together with the most recent quarterly
report on Form 10-Q of KCI for any quarter subsequent to the annual
period covered by such Form 10-K, together with any current reports on
Form 8-K filed by KCI subsequent to such most recent Form 10-Q.
(b) Financial Statements. The financial statements of KCI included
in the KCI SEC Documents complied as to form in all material respects
with the then applicable accounting requirements and the published rules
and regulations of the SEC with respect thereto, were prepared in
accordance with generally accepted accounting principles applied on a
consistent basis during the periods involved (except as may have been
indicated in the notes thereto or, in the case of the unaudited
statements, as permitted by Form 10-Q promulgated by the SEC) and fairly
present (subject, in the case of the unaudited statements, to normal,
year-end audit adjustments) the consolidated financial position of KCI
and its consolidated KCI Subsidiaries as at the respective dates thereof
and the consolidated results of their operations and cash flows for the
respective periods then ended.
3.5 Information Supplied. None of the information supplied or to be
supplied by KCI for inclusion or incorporation by reference in the Form S-4
and Prospectus/Proxy Statement will, at the time the Form S-4 is declared
effective, at the date the Prospectus/Proxy Statement is mailed to the
stockholders
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of KCI and at the time of the KCI Stockholders Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they are made, not misleading. The material
to be supplied by KCI in respect of the Prospectus/Proxy Statement will
comply as to form in all material respects with the provisions of the
Exchange Act and the rules and regulations promulgated by the SEC
thereunder.
3.6 Compliance with Applicable Law. The businesses of KCI and the KCI
Subsidiaries are not being conducted in violation of any law, ordinance,
regulation, rule or order of any Governmental Entity where such violation
would have a Material Adverse Effect. Except as disclosed in the KCI SEC
Documents filed prior to the date of this Agreement or where such
notification would not reasonably be expected to result in a Material
Adverse Effect, KCI has not been notified by any Governmental Entity that
any investigation or review with respect to KCI or any of the KCI
Subsidiaries is pending or threatened, nor has any Governmental Entity
notified KCI of its intention to conduct the same. KCI and the KCI
Subsidiaries have all material permits, licenses and franchises from
Governmental Entities required to conduct their businesses as now being
conducted, except for those whose absence would not have a Material Adverse
Effect.
3.7 Litigation and Legal Matters. There is no suit, action,
arbitration, demand, claim or proceeding pending or threatened against KCI
or any of the KCI Subsidiaries, or any of their officers, directors,
employees or agents involving, affecting or relating to any assets,
operations or properties of KCI or the KCI Subsidiaries, or any KCI
Employee Plans (as defined in Section 3.8), nor is there any judgment,
decree, injunction, rule or order of any Governmental Entity or arbitrator
outstanding against KCI or any of the KCI Subsidiaries that, individually
or in the aggregate, could reasonably be expected to have a Material
Adverse Effect. KCI has made available to DSO or its counsel complete and
correct copies of all correspondence prepared by its counsel for KCI's
auditors in connection with the last five (5) completed audits of KCI's
financial statements and any such correspondence since the date of the last
such audit.
3.8 ERISA and Other Compliance.
(a) KCI has made available to DSO a list of all employees of KCI
and of any KCI Subsidiary, and their salaries as of the date of this
Agreement. KCI has made available to DSO (i) a copy of each "employee
benefit plan," as defined in Section 3(3) of ERISA, and (ii) a copy of
all other written or formal plans or agreements involving direct or
indirect compensation or benefits (including any employment agreements
entered into by KCI or any of the KCI Subsidiaries, but excluding
workers' compensation, unemployment compensation and other
government-mandated programs) currently maintained, contributed to or
entered into by KCI or any of the KCI Subsidiaries under which KCI or
any of the KCI Subsidiaries or any ERISA Affiliate thereof has any
present or future obligation or liability (collectively, the "KCI
Employee Plans"). Copies of all KCI Employee Plans (and, if applicable,
related trust agreements), all amendments thereto and all summary plan
descriptions, other than plans which are multiemployer plans within the
meaning of Title IV of ERISA, have been made available to DSO or its
counsel, together with the three (3) most recent annual reports (Forms
5500) prepared in connection with any such KCI Employee Plans. Each KCI
Pension Plan (as defined below) operates in accordance with the
reporting and disclosure requirements imposed under ERISA and the Code
except for such noncompliance which would not have a Material Adverse
Effect. Copies of all KCI Employee Plans which individually or
collectively would constitute an "employee pension benefit plan," as
defined in Section 3(2) of ERISA (collectively, the "KCI Pension
Plans"), have been made available to DSO. Except for funding waivers
which have been obtained, all contributions due from KCI or any of the
KCI Subsidiaries through March 31, 1996 with respect to any of the KCI
Employee Plans have been made as required under ERISA or have been
accrued in accordance with generally accepted accounting principles on
KCI's or any such KCI Subsidiary's financial statements as of March 31,
1996. Each KCI Employee Plan has been maintained since May 19, 1991 in
substantial compliance with its terms and with the requirements
prescribed by any and all statutes, orders, rules and
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regulations, including, without limitation, ERISA and the Code, which
are applicable to such KCI Employee Plans except for such noncompliance
which would not have a Material Adverse Effect.
(b) No KCI Pension Plan constitutes, or has since May 19, 1991
constituted, a "multiemployer plan," as defined in Section 3(37) of
ERISA. No KCI Pension Plans other than the Keystone-Bartonville Pension
Plan, the Keystone Steel & Wire Company Pension Plan and the Sherman
Wire Pension Plan (collectively, the "KCI Retirement Plans") are subject
to Title IV of ERISA. No "prohibited transaction," as defined in Section
406 of ERISA or Section 4975 of the Code, has occurred with respect to
any KCI Employee Plan which is covered by Title I of ERISA which would
result in a material liability to KCI and the KCI Subsidiaries taken as
a whole, excluding transactions effected pursuant to a statutory or
administrative exemption. To the best of the knowledge of the officers
of KCI, nothing done or omitted to be done and no transaction or holding
of any asset under or in connection with any KCI Employee Plan has or
will make KCI or any officer or director of KCI subject to any material
liability under Title I of ERISA or liable for any material tax or
penalty pursuant to Sections 4972, 4975, 4976 or 4979 of the Code or
Section 502 of ERISA. No KCI Pension Plan is liable for any federal,
state or local taxes other than unrelated business taxable income as
defined in Section 512 of the Code.
(c) To the best knowledge of the officers of KCI, each KCI 401(a)
Plan is qualified under Section 401(a) of the Code and has been so
qualified during the period from May 19, 1991 to date, and the trust
forming a part thereof is exempt from tax pursuant to Section 501(c) of
the Code. Each KCI 401(a) Plan operates in accordance with its terms
and, to KCI's knowledge, there exists no fact which would adversely
affect its qualified status. No KCI 401(a) Plan is currently under
investigation, audit or review by the IRS, nor is such action
contemplated and the IRS has not asserted that any KCI Pension Plan is
not qualified under Section 401(a) of the Code or that any trust
established under a KCI Pension Plan is not exempt under Section 501(a)
of the Code.
(d) With respect to each KCI Pension Plan which is a defined
benefit plan under Section 414(j) of the Code and each defined
contribution plan under Section 414(i) of the Code:
(i) no liability to the PBGC under Sections 406 - 4064 of ERISA
has been incurred by KCI or the KCI Subsidiaries since May 19, 1991
and all premiums due and owing to the PBGC have been timely paid;
(ii) the PBGC has notified neither KCI, any of the KCI
Subsidiaries nor any KCI Pension Plan of the commencement of
proceedings under Section 4042 of ERISA to terminate any such plan;
(iii) since May 19, 1991, no event has occurred, or to KCI's
knowledge is threatened or is about to occur which would constitute a
reportable event within the meaning of Section 4043(c) of ERISA for
which reporting has not been made; and
(iv) no KCI Pension Plan has any "accumulated funding
deficiency" (as defined in Section 302 of ERISA and Section 412 of
the Code for which a waiver has not been obtained).
(e) KCI has made available to DSO a list of each employment,
severance or other similar contract, arrangement or policy and each plan
or arrangement (written or oral) providing for insurance coverage
(including any self-insured arrangements), workers' benefits, vacation
benefits, severance benefits, disability benefits, death benefits,
hospitalization benefits, retirement benefits, deferred compensation,
profit-sharing, bonuses, stock options, stock purchases, phantom stock,
stock appreciation rights or other forms of incentive compensation or
post-retirement insurance, compensation or benefits for employees,
consultants or directors which (i) is not a KCI Employee Plan, (ii) is
entered into, maintained or contributed to, as the case may be, by KCI
or any of the KCI Subsidiaries and (iii) covers any employee or former
employee of KCI or any of the KCI Subsidiaries. Such contracts, plans
and arrangements as are described in this Section 3.8(e) are herein
referred to collectively as the "KCI Benefit Arrangements". To KCI's
knowledge, each KCI Benefit Arrangement has been maintained since May
19, 1991 in material compliance with its terms
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and with the requirements prescribed by any and all statutes, orders,
rules and regulations which are applicable to such KCI Benefit
Arrangement, is not currently under investigation, audit or review by
the IRS or any other federal or state agency and no such actions are
contemplated or under consideration, has no liability for any federal,
state, local or foreign taxes and has no claim subject to dispute or
litigation. KCI has made available to DSO or its counsel a complete and
correct copy or description of each KCI Benefit Arrangement.
(f) There has been no amendment to, written interpretation by or
announcement (whether or not written) by KCI or any of the KCI
Subsidiaries relating to, or change in employee participation or
coverage under, any KCI Employee Plan or KCI Benefit Arrangement that
would increase materially the expense of maintaining such KCI Employee
Plan or KCI Benefit Arrangement above the level of the expense incurred
in respect thereof from the fiscal year ended December 31, 1995.
(g) KCI has provided, or will have provided prior to the Effective
Time, to individuals entitled thereto all required notices and coverage
pursuant to Section 4980B of the Code and COBRA, with respect to any
"qualifying event" (as defined in Section 4980B(f)(3) of the Code)
occurring prior to and including the Effective Time, and no material tax
payable on account of Section 4980B of the Code has been incurred with
respect to any current or former employees (or their beneficiaries) of
KCI or any of the KCI Subsidiaries.
(h) No benefit payable or which may become payable by KCI or any of
the KCI Subsidiaries pursuant to any KCI Employee Plan or any KCI
Benefit Arrangement or as a result of or arising under this Agreement
shall constitute an "excess parachute payment" (as defined in Section
280G(b)(1) of the Code) which is subject to the imposition of an excise
tax under Section 4999 of the Code or which would not be deductible by
reasons of Section 280G of the Code.
3.9 Labor Matters.
(a) KCI and each of the KCI Subsidiaries has paid or made provision
for the payment of all salaries and accrued wages in the ordinary course
of business and has complied in all material respects with all
applicable laws, agreements, rules and regulations relating to the
employment of labor, including those relating to wages, hours,
collective bargaining and the payment and withholding of taxes, and has
withheld and paid to the appropriate governmental authority, or is
holding for payment not yet due to such authority, all amounts required
by law or agreement to be withheld from the wages or salaries of its
employees.
(b) Neither KCI nor any of the KCI Subsidiaries is a party to any
(i) outstanding employment agreements or contracts with officers or
employees that are not terminable at will, or that provide for the
payment of any bonus or commission, (ii) agreement, policy or practice
that requires it to pay termination or severance pay to any employees
(other than as required by law), (iii) collective bargaining agreement
or other labor union contract applicable to persons employed by KCI or
any KCI Subsidiary, nor, to the knowledge of KCI, are there any
activities or proceedings of any labor union to organize any such
employees. KCI and the KCI Subsidiaries have made available to DSO
complete and correct copies of all such agreements (the "KCI Employment
and Labor Agreements"). Neither KCI nor any of the KCI Subsidiaries has
breached or otherwise failed to comply with any provisions of any KCI
Employment and Labor Agreement, and there are no grievances outstanding
which will have a Material Adverse Effect.
(c) With respect to KCI and the KCI Subsidiaries, (i) there is no
unfair labor practice, charge or complaint pending before the NLRB, (ii)
there is no labor strike, material slowdown or material work stoppage or
lockout actually pending or threatened against or affecting KCI or the
KCI Subsidiaries, and neither KCI nor any of the KCI Subsidiaries has
experienced any strike, material slowdown or material work stoppage,
lockout or other collective labor action by or with respect to employees
of KCI or the KCI Subsidiaries, (iii) there is no representation, claim
or petition pending before the NLRB or a similar agency and no question
concerning representation exists relating to the employees of KCI or the
KCI Subsidiaries, (iv) there are no charges with respect to or relating
to
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KCI or KCI Subsidiaries pending before the Equal Employment Opportunity
Commission or any state, local, or foreign agency responsible for the
prevention of unlawful employment practices, (v) neither KCI nor any of
the KCI Subsidiaries has received formal notice from any federal, state,
local or foreign agency responsible for the enforcement of labor or
employment laws of an intention to conduct an investigation of KCI or
the KCI Subsidiaries and no such investigation is in progress and (vi)
the consents of the unions that are parties to any Employment and Labor
Agreements are not required to complete the transactions contemplated by
this Agreement.
(d) Neither KCI nor any of the KCI Subsidiaries has caused any
"plant closing" or "mass layoff" as such actions are defined in the
Worker Adjustment and Retraining Notification Act, as codified at 29
U.S.C. sec.sec. 2101-2109, and the regulations promulgated thereunder,
where KCI or the KCI Subsidiaries have failed to comply with the
provisions of such act.
3.10 Absence of Undisclosed Liabilities. Except as and to the extent
reflected, reserved against or otherwise disclosed in KCI's consolidated
balance sheet (including the notes thereto) at December 31, 1995 (the "KCI
Balance Sheet Date"), as disclosed in the Recent KCI SEC Documents or
otherwise disclosed pursuant to this Agreement, neither KCI nor any of the
KCI Subsidiaries had, at December 31, 1995, any liabilities or obligations
of any nature (matured or unmatured, fixed or contingent) which would have
a Material Adverse Effect on KCI. All reserves established by KCI and set
forth at the December 31, 1995 consolidated balance sheet of KCI (including
the notes thereto) (the "KCI Balance Sheet") were reasonably adequate as
required by generally accepted accounting principles.
3.11 Absence of Certain Changes or Events. Since the KCI Balance
Sheet Date (and other than in compliance with Section 5.3) there has not
occurred:
(a) any change in the condition (financial or otherwise),
properties, assets, liabilities, businesses, operations or results of
operations of KCI and the KCI Subsidiaries, that constitutes or could
reasonably be expected to result in a Material Adverse Effect;
(b) any amendments or changes in the Certificate of Incorporation
or Bylaws of KCI;
(c) any damage, destruction or loss, whether covered by insurance
or not, that constitutes or could reasonably be expected to result in a
Material Adverse Effect;
(d) any redemption, repurchase or other acquisition of shares of
KCI Stock by KCI, or any declarations, setting aside or payment of any
dividend or other distribution (whether in cash, stock or property) with
respect to KCI Stock;
(e) any material increase in or modification of the compensation or
benefits payable or to become payable by KCI to any of its directors or
employees, except in the ordinary course of business consistent with
past practice or pursuant to agreements or arrangements existing as of
the KCI Balance Sheet Date;
(f) any material increase in or modification of any bonus, pension,
insurance, KCI Employee Plan or KCI Benefit Arrangement (including, but
not limited to, the granting of stock options, restricted stock awards
or stock appreciation rights) made to, for or with any of its employees,
other than in the ordinary course of business consistent with past
practice or pursuant to agreements or arrangements existing as of the
KCI Balance Sheet Date;
(g) any acquisition or sale of a material amount of property or
assets of KCI, other than in the ordinary course of business consistent
with past practice;
(h) any alteration in any term of any outstanding security of KCI;
(i) any (A) incurrence, assumption or guarantee by KCI of any debt
for borrowed money or other obligation; (B) issuance or sale of any
security convertible into or exchangeable for debt securities of KCI; or
(C) issuance or sale of options or other rights to acquire from KCI,
directly or indirectly, debt securities of DSO or any securities
convertible into or exchangeable for any such debt securities;
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(j) any creation or assumption by KCI of any mortgage, pledge,
security interest, lien or other encumbrance on any asset, except as
would not have a Material Adverse Effect;
(k) any making of any loan, advance or capital contribution to or
investment in any person (as defined in Section 3.18) other than (i)
travel loans or advances made in the ordinary course of business of KCI,
(ii) other loans and advances in an aggregate amount which does not
exceed $25,000 outstanding at any time and (iii) purchases on the open
market of liquid, publicly traded securities;
(l) any entering into or amendment, relinquishment, termination or
non-renewal by KCI of any contract, lease transaction, commitment or
other right or obligation other than in the ordinary course of business,
except as would not have a Material Adverse Effect;
(m) any transfer or grant of a right under KCI's Intellectual
Property Rights, other than those transferred or granted in the ordinary
course of business; or
(n) any agreement or arrangement made by KCI to take any action
which, if taken prior to the date hereof, would have made any
representation or warranty set forth in this Agreement untrue or
incorrect as of the date when made unless otherwise disclosed.
3.12 No Default. Neither KCI nor any of the KCI Subsidiaries is in
default under, and there exists no event, condition or occurrence which,
after notice or lapse of time, or both, would constitute such a default by
KCI or any of the KCI Subsidiaries under, any contract or agreement to
which KCI or any of the KCI Subsidiaries is a party and which would, if
terminated or modified, have, insofar as can reasonably be foreseen, a
Material Adverse Effect.
3.13 Certain Agreements. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby will
(i) result in any payment (including, without limitation, severance,
unemployment compensation, golden parachute, bonus or otherwise) becoming
due to any director or employee of KCI or any of the KCI Subsidiaries from
KCI or any of the KCI Subsidiaries, under any KCI Employee Plan, KCI
Benefit Arrangement or otherwise, (ii) increase any benefit otherwise
payable under any KCI Employee Plan, KCI Benefit Arrangement or otherwise
or (iii) result in the acceleration of the time of payment or vesting of
any such benefits.
3.14 Taxes. KCI and each of the KCI Subsidiaries have (i) duly and
timely filed with the appropriate governmental authorities all Tax Returns
(as defined in Section 2.14(c)) required to be filed by it, and has not
filed for an extension to file any Tax Returns and such Tax Returns are
true, complete and correct in all material respects, and (ii) duly paid in
full or made adequate provision for the payment of all Taxes (as defined in
Section 2.14(b)) shown to be due on such Tax Returns. Tax Returns referred
to in clause (i) hereinabove have been examined by the IRS or the
appropriate governmental authority through the returns for the year ending
December 31, 1990 or the period of assessment of the Taxes in respect of
which such Tax Returns were required to be filed has expired, all
deficiencies asserted or assessments made as a result of such examination
have been paid in full and no proceeding or examination by or in front of
the relevant governmental authority in connection with the examination of
any of the Tax Returns referred to in clause (i) hereinabove is currently
pending. No claim has been made in writing to them by any authority in a
jurisdiction where they do not file a Tax Return that they are or may be
subject to Tax in such jurisdiction. No waivers of statutes of limitations
have been given by or requested in writing to them with respect to any
Taxes. They have not agreed to any extension of time with respect to any
Tax deficiency. The liabilities and reserves for Taxes reflected in the KCI
Balance Sheet as of March 31, 1996 will be adequate to cover all Taxes for
all periods ending on or prior to such date, except for the payment of such
Taxes which, alone or in the aggregate, would not have a Material Adverse
Effect on them, and there are no liens for Taxes upon any property or asset
of KCI or KCI Subsidiaries, except for liens for Taxes not yet due. There
are no unresolved issues of law or fact arising out of a notice of
deficiency, proposed deficiency or assessment from the IRS or any other
governmental taxing authority with respect to their Taxes which, if decided
adversely, singly or in the aggregate, would have a Material Adverse Effect
on them. They are not parties to any agreement providing for the
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allocation or sharing of Taxes with any entity. They have not, with regard
to any asset or property held, acquired or to be acquired by them, filed a
consent to the application of Section 341(f) of the Code. They have
withheld and paid all Taxes required to have been withheld and paid in
connection with amounts paid or owing to any employee, independent
contractor, creditor, stockholder, or other third party, except for such
taxes which, alone or in the aggregate, would not have a Material Adverse
Effect on them. No Tax is required to be withheld by them pursuant to
Section 1445 of the Code as a result of the transfer contemplated by this
Agreement. As a result of the Merger, they will not be obligated to make a
payment to any individual that would be a "parachute payment" to a
"disqualified individual" as those terms are defined in Section 280G of the
Code without regard to whether such payment is reasonable compensation for
personal services performed or to be performed in the future.
3.15 Intellectual Property. KCI and the KCI Subsidiaries own, or have
the right to use, sell or license all material Intellectual Property Rights
necessary or required for the conduct of their respective businesses as
presently conducted and such rights to use, sell or license are reasonably
sufficient for such conduct of their respective businesses. To KCI's
knowledge, neither KCI nor any KCI Subsidiary is infringing or otherwise
violating Intellectual Property Rights of any person, which infringement or
violation would subject KCI or any KCI Subsidiary to a liability which,
individually or in the aggregate, would have a Material Adverse Effect. No
claim has been made or to KCI's knowledge, threatened against KCI or any
KCI Subsidiary alleging any such violation which will have a Material
Adverse Effect.
3.16 Fees and Expenses. Except for PaineWebber Incorporated, neither
KCI nor any of the KCI Subsidiaries has paid or become obligated to pay any
fee or commission to any broker, finder or intermediary in connection with
the transactions contemplated by this Agreement.
3.17 Environmental Matters.
(a) KCI and the KCI Subsidiaries have duly complied with, and the
real property, equipment, businesses, operations and assets of each are
in compliance with, the Environmental Laws, except where any such
failures to comply, when taken in the aggregate, will not have a
Material Adverse Effect.
(b) To the best of the knowledge of KCI, with respect to KCI and
the KCI Subsidiaries, there are no conditions presently existing which
may reasonably be expected to lead to: (i) responsibilities or
liability, or an assertion thereunder by any governmental entity or
private person, pursuant to any Environmental Law the subject of which
is the management and disposal of toxic or hazardous substances or
wastes (intended hereby and hereafter to include any and all such
materials listed in any foreign, federal, state or local law, statute,
code or ordinance and all rules and regulations promulgated thereunder,
as hazardous or potentially hazardous and, if not so listed, asbestos,
lead and petroleum) or (ii) tort claims based on an action or inaction
of KCI or any of the KCI Subsidiaries relating to the management and
disposal of toxic or hazardous substances or wastes prior to the
Effective Time, except where any such failures to comply, when taken in
the aggregate, will not have a Material Adverse Effect.
(c) KCI and the KCI Subsidiaries have been issued, will maintain
until the Effective Time and will cause to remain in effect immediately
thereafter, all required foreign, federal, state and local permits,
licenses, certificates and approvals relating to (i) air emissions, (ii)
discharges to surface water or ground water, (iii) noise emissions, (iv)
solid or liquid waste disposal, (v) the use, generation, storage,
transportation or disposal of toxic or hazardous substances or wastes
and (vi) any other environmental, health or safety matters, except where
any such failures to comply, when taken in the aggregate, will not have
a Material Adverse Effect.
(d) KCI and the KCI Subsidiaries have neither received notice of,
nor know of, nor have any reason to suspect, any fact(s) which might
constitute violation(s) of any Environmental Laws which remain uncured
or where failure to cure any such violations, when taken in the
aggregate, will not have a Material Adverse Effect.
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(e) To the best of the knowledge of KCI, with respect to KCI and
the KCI Subsidiaries, there has been no Hazardous Discharge which, when
taken in the aggregate, will have a Material Adverse Effect. To KCI's
knowledge, there is not located on the real property used by KCI and the
KCI Subsidiaries toxic or hazardous substances or wastes in violation of
Environmental Laws, which, when taken in the aggregate, will have a
Material Adverse Effect. To the best of the knowledge of KCI, there is
not located on the real property used by KCI and the KCI Subsidiaries
toxic or hazardous substances or wastes in violation of Environmental
Laws, which, when taken in the aggregate, will have a Material Adverse
Effect.
(f) With respect to KCI and the KCI Subsidiaries, there has been no
Environmental Complaints which, when taken in the aggregate, would
result in a Material Adverse Effect.
(g) With respect to KCI and the KCI Subsidiaries, there has been no
lien asserted or created by any foreign, federal, state or local
authority upon any or all of the assets, equipment, real property or
other facilities of KCI and the KCI Subsidiaries by reason of a
Hazardous Discharge or Environmental Complaint initiated or occurring
prior to the Effective Time, except any which, when taken in the
aggregate, would not have a Material Adverse Effect.
(h) For the purposes of this Section 3.17, the term "KCI and KCI
Subsidiaries" shall also mean subsidiaries or other properties
previously owned or operated by KCI or a KCI Subsidiary, either directly
or indirectly, which would create liability for KCI or the KCI
Subsidiary by virtue of their prior ownership.
(i) KCI has made available to DSO all environmental studies and
reports pertaining or relating in any way to the real property or
equipment owned, occupied or leased by KCI or the KCI Subsidiaries or
otherwise relating or pertaining to the business, operations or assets
of KCI and the KCI Subsidiaries.
3.18 Interested Party Transactions.
(a) As of the date hereof, neither KCI nor any of the KCI
Subsidiaries is a party to any oral or written (i) consulting or similar
agreement with any present or former director, officer or employee or
any entity controlled by any such person not terminable on thirty days'
or less notice involving the payment of more than $100,000 per annum,
(ii) agreement with any executive officer or other key employee, the
benefits of which are contingent or the terms of which are materially
altered, upon the occurrence of a transaction involving it of the nature
contemplated by this Agreement, (iii) agreement with respect to any
executive officer or other key employee of it providing any term of
employment or compensation guarantee extending for a period longer than
one year or for the payment in excess of $100,000 per annum, or (iv)
except for the KCI Options, agreement or plan, including any stock
option plan, stock appreciation right plan, restricted stock plan or
stock purchase plan, any of the benefits of which will be increased, or
the vesting of the benefits of which will be accelerated, by the
occurrence of any of the transactions contemplated by this Agreement or
the value of any of the benefits of which will be calculated on the
basis of the transactions contemplated by this Agreement.
(b) Neither KCI nor any of the KCI Subsidiaries is indebted for
money borrowed, either directly or indirectly from any of its officers,
directors, or any Affiliate in any amount whatsoever, nor are any of its
officers, directors, or Affiliates indebted for money borrowed from it;
nor are there any transactions of a continuing nature between it and any
of its officers, directors, or Affiliates (other than the regular
employment of such persons) which will continue beyond the Effective
Time, including, without limitation, use of its assets for personal
benefit with or without adequate compensation.
3.19 Contracts.
(a) Neither KCI nor any of the KCI Subsidiaries is a party to any
contracts, agreements, commitments and other instruments (whether oral
or written) that (i) involve an expenditure by
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such party or require the performance of services or delivery of goods
to, by, through, on behalf of or for the benefit of such party, which in
each case, relates to a contract, commitment or instrument that requires
payments in excess of $25,000 per year and (ii) involve an obligation
for the performance of services or delivery of goods by such party that
cannot, or in reasonable probability will not be performed within thirty
days from the dates as of which these representations are made, except
for arrangements for the manufacture or supply of products and for the
purchase or sale of merchandise or services entered into the ordinary
course of business.
(b) All of the material contracts, agreements, commitments and
other instruments that either KCI or any of the KCI Subsidiaries is a
party to, or by which any of them is bound, are valid and binding upon
such party and the other parties thereto and are in full force and
effect and enforceable in accordance with their terms, and neither such
party nor any other party to any such contract, agreement, commitment or
other instrument has breached any provision of, and no event has
occurred, in each case, which, with the lapse of time or action by a
third party, could result in a default under the terms thereof which,
alone or in the aggregate, would have a Material Adverse Effect, and,
there are no existing facts or circumstances which would prevent such
party's contracts and agreements for the sale of goods from maturing in
due course into fully collectible accounts receivable, except where
failure to do so would have a Material Adverse Effect.
3.20 Title to Properties. KCI and the KCI Subsidiaries have good
title to all of their real and other properties and assets, tangible and
intangible, as reflected in the KCI Balance Sheet, except as since sold or
otherwise disposed of in the ordinary course of business, free and clear of
all claims and encumbrances other than (i) specifically disclosed in the
KCI Balance Sheet, (ii) any liens for taxes not yet due and payable or
being contested, and (iii) such imperfections of title, covenants,
restrictions, easements and encumbrances, if any, as do not materially
detract from the value or materially interfere with the present use of any
of the properties or otherwise materially impair the business operations or
the financial condition of KCI and the KCI Subsidiaries taken as a whole.
3.21 Insurance. KCI and the KCI Subsidiaries have insurance covering
casualty, fire, liability, worker's compensation and disability (the "KCI
Policies") providing coverage and having limitations and deductibles that
are customary for a business of the type operated by them and sufficient
for compliance in all material respects with all requirements of law and of
all agreements to which KCI and the KCI Subsidiaries are a party, and such
KCI Policies will be in full force and effect for all periods up to and
including the Effective Time, and no notice of cancellation or termination
has been received with respect to any of the KCI Policies. There are no
pending claims under or relating to any of the KCI Policies which
individually or in the aggregate, have a Material Adverse Effect.
3.22 Board Approval. The Board of Directors of KCI has, as of the
date hereof, unanimously (i) approved this Agreement and the Merger, (ii)
approved the Voting Agreement among KCI, Coatings Group, Inc., Anders U.
Schroeder, Asgard Ltd., Parkway M & A Capital Corporation and M&A
Investment Pte Ltd., (iii) determined that the Merger is in the best
interests of the stockholders of KCI and is on terms that are fair to such
stockholders and (iv) resolved to recommend that the stockholders of KCI
approve this Agreement and the Merger.
3.23 Vote Required. The affirmative vote of holders of a majority of
the outstanding shares of KCI Common Stock is the only vote of the holders
of any class or series of KCI's capital stock necessary to approve this
Agreement and the Merger.
3.24 Disclosure. No representation or warranty made by KCI in this
Agreement, nor any document, written information, statement, financial
statement, certificate or exhibit prepared and furnished or to be prepared
and furnished by KCI or its representatives pursuant hereto or in
connection with the transactions contemplated hereby, when taken together,
contains any untrue statement of a material fact, or omits to state a
material fact necessary to make the statements or facts contained herein or
therein, not misleading in light of the circumstances under which they are
furnished.
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3.25 Fairness Opinion. KCI's Board of Directors has received a
written opinion from PaineWebber Incorporated that as of the date hereof
the Exchange Ratio is fair to KCI's stockholders from a financial point of
view.
3.26 Restrictions on Business Activities. There is no agreement,
judgment, injunction, order or decree binding upon KCI or any of the KCI
Subsidiaries that has or could reasonably be expected to have the effect of
prohibiting or impairing any business practice of KCI or any of the KCI
Subsidiaries, any acquisition of property by KCI or any of the KCI
Subsidiaries or the conduct of business by KCI or any of the KCI
Subsidiaries as currently conducted, which would have a Material Adverse
Effect.
3.27 Propriety of Past Payments. No funds or assets of KCI or any of
the KCI Subsidiaries have been used for an illegal purpose, nor have any
unrecorded funds or assets of KCI or the KCI Subsidiaries been established
for any purposes. No accumulation or use of KCI's or the KCI Subsidiaries'
corporate funds or assets has been made without being properly accounted
for in their respective books and records and all payments by or on behalf
of KCI or the KCI Subsidiaries have been duly and properly recorded and
accounted for in their respective books and records. No false or artificial
entry has been made in the books and records of KCI or the KCI Subsidiaries
for any reason (except in the case of unaudited financial statements, for
year-ended adjustments). No payment has been made by or on behalf of KCI or
the KCI Subsidiaries with the understanding that any part of such payment
is to be used for any purpose other than that described in the document
supporting such payment, and neither KCI nor any of the KCI Subsidiaries
has made, directly or indirectly, any illegal contributions to any
political party or candidate, either domestic or foreign. Neither the IRS
nor any other federal, state, local or foreign government agency or entity
has initiated or threatened any investigation of any payment made by KCI or
the KCI Subsidiaries of, or alleged to be of, the type described in this
Section 3.27.
4. DSO COVENANTS
4.1 Advice of Changes. During the period from the date of this
Agreement until the earlier of the Effective Time or the termination of
this Agreement in accordance with its terms, DSO will as soon as possible
advise KCI in writing (a) of any event occurring subsequent to the date of
this Agreement that would render any representation or warranty of DSO
contained in this Agreement, if made on or as of the date of such event or
the Effective Time, untrue or inaccurate in any material respect, (b) of
any event or occurrence resulting in or which may reasonably be expected to
result in, a Material Adverse Effect on DSO or (c) of any breach by DSO of
any covenant or agreement contained in this Agreement. To ensure compliance
with this Section 4.1, DSO shall deliver to KCI as soon as reasonably
practicable after the end of each monthly accounting period ending after
the date of this Agreement and before the earlier of the Effective Time or
the termination of this Agreement in accordance with its terms, an
unaudited consolidated balance sheet, statement of operations and statement
of cash flows for DSO, which financial statements shall be prepared in the
ordinary course of business, in accordance with DSO's books and records and
generally accepted accounting principles and shall fairly present the
consolidated financial position of DSO as of their respective dates and the
results of DSO's operations for the periods then ended.
4.2 Maintenance of Business. During the period from the date of this
Agreement until the earlier of the Effective Time or the termination of
this Agreement in accordance with its terms, DSO will use its diligent
commercial efforts to carry on and preserve its business and its
relationships with customers, suppliers, employees and others in
substantially the same manner as it has prior to the date hereof. If DSO
becomes aware of any material deterioration in the relationship with any
material customer, material supplier or key employee, it will promptly
bring such information to the attention of KCI.
4.3 Conduct of Business. Except as may be necessary to consummate the
transactions contemplated hereby, during the period from the date of this
Agreement until the earlier of the Effective Time or the termination of
this Agreement in accordance with its terms, DSO will continue to conduct
its
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business and maintain its business relationships in the ordinary and usual
course and neither DSO nor any DSO Subsidiary will, without the prior
written consent of KCI:
(a) borrow any money except for amounts that are not in the
aggregate material to the financial condition of DSO and the DSO
Subsidiaries, taken as a whole;
(b) enter into any material transaction not in the ordinary course
of its business;
(c) encumber or permit to be encumbered any of its assets except in
the ordinary course of its business or with respect to liens which are
not material or relate to unpaid taxes;
(d) dispose of any of its assets except in the ordinary course of
business;
(e) enter into any material lease or contract for the purchase or
sale or license of any property, real or personal, except in the
ordinary course of business;
(f) fail to maintain its equipment and other assets in good working
condition and repair, and in all material respects, in accordance with
the standards it has maintained to the date of this Agreement, subject
only to ordinary wear and tear;
(g) pay (or make any oral or written commitments or representations
to pay) any bonus, increased salary or special remuneration to any
officer, employee or consultant (except for normal salary increases
consistent with past practices, not to exceed ten percent (10%) per year
pursuant to existing arrangements previously disclosed to KCI on the DSO
Disclosure Schedule) or enter into or vary the terms of any employment,
consulting or severance agreement with any such person, pay any
severance or termination pay (other than payments made in accordance
with plans or agreements existing on the date hereof), grant any stock
option (except for normal grants to newly hired or current employees
consistent with past practices and annual grants of options granted to
non-employee directors required by the terms of the DSO 1992 Stock Plan)
or issue any restricted stock, or enter into or modify any agreement or
plan or increase benefits of the type described in Section 2.8; provided
that DSO shall be entitled to pay annual bonuses and to make changes to
compensation (i) in the ordinary course of business consistent with past
practices or (ii) with prior written notice to KCI in the event that
such changes are required, in the good faith judgment of DSO and after
consultation with KCI, to retain its key employees following the
Effective Time;
(h) change accounting methods;
(i) declare, set aside or pay any cash or stock dividend or other
distribution in respect of capital stock, or redeem or otherwise acquire
any of its capital stock (other than pursuant to arrangements with
terminated employees or consultants in the ordinary course of business
consistent with past practice);
(j) amend or terminate any contract, agreement or license to which
it is a party except those amended or terminated in the ordinary course
of its business, consistent with past practice, and which are not
material in amount or effect;
(k) lend any amount to any person or entity, other than (i)
advances for travel and expenses which are incurred in the ordinary
course of business consistent with past practice, not material in amount
and documented by receipts for the claimed amounts, or (ii) any loans
pursuant to any DSO Section 401(a) Plan;
(l) guarantee or act as a surety for any obligation except for
obligations in amounts that are not material;
(m) issue or sell any shares of its capital stock of any class
(except upon the exercise of a bona fide option or warrant currently
outstanding or permitted to be granted under Section 4.3(g)), or any
other of its securities, or issue or create any warrants, obligations,
subscriptions, options (except as expressly permitted under Section
4.3(g)), convertible securities or other commitments to issue shares of
capital stock, or accelerate the vesting of any outstanding option or
other security;
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(n) split or combine the outstanding shares of its capital stock of
any class or enter into any recapitalization or agreement affecting the
number of rights of outstanding shares of its capital stock of any class
or affecting any other of its securities;
(o) merge, consolidate or reorganize with, or acquire any entity
(other than such transaction that would not be material and that would
not impair or affect the timing of the Merger) or adopt a plan of
liquidation or dissolution;
(p) amend its Certificate of Incorporation or Bylaws;
(q) license any DSO Intellectual Property Rights except in the
ordinary course of business;
(r) agree to any audit assessment by any tax authority;
(s) change any insurance coverage, voluntarily allow any insurance
coverage to lapse, or issue any certificates of insurance; or
(t) agree to do, or permit any DSO Subsidiary to do or agree to do,
or enter into negotiations with respect to any of the things described
in the preceding clauses in this Section 4.3.
4.4 Stockholder Approval. Without regard to the recommendation
contemplated by this Section 4.4, DSO will call the DSO Stockholders
Meeting to be held as soon as possible after the Form S-4 shall have been
declared effective by the SEC to submit this Agreement, the Merger and
related matters for the consideration and approval of the DSO stockholders.
Such approval will be recommended by DSO's Board of Directors subject to
the fiduciary obligations of its directors. Such meeting will be called,
held and conducted, and any proxies will be solicited, in compliance with
applicable securities laws.
4.5 Prospectus/Proxy Statement. DSO will mail to its stockholders in
a timely manner at least twenty (20) business days prior to the meeting,
for the purpose of considering and voting upon the Merger at the DSO
Stockholders Meeting, the Prospectus/Proxy Statement in the Form S-4. DSO
will as soon as possible provide all information relating to DSO, its
business or operations necessary for inclusion in the Prospectus/Proxy
Statement to satisfy all requirements of applicable state and federal
securities laws. DSO shall be solely responsible for any statement,
information or omission in the Prospectus/Proxy Statement relating to it or
its Affiliates based upon written information furnished by it. DSO will not
provide or publish to its stockholders any material concerning it or its
Affiliates that violates the Securities Act or the Exchange Act with
respect to the transactions contemplated hereby.
4.6 Regulatory Approvals. DSO will promptly execute and file or join
in the execution and filing of, any application or other document that may
be necessary in order to obtain the authorization, approval or consent of
any governmental body, federal, state, local or foreign, which may be
reasonably required, or which KCI may reasonably request, in connection
with the consummation of the transactions contemplated by this Agreement.
DSO will use its best efforts to obtain promptly all such authorizations,
approvals and consents. Without limiting the generality of the foregoing,
as promptly as practicable after the execution of this Agreement, DSO shall
file with the Federal Trade Commission (the "FTC") and the Antitrust
Division of the Department of Justice (the "DOJ"), a pre-merger
notification report under the HSR Act.
4.7 Necessary Consents. During the term of this Agreement, DSO will
use its best efforts to obtain such written consents and take such other
actions as may be necessary or appropriate in addition to those set forth
in Section 4.6 to allow the consummation of the transactions contemplated
hereby and to allow the Surviving Corporation to carry on DSO's business
after the Effective Time.
4.8 Access to Information. DSO will allow KCI and its agents
reasonable access to the files, books, records and offices of DSO and each
DSO Subsidiary, including, without limitation, any and all information
relating to DSO's taxes, commitments, contracts, leases, licenses and real,
personal and intangible property and financial condition. DSO will cause
its accountants to cooperate with KCI and its agents in making available to
KCI all financial information reasonably requested, including, without
limitation, the right to examine all working papers pertaining to all tax
returns and financial statements prepared or audited by such accountants.
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4.9 Satisfaction of Conditions Precedent. During the term of this
Agreement, DSO will use its best efforts to satisfy or cause to be
satisfied all the conditions precedent that are set forth in Article 8, and
DSO will use its best efforts to cause the Merger and the other
transactions contemplated by this Agreement to be consummated.
4.10 No Other Negotiations. From and after the date of this Agreement
until the earlier of the Effective Time or the termination of this
Agreement in accordance with its terms, DSO and the DSO Subsidiaries shall
not, and shall direct and use its best efforts to cause its officers,
directors and agents not to (a) solicit, engage in discussions or negotiate
with any person (whether such discussions or negotiations are initiated by
DSO or otherwise) or take any other action intended or designed to
facilitate the efforts of any person, other than KCI, relating to a
possible Alternative Acquisition (as defined below), (b) provide
information with respect to DSO or any of the DSO Subsidiaries to any
person, other than KCI, relating to a possible Alternative Acquisition by
any person, other than KCI, (c) enter into an agreement with any person,
other than KCI, providing for a possible Alternative Acquisition or (d)
except as contemplated by this Section 4.10 or as required by applicable
law (including the exercise of the fiduciary duties of the DSO Board of
Directors), make or authorize any statement, recommendation or solicitation
in support of any possible Alternative Acquisition by any person, other
than by KCI.
Notwithstanding the foregoing, the restrictions set forth in this
Agreement shall not prevent the Board of Directors of DSO (or its agents
pursuant to its instructions) from taking the following actions: (a)
furnishing information concerning DSO and its business, properties and
assets to any third party and (b) entering into discussions with such third
party concerning an Alternative Acquisition, provided that all of the
following events shall have occurred: (i) such third party has made a
written proposal to the Board of Directors of DSO to consummate an
Alternative Acquisition which proposal identifies a price or range of
values to be paid for the outstanding securities or substantially all of
the assets of DSO, and if consummated, based on the advice of DSO's
investment bankers, the Board of Directors of DSO has determined such
Alternative Acquisition to be financially more favorable to the
stockholders of DSO than the terms of the Merger (a "Superior Proposal");
(ii) DSO's Board of Directors has determined, based on the advice of its
investment bankers, that such third party is financially capable of
consummating such Superior Proposal; (iii) the Board of Directors of DSO
shall have determined, after consultation with its outside legal counsel,
that the fiduciary duties of the Board of Directors require DSO to furnish
information to and negotiate with such third party; and (iv) at least two
(2) business days prior thereto, KCI shall have been notified in writing of
such Superior Proposal, including all of its terms and conditions, and
shall have been given copies of such proposal and KCI shall have been
notified of the determinations made by the DSO Board of Directors pursuant
to clauses (i), (ii) and (iii) of this paragraph. Notwithstanding the
foregoing, DSO shall not provide any non-public information to such third
party unless (A) it provides such information to KCI simultaneously or as
promptly as practicable thereafter and (B) DSO has notified KCI in advance
of any such proposed disclosure of non-public information to any such third
party, with a description of the information proposed to be disclosed.
In addition to the foregoing, DSO shall not accept or enter into any
agreement concerning an Alternative Acquisition for a period of not less
than forty-eight (48) hours after KCI's receipt of a copy of such proposal
of an Alternative Acquisition. Upon compliance with the foregoing, DSO
shall be entitled to enter into an agreement with such third-party
concerning an Alternative Acquisition provided that DSO shall immediately
make or cause to be made payment in full to KCI of the Breakup Fee as
defined in Section 9.4 below.
If DSO or any of the DSO Subsidiaries receives any unsolicited offer,
inquiry or proposal to enter into discussions or negotiations relating to
an Alternative Acquisition, DSO shall immediately notify KCI thereof,
including information as to the identity of the party making any such
offer, inquiry or proposal and the specific terms of such offer, inquiry or
proposal, as the case may be.
DSO shall be entitled to provide copies of this Section 4.10 to third
parties who, on an entirely unsolicited basis after the date hereof,
contact DSO concerning an Alternative Acquisition; provided that KCI shall
concurrently be notified of such contact and the delivery of such copy.
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For purposes of this Agreement, "Alternative Acquisition" shall mean
any of the following (other than transactions between KCI and DSO
contemplated hereby): (i) any merger, consolidation, share exchange,
business combination, or other similar transaction involving DSO or the DSO
Subsidiaries; (ii) any sale, exchange, transfer or other disposition of 20%
or more of the assets of DSO or the DSO Subsidiaries, taken as a whole, in
a single transaction or series of related transactions, (iii) any sale of
or tender offer or exchange offer for 20% or more of the outstanding shares
of capital stock of DSO or the filing of a registration statement under the
Securities Act in connection therewith; (iv) any person acquiring
beneficial ownership or the right to acquire beneficial ownership of, or
any "group" (as such term is defined under Section 13(d) of the Exchange
Act and the rules and regulations promulgated thereunder) having been
formed for the purpose of effecting an Alternative Acquisition which
beneficially owns, or has the right to acquire beneficial ownership of, 20%
or more of the then outstanding shares of capital stock of DSO; or (v) any
public announcement of a proposal, plan or intention to do any of the
foregoing or any agreement to engage in any of the foregoing with respect
to DSO or the DSO Subsidiaries.
5. KCI COVENANTS
5.1 Advice of Changes. During the period from the date of this
Agreement until the earlier of the Effective Time or the termination of
this Agreement in accordance with its terms, KCI will as soon as possible
advise DSO in writing (a) of any event occurring subsequent to the date of
this Agreement that would render any representation or warranty of KCI
contained in this Agreement, if made on or as of the date of such event or
the Effective Time, untrue or inaccurate in any material respect, (b) of
any Material Adverse Effect on KCI or (c) of any breach by KCI of any
covenant or agreement contained in this Agreement. To ensure compliance
with this Section 5.1, KCI shall deliver to DSO as soon as reasonably
practicable after the end of each monthly accounting period ending after
the date of this Agreement and before the earlier of the Effective Time or
the termination of this Agreement in accordance with its terms, an
unaudited consolidated balance sheet, statement of operations and statement
of cash flows for KCI, which financial statements shall be prepared in the
ordinary course of business, in accordance with KCI's books and records and
generally accepted accounting principles and shall fairly present the
consolidated financial position of KCI as of their respective dates and the
results of KCI's operations for the periods then ended.
5.2 Maintenance of Business. During the period from the date of this
Agreement until the earlier of the Effective Time or the termination of
this Agreement in accordance with its terms, KCI will use its diligent
commercial efforts to carry on and preserve its business and its
relationships with customers, suppliers, employees and others in
substantially the same manner as it has prior to the date hereof. If KCI
becomes aware of any material deterioration in the relationship with any
material customer, material supplier or key employee, it will promptly
bring such information to the attention of DSO.
5.3 Conduct of Business. Except as may be necessary to consummate the
transactions contemplated hereby, during the period from the date of this
Agreement until the earlier of the Effective Time or the termination of
this Agreement in accordance with its terms, KCI will continue to conduct
its business and maintain its business relationships in the ordinary and
usual course and neither KCI nor any KCI Subsidiary will, without the prior
written consent of DSO:
(a) borrow any money except for amounts that are not in the
aggregate material to the financial condition of KCI and the KCI
Subsidiaries, taken as a whole;
(b) enter into any material transaction not in the ordinary course
of its business;
(c) encumber or permit to be encumbered any of its assets except in
the ordinary course of its business or with respect to liens which are
not material or relate to unpaid taxes;
(d) dispose of any of its assets except in the ordinary course of
business;
(e) enter into any material lease or contract for the purchase or
sale or license of any property, real or personal, except in the
ordinary course of business;
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(f) fail to maintain its equipment and other assets in good working
condition and repair, and accordingly, in all material respects, to the
standards it has maintained to the date of this Agreement, subject only
to ordinary wear and tear;
(g) pay (or make any oral or written commitments or representations
to pay) any bonus, increased salary or special remuneration to any
officer, employee or consultant (except for normal salary increases
consistent with past practices and not to exceed ten percent (10%) per
year pursuant to existing arrangements previously disclosed to DSO on
the KCI Disclosure Schedule) or enter into or vary the terms of any
employment, consulting or severance agreement with any such person, pay
any severance or termination pay (other than payments made in accordance
with plans or agreements existing on the date hereof), grant any stock
option (except for normal grants to newly hired or current employees
consistent with past practices and grants of options granted to non-
employee directors required by the terms of the KCI 1992 Incentive
Compensation Plan) or issue any restricted stock, or enter into or
modify any agreement or plan or increase benefits of the type described
in Section 3.8; provided that KCI shall be entitled to pay annual
bonuses and to make changes to compensation (i) in the ordinary course
of business consistent with past practices or (ii) with prior written
notice to DSO in the event that such changes are required, in the good
faith judgment of KCI and after consultation with DSO, to retain its key
employees following the Effective Time;
(h) change accounting methods;
(i) declare, set aside or pay any cash or stock dividend or other
distribution in respect of capital stock, or redeem or otherwise acquire
any of its capital stock (other than pursuant to arrangements with
terminated employees or consultants in the ordinary course of business
consistent with past practice);
(j) amend or terminate any contract, agreement or license to which
it is a party except those amended or terminated in the ordinary course
of its business, consistent with past practice, and which are not
material in amount or effect;
(k) lend any amount to any person or entity, other than (i)
advances for travel and expenses which are incurred in the ordinary
course of business consistent with past practice, not material in amount
and documented by receipts for the claimed amounts, or (ii) any loans
pursuant to any KCI Section 401(a) Plan;
(l) guarantee or act as a surety for any obligation except for
obligations in amounts that are not material;
(m) issue or sell any shares of its capital stock of any class
(except upon the exercise of a bona fide option or warrant currently
outstanding or permitted to be granted under Section 5.3(g)), or any
other of its securities, or issue or create any warrants, obligations,
subscriptions, options (except as expressly permitted under Section
5.3(g)), convertible securities or other commitments to issue shares of
capital stock, or accelerate the vesting of any outstanding option or
other security;
(n) split or combine the outstanding shares of its capital stock of
any class or enter into any recapitalization or agreement affecting the
number of rights of outstanding shares of its capital stock of any class
or affecting any other of its securities;
(o) merge, consolidate or reorganize with, or acquire any entity
(other than such transaction that would not be material and that would
not impair or affect the timing of the Merger) or adopt a plan of
liquidation or dissolution;
(p) amend its Certificate of Incorporation or Bylaws;
(q) license any KCI Intellectual Property Rights except in the
ordinary course of business;
(r) agree to any audit assessment by any tax authority;
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(s) change any insurance coverage, voluntarily allow any insurance
coverage to lapse, or issue any certificates of insurance; or
(t) agree to do, or permit any KCI Subsidiary to do or agree to do,
or enter into negotiations with respect to any of the things described
in the preceding clauses in this Section 5.3.
5.4 Stockholder Approval. Without regard to the recommendation
contemplated by this Section 5.4, KCI will call the KCI Stockholders
Meeting to be held as soon as possible after the Form S-4 shall have been
declared effective by the SEC to submit this Agreement, the Merger and
related matters for the consideration and approval of the KCI stockholders.
Such approval will be recommended by KCI's Board of Directors subject to
the fiduciary obligations of its directors. Such meeting will be called,
held and conducted, and any proxies will be solicited, in compliance with
applicable securities laws.
5.5 Prospectus/Proxy Statement. KCI will mail to its stockholders in
a timely manner at least twenty (20) business days prior to the meeting,
for the purpose of considering and voting upon the Merger at the KCI
Stockholders Meeting, the Prospectus/Proxy Statement in the Form S-4. KCI
will as promptly as soon as possible provide all information relating to
KCI, its business or operations necessary for inclusion in the
Prospectus/Proxy Statement to satisfy all requirements of applicable state
and federal securities laws. KCI shall be solely responsible for any
statement, information or omission in the Prospectus/Proxy Statement
relating to it or its Affiliates based upon written information furnished
by it. KCI will not provide or publish to its stockholders any material
concerning it or its Affiliates that violates the Securities Act or the
Exchange Act with respect to the transactions contemplated hereby.
5.6 Regulatory Approvals. KCI will promptly execute and file or join
in the execution and filing, of any application or other document that may
be necessary in order to obtain the authorization, approval or consent of
any governmental body, federal, state, local or foreign, which may be
reasonably required, or which DSO may reasonably request, in connection
with the consummation of the transactions contemplated by this Agreement.
KCI will use its best efforts to promptly obtain all such authorizations,
approvals and consents. Without limiting the generality of the foregoing,
as promptly as practicable after the execution of this Agreement, KCI shall
file with the FTC and the Antitrust Division of the DOJ a pre-merger
notification report under the HSR Act.
5.7 Necessary Consents. During the term of this Agreement, KCI will
use its best efforts to obtain such written consents and take such other
actions as may be necessary or appropriate in addition to those set forth
in Section 5.6 to allow the consummation of the transactions contemplated
hereby and to allow the Surviving Corporation to carry on KCI's business
after the Effective Time.
5.8 Access to Information. KCI will allow DSO and its agents
reasonable access to the files, books, records and offices of KCI and each
KCI Subsidiary, including, without limitation, any and all information
relating to KCI's taxes, commitments, contracts, leases, licenses and real,
personal and intangible property and financial condition. KCI will cause
its accountants to cooperate with DSO and its agents in making available to
DSO all financial information reasonably requested, including, without
limitation, the right to examine all working papers pertaining to all tax
returns and financial statements prepared or audited by such accountants.
5.9 Satisfaction of Conditions Precedent. During the term of this
Agreement, KCI will use its best efforts to satisfy or cause to be
satisfied all the conditions precedent that are set forth in Article 7, and
KCI will use its best efforts to cause the Merger and the other
transactions contemplated by this Agreement to be consummated.
5.10 Listing. KCI will use its best efforts to cause as promptly as
reasonably practicable the shares of KCI Common Stock to be issued pursuant
to the Merger to be listed upon the Effective Time with the NYSE, subject
to official notice of issuance.
5.11 Nomination of Directors. The Board of Directors of KCI shall
take all necessary action to increase the KCI Board of Directors to nine
members as of the Effective Time and to cause the two persons named by DSO
at the Effective Time to be appointed to the Board of Directors of KCI with
one
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DSO designee to be appointed to the class of directors serving until the
KCI Annual Meeting of Shareholders in 1999 and the other in the class
serving until the KCI Annual Meeting in 1997, at which KCI agrees to use
its best efforts to renominate such person to serve until the KCI Annual
Meeting in 2000.
5.12 Executive Committee. The Board of Directors of KCI shall take
all necessary steps as of the Effective Time, to create an Executive
Committee of the Board of Directors with three members, and to cause one
director, named by DSO at the Effective Time, to be appointed to such
committee.
5.13 Director and Officer Indemnification. From and after the
Effective Time, KCI shall indemnify, defend and hold harmless the current
officers and directors of DSO and DSO Subsidiaries against all losses,
claims, damages and liability in respect of acts or omissions occurring at
or prior to the Effective Time to the fullest extent that DSO or such DSO
Subsidiary would have been permitted under applicable law and the
Certificates or Articles of Incorporation and Bylaws of DSO or DSO
Subsidiary in effect on the date hereof to indemnify such person. For at
least six years after the Effective Time, KCI shall cause the Surviving
Corporation to keep in effect provisions in its Certificate or Article of
Incorporation and Bylaws providing for limitation of director and officer
liability and indemnification of such persons to the fullest extent. KCI
shall reimburse all expenses including reasonable attorney's fees, incurred
by any person to enforce successfully the obligations of KCI under this
Section. The provisions of this Section 5.13 shall survive consummation of
the Merger and are expressly intended to benefit current directors and
officers of DSO. After the Effective Time, KCI shall cause the Surviving
Corporation to purchase insurance covering the directors and officers of
DSO for claims made within one year after the Effective Time against such
directors and officers relating to claims arising prior to the Effective
Time. KCI shall not be obligated to pay more than $150,000 for such
insurance. From and after the Effective Time, KCI shall purchase insurance
covering the directors and officers of KCI, with coverage limits comparable
to such insurance carried by DSO prior to the Effective Time, if in the
sole discretion of KCI, such insurance may be purchased at prices
comparable to that paid by DSO.
5.14 DSO Trade Debt. KCI shall cause the Surviving Corporation to
provide for the approximately $9,922,017 (plus interest accruing after July
1, 1996) owing as of the date hereof by DeSoto to its trade creditors
pursuant to the Trade Composition Agreement and related Security Agreement
(the "Trade Debt"), in the following amounts: (i) eighty percent (80%) of
the Trade Debt as promptly as reasonably practicable after the Effective
Time, and (ii) twenty percent (20%) of the Trade Debt no later than one (1)
year after the Effective Time.
6. CLOSING MATTERS
6.1 The Closing. Subject to the termination of this Agreement as
provided in Article 9 below, the Closing of the transactions contemplated
by this Agreement (the "Closing") will take place at the offices of Godwin
& Carlton, P.C., 901 Main Street, Suite 2500, Dallas, Texas 75202 on a date
(the "Closing Date") and at a time to be mutually agreed upon by the
parties, which date shall be no later than the third business day after all
conditions to Closing set forth herein shall have been satisfied or waived,
unless another place, time and date is mutually selected by DSO and KCI.
Concurrently with the Closing, the Certificate of Merger will be filed in
the office of Secretary of State of the State of Delaware. As soon as
practicable thereafter, the Certificate of Merger will be recorded in the
Office of Recorder of the Delaware county or counties in which the parties
to the Certificate of Merger maintain their respective registered offices.
6.2 Exchange of Certificates.
(a) Exchange Agent. Prior to the Closing Date, KCI shall select a
bank or trust company reasonably acceptable to DSO to act as exchange
agent (the "Exchange Agent") in the Merger. Promptly after the Effective
Time, KCI shall deposit with the Exchange Agent, for the benefit of the
holders of shares of DSO Common Stock, for exchange in accordance with
this Agreement and the Certificate of Merger, certificates representing
the shares of KCI Common Stock (such shares of KCI Common Stock,
together with any dividends or distributions with respect thereto
pursuant to
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Section 6.2(c), being hereinafter referred to as the "Exchange Fund")
issuable pursuant to this Agreement and the Certificate of Merger in
exchange for outstanding shares of DSO Common Stock. The Exchange Agent
shall not be entitled to vote or exercise any right of ownership with
respect to the KCI Common Stock held by it from time to time hereunder.
(b) Exchange Procedures. As soon as practicable after the Effective
Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective
Time represented issued and outstanding shares of DSO Common Stock
(collectively, the "Certificates"), (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and
title to the Certificates shall pass, upon delivery of the Certificates
to the Exchange Agent and shall be in such form and have such other
provisions as DSO and KCI may reasonably specify) and (ii) instructions
for use in effecting the surrender of the Certificates in exchange for
certificates representing KCI Common Stock. Upon surrender of a
Certificate for cancellation to the Exchange Agent, together with a duly
executed letter of transmittal and such other documents as may be
reasonably required by the Exchange Agent, the holder of such
Certificate shall be entitled to receive in exchange therefor a
certificate representing the number of whole shares of KCI Common Stock
which such holder has the right to receive pursuant to the provisions of
this Agreement and the Certificate of Merger, and the Certificate so
surrendered shall forthwith be cancelled. In the event of a transfer of
ownership of shares of DSO Common Stock which is not registered on the
transfer records of DSO, a certificate representing the proper number of
shares of KCI Common Stock may be issued to a transferee if the
Certificate representing such KCI Common Stock is presented to the
Exchange Agent, accompanied by all documents required to evidence and
effect such transfer and by evidence that any applicable stock transfer
taxes have been paid. Until surrendered as contemplated by this Section
6.2 and the Certificate of Merger, each Certificate shall be deemed, on
and after the Effective Time, to represent only the right to receive
upon such surrender the certificate representing shares of KCI Common
Stock and cash in lieu of any fractional shares of KCI Common Stock as
contemplated by Section 1.2, the Certificate of Merger and the Delaware
Law.
(c) Distributions with Respect to Unsurrendered Certificates. No
dividends or other distributions declared or made after the Effective
Time with respect to KCI Common Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered
Certificate with respect to the shares of KCI Common Stock represented
thereby and no cash payment in lieu of fractional shares shall be paid
to any such holder pursuant to Section 1.2 or the Certificate of Merger
until a new certificate for KCI Common Stock is issued in exchange for
such Certificate. Subject to the effect of applicable laws, after the
issuance of a certificate for KCI Common Stock in exchange for a
Certificate, there shall be paid to the record holder of such new
certificate representing whole shares of KCI Common Stock issued in
exchange therefor, without interest, (i) at the time of such issuance,
the amount of any cash payable in lieu of a fractional share of KCI
Common Stock to which such holder is entitled pursuant to Section 1.2
and the Certificate of Merger and the amount of dividends or other
distributions with a record date after the Effective Time theretofore
paid with respect to such whole shares of KCI Common Stock and (ii) at
the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to
surrender and a payment date subsequent to surrender payable with
respect to such whole shares of KCI Common Stock.
(d) No Further Ownership Rights to DSO Stock. All shares of KCI
Stock issued upon the surrender for exchange of shares of DSO Stock in
accordance with the terms of this Agreement and the Certificate of
Merger (including any cash paid pursuant to Section 1.2) shall be deemed
to have been issued in full satisfaction of all rights pertaining to
such shares of DSO Stock, and after the Effective Time there shall be no
further registration of any transfer on the stock transfer books of the
Surviving Corporation of the shares of DSO Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to KCI for any reason, they shall be
cancelled and exchanged as provided in this Section 6.2 and the
Certificate of Merger.
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(e) Termination of Exchange Fund. Any portion of the Exchange Fund
which remains undistributed to the former stockholders of DSO for six
(6) months after the Effective Time shall be delivered to KCI, upon
demand, and any former stockholders of DSO who have not theretofore
complied with this Section 6.2 and the Certificate of Merger shall
thereafter look only to KCI for payment of their claim for KCI Stock,
any cash in lieu of fractional shares of KCI Stock and any dividends or
distributions with respect to KCI Stock.
(f) No Liability. Neither the Exchange Agent, KCI nor DSO shall be
liable to any holder of shares of DSO Stock or KCI Stock, as the case
may be, for Exchange Funds or stock delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
6.3 Assumption of Options. Promptly after the Effective Time, KCI
will notify in writing each holder of a KCI Converted Option of the
assumption of such option by KCI, the number of shares of KCI Common Stock
that are then subject to such option, and the exercise price of such
option, as determined pursuant to this Agreement.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF DSO
The obligations of DSO hereunder are subject to the fulfillment or
satisfaction on or before the Closing Date, of each of the following
conditions (any one or more of which may be waived by DSO, but only in a
writing signed by DSO):
7.1 Accuracy of Representations and Warranties. The representations
and warranties of KCI set forth in Article 3 (as qualified by the KCI
Disclosure Schedule and the Recent KCI SEC Documents) shall be true and
accurate in every respect on and as of the Closing Date with the same force
and effect as if they had been made at the Closing except to the extent the
failure of such representations and warranties to be true and accurate in
such respects has not had and could not reasonably be expected to have a
Material Adverse Effect, and DSO shall receive a certificate to such effect
executed by KCI's Chief Financial Officer.
7.2 Covenants. KCI shall have performed and complied in all material
respects with all of its covenants required to be performed by it under
this Agreement on or before the Closing, and DSO shall receive a
certificate to such effect signed by KCI's Chief Financial Officer.
7.3 Absence of Material Adverse Change. From the date of this
Agreement through the Effective Time, there shall not have been any
material adverse change in the condition (financial or otherwise),
properties, assets, liabilities, businesses, operations or results of
operations of KCI and the KCI Subsidiaries, taken as a whole (a "KCI
Material Adverse Change").
7.4 Compliance with Law. There shall be no order, decree or ruling by
any governmental agency or written threat thereof, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Merger, which would prohibit or render illegal the transactions
contemplated by this Agreement.
7.5 Government Consents. There shall have been obtained on or before
the Closing such material permits or authorizations, and there shall have
been taken such other action, as may be required to consummate the Merger
by any regulatory authority having jurisdiction over the parties and the
actions herein proposed to be taken, including but not limited to
requirements under applicable federal and state securities laws and the
compliance with, and expiration of any applicable waiting period under, the
HSR Act.
7.6 The Form S-4. The Form S-4 shall have become effective under the
Securities Act and shall not be the subject of any stop-order or
proceedings seeking a stop-order and the Prospectus/Proxy Statement shall
on the Closing not be subject to any proceedings commenced or threatened by
the SEC.
7.7 Documents. DSO shall have received all written consents,
assignments, waivers, authorizations or other certificates reasonably
deemed necessary by DSO's legal counsel to provide for the continuation in
full force and effect of any and all material contracts and leases of KCI
and for KCI to consummate
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the transactions contemplated hereby except when the failure to receive
such consents, assignments, waivers, authorizations or certificates would
not constitute a KCI Material Adverse Change.
7.8 Stockholder Approval. This Agreement and the Merger shall have
been approved and adopted by the DSO stockholders in accordance with the
rules of the NYSE, applicable law and DSO's Certificate of Incorporation
and Bylaws.
7.9 KCI Approval. This Agreement, the Merger and the issuance of KCI
Common Stock in connection with the Merger shall have been approved by the
KCI stockholders in accordance with the rules of the NYSE, applicable law
and KCI's Certificate of Incorporation and Bylaws.
7.10 No Legal Action. No temporary restraining order, preliminary
injunction or permanent injunction or other order preventing the
consummation of the Merger shall have been issued by any federal or state
court and remain in effect, nor shall any proceeding initiated by the U.S.
Government seeking any of the foregoing be pending.
7.11 Election of DSO Designees to Board of Directors of KCI. The
Board of Directors of KCI shall have taken appropriate action to cause the
number of directors comprising the full Board of Directors of KCI at the
Effective Time to be increased from seven to nine persons, and the two
persons named by DSO at the Effective Time shall be added as additional
Directors effective upon the Effective Time.
7.12 Tax Opinions. DSO shall have received two opinions of Fried,
Frank, Harris, Shriver & Jacobson (or such other counsel selected by DSO)
in form and substance reasonably satisfactory to it, based, in each case,
upon representation letters dated on or about the dates of such opinions
from persons reasonably requested to provide such letters and such other
facts and representations as counsel may reasonably deem relevant, to the
effect that the Merger will be treated for federal income tax purposes as a
reorganization qualifying under the provisions of Section 368 of the Code,
the first of which shall be dated on or about the date that is two business
days prior to the date of the Joint Proxy Statement/Prospectus and the
second of which shall be dated as of the Effective Time.
7.13 Legal Opinion. DSO shall have received from counsel to KCI an
opinion reasonably acceptable to DSO.
7.14 Listing. The shares of KCI Common Stock to be issued in the
Merger and upon exercise of the Warrants shall have been approved for
listing on the NYSE, subject to official notice of issuance.
7.15 PBGC. Prior to the Effective Time (i) KCI shall have discussed
with the PBGC the merger of the DSO Retirement Plans and the KCI Retirement
Plans, and the assets thereof, and (ii) the PBGC will have raised KCI's
borrowing restrictions to an amount reasonably expected to enable KCI to
perform its obligations under this Agreement.
7.16 Financing. KCI shall have available reasonably sufficient
sources of financing in order to effect the Merger and to satisfy its
obligations and those of the Surviving Corporation.
7.17 Fairness Opinion. DSO shall have received an opinion of Salomon
Brothers, Inc. confirming, as of one business day before the Effective
Time, that the Exchange Ratio is fair to the holders of DSO Common Stock
from a financial point of view.
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF KCI
The obligations of KCI hereunder are subject to the fulfillment or
satisfaction on or before the Closing, of each of the following conditions
(any one or more of which may be waived by KCI, but only in a writing
signed by KCI):
8.1 Accuracy of Representations and Warranties. The representations
and warranties of DSO set forth in Article 2 (as qualified by the DSO
Disclosure Schedule and the Recent DSO SEC Documents) shall be true and
accurate in every respect on and as of the Closing Date with the same force
and effect as if they had been made at the Closing except to the extent the
failure of such representations and warranties to be true and accurate in
such respects had not had and could not reasonably be expected to
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have a Material Adverse Effect (except that any breach of this Section 8.1
shall be deemed to have a Material Adverse Effect with respect to any
untruth or inaccuracy contained in Section 2.8(i)), and KCI shall receive a
certificate to such effect executed by DSO's Chief Financial Officer.
8.2 Covenants. DSO shall have performed and complied in all material
respects with all of its covenants required to be performed by it under
this Agreement on or before the Closing, and KCI shall receive a
certificate to such effect signed by DSO's Chief Financial Officer.
8.3 Absence of Material Adverse Change. From the date of this
Agreement through the Effective Time, there shall not have been any
material adverse change in the condition (financial or otherwise),
properties, assets, liabilities, businesses, operations or results of
operations of DSO and DSO Subsidiaries, taken as a whole (a "DSO Material
Adverse Change").
8.4 Compliance with Law. There shall be no order, decree or ruling by
any governmental agency or written threat thereof, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Merger, which would prohibit or render illegal the transactions
contemplated by this Agreement.
8.5 Government Consents. There shall have been obtained on or before
the Closing such material permits or authorizations, and there shall have
been taken such other action, as may be required to consummate the Merger
by any regulatory authority having jurisdiction over the parties and the
actions herein proposed to be taken, including but not limited to
requirements under applicable federal and state securities laws and the
compliance with, and expiration of any applicable waiting period under, the
HSR Act.
8.6 Form S-4. The Form S-4 shall have become effective under the
Securities Act and shall not be the subject of any stop-order or
proceedings seeking a stop-order and the Prospectus/Proxy Statement shall
on the Closing not be subject to any proceedings commenced or threatened by
the SEC.
8.7 Documents. KCI shall have received all written consents,
assignments, waivers, authorizations or other certificates reasonably
deemed necessary by KCI's legal counsel to provide for the continuation in
full force and effect of any and all material contracts and leases of DSO
and for DSO to consummate the transactions contemplated hereby except when
the failure to receive such consents, assignments, waivers, authorizations,
or certificates would not constitute a DSO Material Adverse Change.
8.8 Stockholder Approval. This Agreement, the Merger and the issuance
of KCI Common Stock in connection with the Merger shall have been approved
by the KCI stockholders in accordance with the rules of the NYSE,
applicable law and KCI's Certificate of Incorporation and Bylaws.
8.9 DSO Approval. This Agreement and the Merger shall have been
approved and adopted by the DSO stockholders in accordance with the rules
of the NYSE, applicable law and DSO's Certificate of Incorporation and
Bylaws.
8.10 No Legal Action. No temporary restraining order, preliminary
injunction or permanent injunction or other order preventing the
consummation of the Merger shall have been issued by any federal or state
court and remain in effect, nor shall any proceeding initiated by the U.S.
Government seeking any of the foregoing be pending.
8.11 Tax Opinions. KCI shall have received two opinions of Godwin &
Carlton, P.C. (or such other counsel selected by KCI) in form and substance
reasonably satisfactory to it, based, in each case, upon representation
letters dated on or about the dates of such opinions from persons
reasonably requested to provide such letters and such other facts and
representations as counsel may reasonably deem relevant, to the effect that
the Merger will be treated for federal income tax purposes as a
reorganization qualifying under the provisions of Section 368 of the Code,
the first of which shall be dated on or about the date that is two business
days prior to the date of the Joint Proxy Statement/Prospectus and the
second of which shall be dated as of the Effective Time.
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8.12 Legal Opinion. KCI shall have received from counsel to DSO, an
opinion reasonably acceptable to KCI.
8.13 Agreement of Warrantholders. The Warrant Conversion Agreement of
even date herewith between each holder of DSO Warrants and KCI shall be in
full force and effect and the holders of the DSO Warrants shall have
complied with all of their obligations under such Warrant Conversion
Agreement.
8.14 Financing. KCI shall have available reasonably sufficient
sources of financing in order to effect the Merger and to satisfy its
obligations and those of the Surviving Corporation.
8.15 Amendment of DSO Retirement Plan. DSO shall have amended the DSO
Retirement Plan effective immediately prior to the Effective Time to the
reasonable satisfaction of KCI, in order to remove all restrictions in the
DSO Retirement Plan, other than those required by ERISA, regarding (a)
reductions or changes in benefit formulas thereunder, (b) the merger of the
DSO Retirement Plan into another plan or the merger of another plan into
the DSO Retirement Plan, (c) the reversion of plan assets thereof, and (d)
the allocation of plan assets upon plan termination, including without
limitation, any such restrictions in Section 10.3(e), Section 10.4 or
Section 11.4 of the DSO Retirement Plan.
8.16 No Pending Termination. The DSO Retirement Plan shall not have
been terminated.
8.17 PBGC. Prior to the Effective Time (i) KCI shall have discussed
with the PBGC the merger of the DSO Retirement Plans and the KCI Retirement
Plans, and the assets thereof, and (ii) the PBGC will have raised KCI's
borrowing restrictions to an amount reasonably expected to enable KCI to
perform its obligations under this Agreement.
8.18 Approval of Change of Control. Prior to the Effective Time, DSO
and its Board of Directors shall make the approval and nomination described
in Section 10.4 of the DSO Retirement Plan.
8.19 Preferred Stockholders Consents. The Preferred Stockholder
Waiver and Consent Agreement of even date herewith between KCI and the
holders of the DSO Preferred Stock shall be in full force and effect and
the holders of the DSO Preferred Stock shall have complied with all of
their obligations under such Preferred Stockholder Waiver and Consent
Agreement.
8.20 Prescott Obligation. DSO's payment obligation in respect of its
purchase of J.L. Prescott Company shall be resolved on terms satisfactory
to KCI in its sole discretion.
8.21 Fairness Opinion. KCI shall have received an opinion of
PaineWebber Incorporated confirming, as of one business day before the
Effective Time, that the Exchange Ratio is fair to the holders of KCI
Common Stock from a financial point of view.
8.22 Lender Consent. KCI shall have received a consent of its secured
lender to the transactions contemplated by this Agreement.
8.23 Trade Creditor Agreement. DSO's trade creditors shall have
consented to the terms of repayment contemplated by Section 5.14 hereof.
8.24 Merger of Pension Plans. All regulatory action shall have been
taken in order to effect, and no impediments shall exist to prohibit, the
merger of the DSO Pension Plans and the KCI Pension Plans, in a manner
satisfactory to KCI, at the Effective Time.
9. TERMINATION OF AGREEMENT; BREAK UP FEES
9.1 Termination. This Agreement may be terminated at any time prior
to the Effective Time, whether before or after approval of the Merger by
the stockholders of KCI or DSO:
(a) by mutual agreement of DSO and KCI;
(b) by DSO, if (i) there has been a breach by KCI of any
representation, warranty, covenant or agreement set forth in this
Agreement on the part of KCI, or if any representation or warranty of
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KCI shall have become untrue, in either case which has or can reasonably
be expected to have a Material Adverse Effect and which KCI fails to
cure prior to the Closing (except that no cure period shall be provided
for a breach by KCI which by its nature cannot be cured),(ii) DSO shall
have received a Superior Proposal and DSO's Board of Directors believes,
after consultation with legal counsel, that its fiduciary duties require
termination of this Agreement, or (iii) KCI shall not have received a
nonbinding commitment letter from a lending institution with respect to
the matters contemplated by Sections 7.16 and 8.14 hereof, before the
Form S-4 shall be declared effective by the SEC.
(c) by KCI, if (i) there has been a breach by DSO of any
representation, warranty, covenant or agreement set forth in this
Agreement on the part of DSO, or if any representation or warranty of
DSO shall have become untrue, in either case which has or can reasonably
be expected to have a Material Adverse Effect and which DSO fails to
cure prior to the Closing (except that no cure period shall be provided
for a breach by DSO which by its nature cannot be cured) or (ii) DSO
shall have entered into an agreement with respect to an Alternative
Acquisition;
(d) by either party if the required approvals of the stockholders
of DSO or KCI shall not have been obtained by reason of the failure to
obtain the required vote;
(e) by either party, if all the conditions to its obligations for
Closing the Merger shall not have been satisfied or waived on or before
the Final Date (as defined below) other than as a result of a breach of
this Agreement by the terminating party; or
(f) by either party, if a permanent injunction or other order by
any federal or state court which would make illegal or otherwise
restrain or prohibit the consummation of the Merger shall have been
issued and shall have become final and nonappealable.
As used herein, the "Final Date" shall be December 31, 1996.
9.2 Notice of Termination. Any termination of this Agreement under
Section 9.1 above will be effective by the delivery of written notice
pursuant to Section 11.9 of the terminating party to the other party
hereto.
9.3 Effect of Termination. In the case of any termination of this
Agreement as provided in this Article 9, this Agreement shall be of no
further force and effect (except as provided in Section 9.4 and Article 11)
and nothing herein shall relieve any party from liability for any breach of
this Agreement. No termination of this Agreement shall affect the
obligations contained in the pre-existing confidentiality agreements
between DSO and KCI (the "Confidentiality Agreements") which will survive
termination of this Agreement in accordance with their terms.
9.4 Breakup Fee.
(a) Upon the occurrence of any of the following events, DSO shall
immediately make payment or cause payment to be made to KCI (by wire
transfer or cashier's check) of a breakup fee in the amount of
$1,000,000 (the "Breakup Fee"): (i) this Agreement is terminated by KCI
pursuant to Section 9.1(c)(ii); (ii) the Merger shall be submitted to a
vote of the DSO stockholders as required hereunder, and the stockholders
of DSO shall have failed to approve the Merger by a requisite vote
required for such approval where at the time of such vote there is
pending a proposal with respect to an Alternative Acquisition; (iii)
without the occurrence of a KCI Material Adverse Change, the Board of
Directors of DSO shall have failed to submit the Merger to its
stockholders for approval as required by, and in accordance with, the
terms of this Agreement; or (iv) DSO shall have terminated this
Agreement pursuant to Section 9.1(b)(ii). Notwithstanding the foregoing,
the fee payable under this Section 9.4(a) shall not be payable if, prior
to the above-referenced occurrence, there shall be an event giving rise
to KCI's payment obligation under Section 9.4(b).
(b) If without the occurrence of a DSO Material Adverse Change, the
Board of Directors of KCI shall fail to submit the Merger to its
stockholders for approval as required by, and in accordance with, the
terms of this Agreement, KCI shall immediately make payment or cause
payment to be
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made to DSO (by wire transfer or cashier's check) the Breakup Fee.
Notwithstanding the foregoing, the fee payable under this Section 9.4(b)
shall not be payable if, prior to the above-referenced occurrence, there
shall be an event giving rise to DSO's payment obligation under Section
9.4(a).
(c) Neither party shall be entitled to receive the Breakup Fee
hereunder if it shall have committed a material breach of this
Agreement.
10. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS.
All representations, warranties and covenants of the parties contained
in this Agreement will remain operative and in full force and effect,
regardless of any investigation made by or on behalf of the parties to this
Agreement, until the earlier of the termination of this Agreement or the
Closing Date, whereupon such representations, warranties and covenants will
expire (except for covenants that by their terms survive for a longer
period).
11. MISCELLANEOUS.
11.1 Governing Law. The internal laws of the State of Delaware
(irrespective of its choice of law principles) will govern the validity of
this Agreement, the construction of its terms and the interpretation and
enforcement of the rights and duties of the parties hereto.
11.2 Assignment; Binding Upon Successors and Assigns. Neither party
hereto may assign any of its rights or obligations hereunder without the
prior written consent of the other party hereto. This Agreement will be
binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
11.3 Severability. If any provision of this Agreement, or the
application thereof, will for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such
provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such void or unenforceable provision of this Agreement
with a valid and enforceable provision that will achieve, to the greatest
extent possible, the economic, business and other purposes of the void or
unenforceable provisions.
11.4 Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be an original as regards any party whose
signature appears thereon and all of which together will constitute one and
the same instrument. This Agreement will become binding when one or more
counterparts hereof, individually or taken together, will bear the
signatures of all the parties reflected hereon as signatories.
11.5 Other Remedies. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative
with and not exclusive of any other remedy conferred hereby or by law on
such party, and the exercise of any one remedy will not preclude the
exercise of any other.
11.6 Amendment and Waivers. Any term or provision of this Agreement
may be amended only in a writing signed by the party to be bound thereby.
The observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively) only by a writing signed by the party to be benefitted
thereby. The waiver by a party of any breach hereof or default in the
performance hereof will not be deemed to constitute a waiver of any other
default or any succeeding breach or default. The Agreement may be amended
by the parties hereto at any time before or after approval of the DSO
stockholders or the KCI stockholders, but, after such approval, no
amendment will be made which by applicable law requires the further
approval of the DSO stockholders or the KCI stockholders without obtaining
such further approval.
11.7 Expenses. Each party will bear its respective expenses and legal
fees incurred with respect to this Agreement, and the transactions
contemplated hereby.
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11.8 Attorney's Fees. Should suit be brought to enforce or interpret
any part of this Agreement, the prevailing party will be entitled to
recover, as an element of the costs of suit and not as damages, reasonable
attorney's fees to be fixed by the court (including without limitation,
costs, expenses and fees on any appeal).
11.9 Notices. All notices and other communications pursuant to this
Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid,
to the parties at the following addresses (or at such other address for a
party as shall be specified by like notice):
If to DSO to: DeSoto, Inc.
2101 E. 52nd St., 11th Floor
New York, NY 10022
Attention: William Spier
Telecopier: (212) 644-0499
With a copy to: Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Attention: Peter Golden
Telecopier: (212) 859-8586
And if to KCI: Keystone Consolidated Industries, Inc.
Three Lincoln Centre
5430 LBJ Freeway, Suite 1740
Dallas, Texas 75240
Attention: Glenn R. Simmons
Telecopier: (214) 458-8108
With a copy to: Godwin & Carlton, P.C.
901 Main Street, Suite 2500
Dallas, Texas 75202
Attention: James G. Vetter, Jr.
Telecopier: (214) 760-7332
All such notices and other communications shall be deemed to have been
received (a) in the case of personal delivery, on the date of such
delivery, (b) in the case of a telecopy, when the party sending such copy
shall have confirmed receipt of the communication, (c) in the case of
delivery by nationally-recognized overnight courier, on the business day
following dispatch, and (d) in the case of mailing, on the third business
day following such mailing.
11.10 Construction of Agreement. This Agreement has been negotiated
by the respective parties hereto and their attorneys and the language
hereof will not be construed for or against either party. A reference to a
Section or an Exhibit will mean a Section in, or Exhibit to, this Agreement
unless otherwise explicitly set forth. The titles and headings herein are
for convenience purposes only and will not in any manner limit the
construction of this Agreement which will be considered as a whole.
11.11 No Joint Venture. Nothing contained in this Agreement will be
deemed or construed as creating a joint venture or partnership between any
of the parties hereto. No party is by virtue of this Agreement authorized
as an agent, employee or legal representative of any other party. No party
will have the power to control the activities and operations of any other.
The status of the parties hereto is, and at all times, will continue to be,
that of independent contractors with respect to each other. No party will
have any power or authority to bind or commit any other. No party will hold
itself out as having any authority or relationship in contravention of this
Section.
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11.12 Further Assurances. Each party agrees to cooperate fully with
the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances as may be reasonably
requested by any other party to evidence and reflect the transactions
described herein and contemplated hereby and to carry into effect the
intents and purposes of this Agreement.
11.13 Absence of Third Party Beneficiary Rights. No provisions of
this Agreement are intended, nor will be interpreted, to provide or create
any third party beneficiary rights or any other rights of any kind in any
client, customer, affiliate, stockholder, partner or any party hereto or
any other person or entity.
11.14 Public Announcement. Upon execution of this Agreement, KCI and
DSO promptly will issue a joint press release approved by both parties
announcing the Merger. Thereafter, KCI or DSO may issue such press
releases, and make such other disclosure regarding the Merger, after
consultation with the other party, as it determines are required under
applicable securities laws or NYSE rules after consultation with legal
counsel.
11.15 Entire Agreement. This Agreement and the exhibits hereto
constitute the entire understanding and agreement of the parties hereto
with respect to the subject matter hereof and supersede all prior and
contemporaneous agreements or understandings, inducements or conditions,
express or implied, written or oral, between the parties with respect
hereto other than the Confidentiality Agreements, which shall remain in
full force and effect. The express terms hereof control and supersede any
course of performance or usage of trade inconsistent with any of the terms
hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement and
Plan of Reorganization as of the date first above written.
KEYSTONE CONSOLIDATED INDUSTRIES, INC. DESOTO, INC.
By: /s/ GLENN R. SIMMONS By: /s/ WILLIAM SPIER
----------------------------------- -------------------------------
Glenn R. Simmons William Spier
Chief Executive Officer Chief Executive Officer
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APPENDIX B
OPINION OF PAINEWEBBER INCORPORATED
<PAGE> 169
[PAINEWEBBER LETTERHEAD]
June 26, 1996
Board of Directors
Keystone Consolidated Industries, Inc.
Three Lincoln Centre
5430 LBJ Freeway, Suite 1700
Dallas, Texas 75240
Gentlemen:
Keystone Consolidated Industries, Inc. ("Keystone" or the "Company")
has entered into an Agreement and Plan of Reorganization (the "Agreement") with
DeSoto, Inc. ("DeSoto"). Pursuant to the Agreement, DeSoto will consolidate
with a wholly-owned subsidiary of Keystone (the "Merger"). Upon the
effectiveness of the Merger, all common stock of DeSoto, par value $1.00 per
share and Associated Rights issued pursuant to a Rights Agreement between
DeSoto and Harris Trust and Savings Bank will convert into the right to receive
0.7465 shares of common stock of Keystone (the "Exchange Ratio"). All
outstanding DeSoto options will be converted into options to purchase Keystone
common stock with the amount of options and exercise price to be determined by
the Exchange Ratio. In addition, each share of DeSoto Series B Preferred
Stock, $1.00 par value (the "DeSoto Preferred Stock"), will be converted into
the right to receive the Exchange Ratio of shares of preferred stock issued by
Keystone with substantially similar terms and conditions as the DeSoto
Preferred Stock. Accrued interest on the DeSoto Preferred Stock will be paid
by Keystone on the closing date.
You have asked us whether or not, in our opinion, the proposed
consideration to be paid by Keystone pursuant to the Merger is fair to Keystone
stockholders, other than Contran Corporation and its affiliates, from a
financial point of view.
In arriving at the opinion set forth below, we have, among other
things:
(1) Reviewed, among other public information, Keystone's
Annual Reports, Forms 10-K and related financial
information for the five fiscal years ended December
31, 1995 and Keystone's Form 10-Q for the three months
ended March 31, 1996;
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(2) Reviewed Keystone's financial projections dated May 3,
1996 prepared by Keystone's management;
(3) Reviewed certain financial information relating to
Keystone, including, earnings, cash flow, assets and
liabilities statements, furnished to us by Keystone;
(4) Conducted discussions with senior management of Keystone
regarding (i) the Company's operations and business
prospects, (ii) DeSoto's operations and business
prospects and (iii) certain studies prepared by Keystone
and its legal and accounting advisors relating to
potential off-balance sheet items;
(5) Considered the pro forma effect of the Merger on
Keystone's cash flow and earnings per share;
(6) Considered the pro forma balance sheet effects of the
Merger on Keystone;
(7) Reviewed, among other public information, DeSoto's
Annual Reports, Forms 10-K and related financial
information for the five fiscal years ended December 31,
1995 and DeSoto's Form 10-Q for the three months ended
March 31, 1996;
(8) Conducted interviews with senior management of DeSoto,
regarding DeSoto's operations, financial condition and
business prospects;
(9) Reviewed the Agreement dated June 26, 1996; and
(10) Reviewed such other financial studies and analyses and
performed such other investigations and took into
account such other matters as we deemed necessary
including our assessment of regulatory, general
economic, market and monetary conditions.
In preparing our opinion, we have relied on the accuracy and
completeness of all information that was publicly available or supplied or
otherwise communicated to us by or on behalf of Keystone and DeSoto, and we
have not assumed any responsibility to independently verify such information.
We have assumed that the financial forecasts examined by us were reasonably
prepared on bases reflecting the best currently available estimates and good
faith judgments of the management of Keystone as to the future performance of
Keystone. In arriving at our opinion, we have assumed that, as a result of the
Merger and the follow on merger of the pension plans, Keystone's liabilities
calculated in accordance with generally accepted accounting principles with
respect to its pension plan will be eliminated and that certain projected
obligations of Keystone to fund such liabilities will be reduced. We have not
undertaken, or caused to be taken, an independent evaluation
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or appraisal of the assets or liabilities (contingent or otherwise) of Keystone
or DeSoto and have assumed that all material liabilities (contingent or
otherwise, known or unknown) of Keystone and DeSoto are as set forth in
Keystone's and DeSoto's respective consolidated financial statements and other
provided information.
Our opinion is directed to the Board of Directors of Keystone and
does not constitute a recommendation to any shareholder of Keystone as to how
any such shareholder should vote with respect to the Merger. This opinion does
not address the relative merits of the Merger and any other potential
transactions or business strategies discussed by the Board of Directors of
Keystone as alternatives to the Merger or the decision of the Board of
Directors of Keystone to proceed with the Merger.
This opinion has been prepared solely for the use of the Board of
Directors of Keystone and shall not be reproduced, summarized, described or
referred to, or given to any other person or otherwise made public without the
prior written consent of PaineWebber Incorporated; provided, however, that this
letter may be reproduced in full in the Proxy Statement.
In the ordinary course of our business, we may trade the securities
of Keystone and DeSoto for our own account and for the accounts of our
customers and, accordingly, may at any time hold long or short positions in
such securities.
On the basis of, and subject to the foregoing, we are of the opinion
that the proposed consideration to be paid by Keystone pursuant to the Merger
is fair to Keystone stockholders, other than Contran Corporation and its
affiliates, from a financial point of view.
Very truly yours,
PAINEWEBBER INCORPORATED
/s/ PAINEWEBBER INCORPORATED
-----------------------------------
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APPENDIX C
OPINION OF SALOMON BROTHERS INC
<PAGE> 173
[SALOMON BROTHERS LETTERHEAD]
August 23, 1996
Board of Directors
DeSoto, Inc.
101 East 52nd Street, 11th Floor
New York, NY 10022
Members of the Board:
You have requested our opinion as investment bankers as to the
fairness, from a financial point of view, to the holders of common stock with a
par value of $1.00 per share (the "Common Stock") of DeSoto, Inc. (the
"Company") of the exchange ratio in the proposed merger (the "Merger") of the
Company with Keystone Consolidated Industries, Inc. ("Keystone") pursuant to
the Agreement and Plan of Reorganization dated as of June 26, 1996, between
Keystone and the Company (the "Merger Agreement"). Pursuant to the terms of the
Merger Agreement, each then issued and outstanding share of Common Stock not
owned directly or indirectly by Keystone or the Company will be converted into
0.7465 of a share of common stock of Keystone (the "Exchange Ratio"). You have
informed us that the Merger is intended to qualify as a tax-free
reorganization for federal income tax purposes and to be accounted for as a
purchase of the Company.
In arriving at our opinion, we have considered, and if appropriate,
reviewed and analyzed, among other things, the following (i) a draft of the
Merger Agreement dated as of June 26, 1996, and have assumed that the final
form of such agreement will not vary in any regard that is material to our
analysis; (ii) certain publicly available business and financial information
concerning the Company and Keystone; (iii) certain internal information,
including financial projections, concerning the businesses and operations of
the Company and Keystone that were prepared by management of the Company and
Keystone, respectively; (iv) the historical and current market for the equity
securities of the Company, Keystone and certain other companies that we believe
to be comparable in certain respects to the Company and Keystone, including the
current and historical relationships between the trading levels of the
Company's Common Stock and Keystone's common stock; (v) the nature and terms of
certain other acquisition transactions that we believe to be reasonably
comparable or relevant; and (vi) information relating to the pension plans of
the Company and Keystone. We have also had due diligence discussions with
certain officers and employees of the Company and Keystone to discuss the
foregoing, including the past and current business operations, financial
condition and prospects of the Company and Keystone as well as other matters we
<PAGE> 174
DeSoto, Inc.
August 23, 1996
Page 2
believe relevant to our inquiry. We have also taken into account our assessment
of general economic, market and financial conditions and our knowledge of the
rod and wire industry, as well as our experience in connection with similar
transactions and securities valuation generally. We have also considered such
other information, financial studies, analyses, investigations and financial,
economic, market and trading criteria which we deemed relevant to our inquiry.
In our review and analysis and in arriving at our opinion, we have
assumed and relied upon the accuracy and completeness of all of the financial,
pension plan and other information provided to us or publicly available and
have not assumed responsibility for verifying any of such information. With
respect to the Company's and Keystone's financial projections, we have assumed
that they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the Company's or Keystone's management as
to the future financial performance of the Company and Keystone, and we express
no opinion with respect to such projections for the assumptions on which they
are based. With respect to information relating to the Company's and
Keystone's pension plans, we have relied upon information provided to us by the
Company's and Keystone's management and accountants, and from the Company's
actuaries and pension plan consultants. We have not made or obtained any
independent evaluations or appraisals of any of the pension plans, assets
(including properties and facilities) or liabilities of the Company or
Keystone. Our opinion is necessarily based upon business, market, economic and
other conditions as they exist on, and can be evaluated as of, the date hereof,
and we assume no responsibility to update or revise our opinion based upon
circumstances or events occurring after the date hereof. Our opinion does not
address the Company's underlying business decision to effect the Merger or
constitute a recommendation to any holder of Common Stock of the Company as to
how such holder should vote with respect to the Merger. Our opinion as
expressed below does not imply any conclusion as to the likely trading range
for the common stock of Keystone following the consummation of the Merger,
which may vary depending upon, among other factors, changes in interest rates,
dividend rates, market conditions, general economic conditions and other
factors that generally influence the price of securities. The Company has not
requested us to solicit, and we have not solicited, other third party
indications of interest or proposals to acquire all or any part of the Company.
For purposes of rendering our opinion we have assumed, in all respects
material to our analysis, that the representations and warranties of each party
contained in the Merger Agreement are true and correct, that each party will
perform all of the covenants and agreements required to be performed by it
under the Merger Agreement and that all conditions to the consummation of the
Merger will be satisfied without waiver thereof. We have also assumed that all
material governmental, regulatory or other consents and approvals will be
obtained and that in the course of obtaining any
<PAGE> 175
DeSoto, Inc.
August 23, 1996
Page 3
such necessary approvals, as contemplated by the Merger Agreement, no
restrictions will be imposed or waivers made that would have any material
adverse effect on the contemplated benefits of the Merger.
We have not acted as the financial advisor to the Company in
connection with the Merger and will receive fees from the Company solely
related to our services in connection with this opinion, and such fees are
contingent upon consummation of the Merger or termination of the Company's
pension plan, whichever event occurs first. We have from time to time provided
investment banking and related services to the Company, for which we have
received customary fees. We will continue to maintain a relationship with
certain principals of the Company and may provide them investment banking and
other related services. In the ordinary course of our business, we may actively
trade the debt and equity securities of the Company and Keystone for our own
account and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities.
This letter, and our opinion expressed herein, is not to be quoted,
summarized or referred to, in whole or in part, without our prior written
consent. Notwithstanding the foregoing, this opinion may be included or
referred to in any registration statement or proxy statement sent to the
shareholders of the Company and Keystone with respect to the Merger.
Based upon and subject to the foregoing, it is our opinion that, as of
the date hereof, the Exchange Ratio in the Merger is fair, from a financial
point of view, to the holders of Common Stock.
Very truly yours,
/s/ SALOMON BROTHERS INC
SALOMON BROTHERS INC
<PAGE> 176
APPENDIX D
KEYSTONE ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1995
INCORPORATED BY REFERENCE (FILE NO. 1-3919)
[TO BE DELIVERED WITH JOINT PROXY STATEMENT/PROSPECTUS]
<PAGE> 177
APPENDIX E
KEYSTONE QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
INCORPORATED BY REFERENCE (FILE NO. 1-3919)
[TO BE DELIVERED WITH JOINT PROXY STATEMENT/PROSPECTUS]
<PAGE> 178
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of DGCL provides that, to the extent a director, officer,
employee or agent of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding, whether civil, criminal,
administrative or investigative or in defense of any claim, issue, or matter
therein (hereinafter a "Proceeding"), by reason of the fact that he is or was a
director, officer, employee or agent of a corporation or is or was serving at
the request of such corporation as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise (collectively an "Agent" of the corporation), he shall be indemnified
against expenses (including attorney's fees) actually and reasonably incurred by
him in connection therewith.
Section 145 also provides that a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened
Proceeding by reason of the fact that he is or was an Agent of the corporation,
against expenses (including attorney's fees), judgment, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interest of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful; provided, however, that in
an action by or in the right of the corporation, the corporation may not
indemnify such person in respect of any claim, issue, or matter as to which he
is adjudged to be liable to the corporation unless, and only to the extent that,
the Court of Chancery or the court in which such proceeding was brought
determines that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is reasonably entitled to indemnity.
Article V of the Bylaws of Registrant provides with respect to the
indemnification of directors and officers that the Registrant shall indemnify to
the same extent currently permitted by Section 145 of the DGCL, each person that
such Section grants the Registrant power to indemnify. Article Eleventh of the
Certificate of Incorporation of the Registrant provides that no director shall
be personally liable to the corporation or any of its stockholders for monetary
damages for breach of fiduciary duty as a director, except with respect to (1) a
breach of the director's duty of loyalty to the corporation or its stockholders,
(2) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (3) liability under Section 174 of the DGCL, or
(4) a transaction from which the director derived an improper personal benefit.
Article Eleventh further provides that the liability of the corporation's
directors to the corporation or its stockholders will be limited to the fullest
extent permitted by Section 102(b)(7) of the DGCL, as amended from time to time.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that, in
the opinion of the Commission, such indemnification is against public policy as
expressed in the Act and is therefore unenforceable.
II-1
<PAGE> 179
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
2.1 -- Agreement and Plan of Reorganization, dated as of June 26, 1996,
between Registrant and DeSoto, Inc. ("DeSoto") (the Agreement and
Plan of Reorganization") (included as Appendix A to the Joint Proxy
Statement/Prospectus which forms a part of the Registration Statement
(the "Proxy Statement")).
5.1 -- Opinion of Godwin & Carlton, P.C.
8.1 -- Opinion of Godwin & Carlton, P.C. with respect to certain federal
income tax aspects attendant to the Merger.
8.2 -- Opinion of Fried, Frank, Harris, Shriver & Jacobson with respect to
certain federal income tax aspects attendant to the Merger.
9.1* -- Voting Agreement between Contran Corporation and DeSoto, dated June
26, 1996.
10.1 -- Amended and Restated Revolving Loan and Security Agreement dated as
of December 29, 1995 between the Registrant and Congress Financial
Corporation (Central). (Incorporated by reference to Exhibit 4.1 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995.)
10.2 -- Term Loan and Security Agreement between the Registrant and Congress
Financial Corporation (Central) dated December 30, 1993.
(Incorporated by reference to Exhibit 4.5 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.)
10.3 -- Intercorporate Services Agreement between Registrant and Contran
Corporation dated as of January 1, 1996.
10.5* -- Registrant's 1995 Incentive Compensation Plan.
10.6* -- Registrant's 1992 Non-Employee Director Stock Option Plan.
10.7* -- Preferred Stockholder Waiver and Consent Agreement between
Registrant, Coatings Group, Inc., Asgard, Ltd. and Parkway M&A
Capital Corporation, dated June 26, 1996 (collectively, the "Sutton
Entities").
10.8* -- Voting Agreement by and among the Registrant, the Sutton Entities and
Anders U. Schroeder dated June 26, 1996.
10.9* -- Warrant Conversion Agreement between the Sutton Entities and
Registrant, dated June 26, 1996.
10.10* -- Stockholders Agreement by and among Registrant, the Sutton Entities,
DeSoto and Contran Corporation, dated June 26, 1996.
10.11 -- DeSoto Salaried Employees' Pension Preservation Plan.
10.12 -- Form of DeSoto Employees Retirement Plan.
10.13 -- Plan and Agreement of Merger, dated as of August 21, 1992, by and
among DeSoto, DeSoto Subsidiary One Corp. and J.L. Prescott Company.
10.14 -- Stock Redemption Agreement, dated as of August 21, 1992, by and among
Narragansett/Prescott, Inc., DeSoto, Inc., and Matthew Carroll.
10.15 -- Letter Agreement, dated as of August 21, 1992, by and between
Narragansett/Prescott, Inc. and DeSoto.
10.16 -- Stockholders Agreement, dated as of August 21, 1992, by and between
Narragansett/Prescott, Inc. and DeSoto.
</TABLE>
II-2
<PAGE> 180
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
10.17 -- Real Estate Sale Contract, dated as of December 1, 1994, between
DeSoto as Seller, and John M. Gillen, not personally but as Trustee
of the DeSoto, Inc. Pension Plans Real Property Trust under Trust
Agreement, dated October 1, 1992 (the "Trustee"), as Purchaser.
10.18 -- Industrial Building Lease, dated December 7, 1994, between Trustee as
Landlord and DeSoto as Tenant relating to the property at 16750 South
Vincennes Road, South Holland, Illinois.
10.19 -- Letter Agreement, dated August 6, 1993, between DeSoto, Inc. and John
Gillen, Trustee of The DeSoto Pension Plans Real Property Trust,
dated August 6, 1993.
10.20* -- Severance Agreement between DeSoto and Anne E. Eisele, President and
Chief Financial Officer of DeSoto, as amended dated March 12, 1996.
10.21* -- Severance Agreement between DeSoto and Fred J. Flaxmayer, Controller
and Chief Accounting Officer of DeSoto as amended dated March 12,
1996.
10.22* -- Trade Composition Agreement by and among DeSoto, Rock-Tenn Company,
Veratec, Inc., Owens-Illinois, Inc., Stepan Company, Glenn
Corporation, Vista Chemical Company and Richard Holmes, as agent
dated as of January 16, 1996.
10.23* -- Security Agreement between DeSoto and Richard Holmes, as Agent dated
as of July 18, 1996.
13.1 -- Registrant's Quarterly Report on Form 10-Q for the Quarter ended June
30, 1996. (Incorporated by Reference -- File No. 1-3919).
23.1 -- Consent of Coopers & Lybrand, L.L.P.
23.2 -- Consent of Arthur Andersen LLP
23.3 -- Consent of Godwin & Carlton, P.C. (included in Exhibits 5.1 and 8.1).
23.4 -- Consent of Fried, Frank, Harris, Shriver & Jacobson (Included in
Exhibit 8.2).
23.5 -- Consent of PaineWebber Incorporated ("PaineWebber") (Included in
Appendix B to the Joint Proxy Statement/Prospectus).
23.6 -- Consent of Salomon Brothers Inc.
99.1 -- Form of Proxy to be used by Registrant.
99.2 -- Form of Proxy to be used by DeSoto.
99.3 -- Opinion of PaineWebber (Incorporated by reference to Appendix B to
the Joint Proxy Statement/Prospectus).
99.4 -- Opinion of Salomon Brothers Inc (Incorporated by reference to
Appendix C to the Joint Proxy Statement/Prospectus).
</TABLE>
- ---------------
* Previously filed
II-3
<PAGE> 181
ITEM 22. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment to the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the questions whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(b) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(c) The undersigned Registrant hereby undertakes to respond to requests for
information that are incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
II-4
<PAGE> 182
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on the 22nd day of August, 1996.
KEYSTONE CONSOLIDATED
INDUSTRIES, INC.
By: /s/ GLENN R. SIMMONS
----------------------------------
Glenn R. Simmons,
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Amendment No. 1 to
the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ ----------------
<C> <S> <C>
* Chairman of the Board, Chief August 22, 1996
- --------------------------------------------- Executive Officer and
Glenn R. Simmons Director (Principal
Executive Officer)
* President and Chief Operating August 22, 1996
- --------------------------------------------- Officer
Robert W. Singer
* Vice President -- Finance and August 22, 1996
- --------------------------------------------- Treasurer (Principal
Harold M. Curdy Financial Officer)
* Corporate Controller August 22, 1996
- --------------------------------------------- (Principal Accounting
Bert E. Downing, Jr. Officer)
* Director August 22, 1996
- ---------------------------------------------
Thomas E. Barry
* Director August 22, 1996
- ---------------------------------------------
Paul M. Bass, Jr.
* Director August 22, 1996
- ---------------------------------------------
David E. Connor
* Director August 22, 1996
- ---------------------------------------------
Donald A. Sommer
* Vice Chairman of the Board and August 22, 1996
- --------------------------------------------- Director
J. Walter Tucker, Jr.
* Director August 22, 1996
- ---------------------------------------------
Richard N. Ullman
*By: /s/ RALPH P. END
---------------------------------
Ralph P. End, Attorney In Fact
</TABLE>
II-5
<PAGE> 183
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------
<C> <S>
2.1 -- Agreement and Plan of Reorganization, dated as of June 26, 1996,
between Registrant and DeSoto, Inc. ("DeSoto") (the Agreement and
Plan of Reorganization") (included as Appendix A to the Joint Proxy
Statement/Prospectus which forms a part of the Registration Statement
(the "Proxy Statement")).
5.1 -- Opinion of Godwin & Carlton, P.C.
8.1 -- Opinion of Godwin & Carlton, P.C. with respect to certain federal
income tax aspects attendant to the Merger.
8.2 -- Opinion of Fried, Frank, Harris, Shriver & Jacobson with respect to
certain federal income tax aspects attendant to the Merger.
9.1* -- Voting Agreement between Contran Corporation and DeSoto, dated June
26, 1996.
10.1 -- Amended and Restated Revolving Loan and Security Agreement dated as
of December 29, 1995 between the Registrant and Congress Financial
Corporation (Central). (Incorporated by reference to Exhibit 4.1 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995.)
10.2 -- Term Loan and Security Agreement between the Registrant and Congress
Financial Corporation (Central) dated December 30, 1993.
(Incorporated by reference to Exhibit 4.5 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.)
10.3 -- Intercorporate Services Agreement between Registrant and Contran
Corporation dated as of January 1, 1996.
10.5* -- Registrant's 1995 Incentive Compensation Plan
10.6* -- Registrant's 1992 Non-Employee Director Stock Option Plan
10.7* -- Preferred Stockholder Waiver and Consent Agreement between
Registrant, Coatings Group, Inc., Asgard, Ltd. and Parkway M&A
Capital Corporation, dated June 26, 1996 (collectively, the "Sutton
Entities").
10.8* -- Voting Agreement by and among the Registrant, the Sutton Entities and
Anders U. Schroeder dated June 26, 1996.
10.9* -- Warrant Conversion Agreement between the Sutton Entities and
Registrant, dated June 26, 1996.
10.10* -- Stockholders Agreement by and among Registrant, the Sutton Entities,
DeSoto and Contran Corporation, dated June 26, 1996.
10.11 -- DeSoto Salaried Employees' Pension Preservation Plan.
10.12 -- Form of DeSoto Employees Retirement Plan.
10.13 -- Plan and Agreement of Merger, dated as of August 21, 1992, by and
among DeSoto, DeSoto Subsidiary One Corp. and J.L. Prescott Company.
10.14 -- Stock Redemption Agreement, dated as of August 21, 1992, by and among
Narragansett/Prescott, Inc., DeSoto, Inc., and Matthew Carroll.
10.15 -- Letter Agreement, dated as of August 21, 1992, by and between
Narragansett/Prescott, Inc. and DeSoto.
10.16 -- Stockholders Agreement, dated as of August 21, 1992, by and between
Narragansett/Prescott, Inc. and DeSoto.
</TABLE>
<PAGE> 184
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------
<C> <S>
10.17 -- Real Estate Sale Contract, dated as of December 1, 1994, between
DeSoto as Seller, and John M. Gillen, not personally but as Trustee
of the DeSoto, Inc. Pension Plans Real Property Trust under Trust
Agreement, dated October 1, 1992 (the "Trustee"), as Purchaser.
10.18 -- Industrial Building Lease, dated December 7, 1994, between Trustee as
Landlord and DeSoto as Tenant relating to the property at 16750 South
Vincennes Road, South Holland, Illinois.
10.19 -- Letter Agreement, dated August 6, 1993, between DeSoto, Inc. and John
Gillen, Trustee of The DeSoto Pension Plans Real Property Trust,
dated August 6, 1993.
10.20* -- Severance Agreement between DeSoto and Anne E. Eisele, President and
Chief Financial Officer of DeSoto, as amended dated March 12, 1996.
10.21* -- Severance Agreement between DeSoto and Fred J. Flaxmayer, Controller
and Chief Accounting Officer of DeSoto, Inc., as amended dated March
12, 1996.
10.22* -- Trade Composition Agreement by and among DeSoto, Rock-Tenn Company,
Veratec, Inc., Owens-Illinois, Inc., Stepan Company, Glenn
Corporation, Vista Chemical Company and Richard Holmes, as agent
dated as of January 16, 1996.
10.23* -- Security Agreement between DeSoto and Richard Holmes, as Agent, dated
as of July 18, 1996
13.1 -- Registrant's Quarterly Report on Form 10-Q for the Quarter Ended June
30, 1996. (Incorporated by Reference -- File No. 1-3919).
23.1 -- Consent of Coopers & Lybrand, L.L.P.
23.2 -- Consent of Arthur Andersen LLP
23.3 -- Consent of Godwin & Carlton, P.C. (included in Exhibits 5.1 and 8.1).
23.4 -- Consent of Fried, Frank, Harris, Shriver & Jacobson (Included in
Exhibit 8.2).
23.5 -- Consent of PaineWebber Incorporated ("PaineWebber") (Included in
Appendix B to the Joint Proxy Statement/Prospectus).
23.6 -- Consent of Salomon Brothers Inc.
99.1 -- Form of Proxy to be used by Registrant.
99.2 -- Form of Proxy to be used by DeSoto.
99.3 -- Opinion of PaineWebber (Incorporated by reference to Appendix B to
the Joint Proxy Statement/Prospectus).
99.4 -- Opinion of Salomon Brothers Inc (Incorporated by reference to
Appendix C to the Joint Proxy Statement/Prospectus).
</TABLE>
- ---------------
* Previously Filed
<PAGE> 1
EXHIBIT 5.1
[On Godwin & Carlton, P.C. Letterhead]
August 22, 1996
Keystone Consolidated Industries, Inc.
Three Lincoln Centre
5430 LBJ Freeway, Suite 1740
Dallas, Texas 75240-2697
Ladies and Gentlemen:
We refer to the registration statement on Form S-4 (the "Registration
Statement") filed by Keystone Consolidated Industries, Inc. (the "Company"), a
Delaware corporation, with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Securities Act"), relating to the
registration of 3,637,000 shares of common stock, par value $1.00 per share, of
the Company (the "Keystone Common Stock"), issuable in connection with the
merger (the "Merger") of a wholly owned subsidiary of the Company, with and
into DeSoto, Inc., ("DeSoto") a Delaware corporation, all as set forth in the
Agreement and Plan of Reorganization dated June 26, 1996 between the Company
and DeSoto (the "Merger Agreement").
We have acted as counsel for the Company in connection with the
transaction contemplated by the Merger Agreement, in such capacity are familiar
with the details of said transaction and have examined such records, documents
and questions of law, and have satisfied ourselves as to such matters of fact,
as we have considered relevant and necessary as a basis for this opinion.
Based on the foregoing, we are of the opinion that the Keystone Common
Stock to be issued in the Merger will be legally issued, fully paid and
nonassessable when (a) the Registration Statement shall have become effective
under the Securities Act; and (b) certificates representing such Keystone
Common Stock shall have been duly executed, countersigned and registered and
duly delivered in accordance with the Merger Agreement.
We do not find it necessary for purposes of this opinion to cover, and
accordingly express no opinion as to, the application of the securities or blue
sky laws of the various states to the issuance of Keystone Common Stock in the
Merger.
The opinions herein are limited to the laws of the State of Texas, and
we do not express any opinion concerning any laws other than the laws of the
State of Texas, the corporate laws of the State of Delaware and the Federal
laws of the United States of America, and we express no opinion as to the
effect on the matters covered by this opinion of the laws of any other
jurisdiction.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to all references to us included in or made a part
of the Registration Statement.
Very truly yours,
GODWIN & CARLTON, P.C.
By: /s/ Godwin & Carlton, P.C.
--------------------------
Godwin & Carlton, P.C.
<PAGE> 1
EXHIBIT 8.1
[On Godwin & Carlton, P.C. Letterhead]
August 22, 1996
Keystone Consolidated Industries, Inc.
Three Lincoln Centre
5430 LBJ Freeway, Suite 1740
Dallas, Texas 75240-2697
Ladies and Gentlemen:
You have requested our opinion regarding certain federal income tax
consequences of the proposed merger (the "Merger") of a direct, wholly owned
subsidiary of Keystone Consolidated Industries, Inc. ("Keystone") with and into
DeSoto, Inc. ("DeSoto"), pursuant to an Agreement and Plan of Reorganization
dated as of June 26, 1996 between Keystone and DeSoto (the "Merger Agreement").
We have acted as counsel for Keystone and Sub in connection with the
transaction contemplated by the Merger Agreement and in such capacity are
familiar with the details of said transaction. The following opinion is based
on our review of the Merger Agreement, the Registration Statement on Form S-4
(File No. 333-0917) and the preliminary from of Proxy Statement/Prospectus with
respect to the Merger as filed with the Securities and Exchange Commission on
July 30, 1996 (the "Registration Statement"), and such other materials and
documents as we have deemed appropriate. In rendering our opinion, we have
assumed that the Merger will be consummated as described in the Merger
Agreement and the Registration Statement, that the facts, representations, and
warranties set forth in the Merger Agreement and the Registration Statement are
accurate, and that the covenants, conditions, and obligations set forth in the
Merger Agreement have been and will be fulfilled. We have also relied on and
assumed the accuracy and fulfillment of the representations and covenants
contained in certificates that have been provided to us by you and by DeSoto.
Capitalized terms not otherwise defined herein shall have the same meanings as
they have for purposes of the Registration Statement.
On the basis of the foregoing, we are of the opinion, based on existing
law and regulations, that the Merger will constitute a reorganization for
federal income tax purposes within the meaning of Sections 368(a)(1)(A) and
368(a)(2)(E) of the Internal Revenue Code of 1986, as amended.
<PAGE> 2
Keystone Consolidated Industries, Inc.
August 22, 1996
Page 2
Attorneys involved in the preparation of this opinion are admitted to
practice law in the State of Texas and we do not purport to be experts on, or
to express any opinion herein concerning, any law other than the laws of the
State of Texas and the federal laws of the United States of America.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to all references to us included in or made a part
of the Registration Statement.
Very truly yours,
GODWIN & CARLTON, P.C.
By: /s/ Godwin & Carlton, P.C.
------------------------------
Godwin & Carlton, P.C.
<PAGE> 1
EXHIBIT 8.2
212-859-8171
(FAX: 212-859-8588)
August 23, 1996
DeSoto, Inc.
900 East Washington Street
Joliet, Illinois 60433
RE: Federal Income Tax Consequences of Merger of a
Keystone Consolidated Industries, Inc. Subsidiary
into DeSoto, Inc.
Gentlemen:
You have requested our opinion as to certain federal income tax
consequences of the proposed merger (the "Merger") of a wholly-owned subsidiary
("Sub") of Keystone Consolidated Industries, Inc. ("Keystone"), into DeSoto,
Inc. ("DeSoto"), pursuant to which DeSoto will become a wholly-owned subsidiary
of Keystone.
In reaching the opinions expressed below, we have reviewed and relied
on (i) the Agreement and Plan of Reorganization, dated as of June 26, 1996,
between Keystone and DeSoto (the "Merger Agreement"), and (ii) certain
representations made by Keystone, DeSoto and certain stockholders of DeSoto.
Based upon and subject to the foregoing, and assuming that the Merger
and related transactions take place in accordance with all the terms of the
Merger Agreement, it is our opinion that the Merger will constitute a
reorganization for federal income tax purposes within the meaning of Sections
368(a)(1)(A) and 368(a)(2)(E) of the Internal Revenue Code of 1986, as amended.
The opinion expressed herein is solely for your benefit and the
benefit of holders of outstanding DeSoto common stock and may not be relied on
in any manner or for any purpose by any other person or entity.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement on Form S-4 and to the reference to this firm under the
caption "The Reorganization Agreement - Certain Federal Income Tax Matters" in
the Joint Proxy Statement/Prospectus included as part of the Registration
Statement.
Very truly yours,
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
By: /s/Lee S. Parker
-------------------------------------
Lee S. Parker
<PAGE> 1
EXHIBIT 10.3
INTERCORPORATE SERVICES AGREEMENT
This INTERCORPORATE SERVICES AGREEMENT (the "AGREEMENT"), effective as
of January 1, 1996, amends and supersedes that certain Intercorporate Services
Agreement effective as of January 1, 1995 between CONTRAN CORPORATION, a
Delaware corporation ("CONTRAN"), and KEYSTONE CONSOLIDATED INDUSTRIES, INC., a
Delaware corporation ("RECIPIENT").
RECITALS
A. Employees and agents of Contran and affiliates of Contran,
including Harold C. Simmons, perform management, financial and administrative
functions for Recipient without direct compensation from Recipient.
B. Recipient does not separately maintain the full internal
capability to perform all necessary management, financial and administrative
functions that Recipient requires.
C. The cost of maintaining the additional personnel by Recipient
necessary to perform the functions provided for by this Agreement would exceed
the fee set forth in SECTION 3 of this Agreement and that the terms of this
Agreement are no less favorable to Recipient than could otherwise be obtained
from a third party for comparable services.
D. Recipient desires to continue receiving the management,
financial and administrative services presently provided by Contran and
affiliates of Contran and Contran is willing to continue to provide such
services under the terms of this Agreement.
AGREEMENT
For and in consideration of the mutual premises, representations and
covenants herein contained, the parties hereto mutually agree as follows:
SECTION 1. SERVICES TO BE PROVIDED. Contran agrees to make available
to Recipient, upon request, the following services (the "SERVICES") to be
rendered by the internal staff of Contran and affiliates of Contran:
(a) Consultation and assistance in the development and
implementation of Recipient's corporate business strategies, plans and
objectives;
(b) Consultation and assistance in management and
conduct of corporate affairs and corporate governance consistent with
the charter and bylaws of Recipient;
(c) Consultation and assistance in maintenance of
financial records and controls, including preparation and review of
periodic financial statements and reports to be filed with public and
regulatory entities and those required to be prepared for financial
institutions or pursuant to indentures and credit agreements;
<PAGE> 2
(d) Consultation and assistance in cash management and in
arranging financing necessary to implement the business plans of
Recipient;
(e) Consultation and assistance in tax management and
administration, including, without limitation, preparation and filing
of tax returns, tax reporting, examinations by government authorities
and tax planning;
(f) Consultation and assistance in performing internal
audit and control functions;
(g) Consultation and assistance with respect to insurance
and risk management;
(h) Consultation and assistance with respect to employee
benefit plans and incentive compensation arrangements; and
(i) Such other services as may be requested by Recipient
from time to time.
SECTION 2. MISCELLANEOUS SERVICES. It is the intent of the parties
hereto that Contran provide only the Services requested by Recipient in
connection with routine management, financial and administrative functions
related to the ongoing operations of Recipient and not with respect to special
projects, including corporate investments, acquisitions and divestitures. The
parties hereto contemplate that the Services rendered in connection with the
conduct of Recipient's business will be on a scale compared to that existing on
the effective date of this Agreement, adjusted for internal corporate growth or
contraction, but not for major corporate acquisitions or divestitures, and that
adjustments may be required to the terms of this Agreement in the event of such
major corporate acquisitions, divestitures or special projects. Recipient will
continue to bear all other costs required for outside services including, but
not limited to, the outside services of attorneys, auditors, trustees,
consultants, transfer agents and registrars, and it is expressly understood
that Contran assumes no liability for any expenses or services other than those
stated in SECTION 1. In addition to the fee paid to Contran by Recipient for
the Services provided pursuant to this Agreement, Recipient will pay to Contran
the amount of out-of-pocket costs incurred by Contran in rendering such
Services.
SECTION 3. FEE FOR SERVICES. Recipient agrees to pay to Contran
$116,250.00 quarterly, commencing as of January 1, 1996, pursuant to this
Agreement.
SECTION 4. ORIGINAL TERM. Subject to the provisions of SECTION 5
hereof, the original term of this Agreement shall be from January 1, 1996 to
December 31, 1996.
SECTION 5. EXTENSIONS. This Agreement shall be extended on a
quarter-to-quarter basis after the expiration of its original term unless
written notification is given by Contran or Recipient thirty (30) days in
advance of the first day of each successive quarter or unless it is superseded
by a subsequent written agreement of the parties hereto.
SECTION 6. LIMITATION OF LIABILITY. In providing its Services
hereunder, Contran shall
-2-
<PAGE> 3
have a duty to act, and to cause its agents to act, in a reasonably prudent
manner, but neither Contran nor any officer, director, employee or agent of
Contran or its affiliates shall be liable to Recipient for any error of
judgment or mistake of law or for any loss incurred by Recipient in connection
with the matter to which this Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of Contran.
SECTION 7. INDEMNIFICATION OF CONTRAN BY RECIPIENT. Recipient shall
indemnify and hold harmless Contran, its affiliates and their respective
officers, directors and employees from and against any and all losses,
liabilities, claims, damages, costs and expenses (including attorneys' fees and
other expenses of litigation) to which such party may become subject arising
out of the Services provided by Contran to Recipient hereunder, provided that
such indemnity shall not protect any person against any liability to which such
person would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence on the part of such person.
SECTION 8. FURTHER ASSURANCES. Each of the parties will make,
execute, acknowledge and deliver such other instruments and documents, and take
all such other actions, as the other party may reasonably request and as may
reasonably be required in order to effectuate the purposes of this Agreement
and to carry out the terms hereof.
SECTION 9. NOTICES. All communications hereunder shall be in writing
and shall be addressed, if intended for Contran, to Three Lincoln Centre, 5430
LBJ Freeway, Suite 1700, Dallas, Texas 75240, Attention: President, or such
other address as it shall have furnished to Recipient in writing, and if
intended for Recipient, to Three Lincoln Centre, 5430 LBJ Freeway, Suite 1740,
Dallas, Texas 75240, Attention: Chairman of the Board, or such other address
as it shall have furnished to Contran in writing.
SECTION 10. AMENDMENT AND MODIFICATION. Neither this Agreement nor any
term hereof may be changed, waived, discharged or terminated other than by
agreement in writing signed by the parties hereto.
SECTION 11. SUCCESSOR AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of Contran and Recipient and their respective
successors and assigns, except that neither party may assign its rights under
this Agreement without the prior written consent of the other party.
SECTION 12. GOVERNING LAW. This Agreement shall be governed by, and
construed and interpreted in accordance with, the laws of the State of Texas.
-3-
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered as of the date first above written.
CONTRAN CORPORATION
By:
---------------------------------------
Steven L. Watson
Vice President
KEYSTONE CONSOLIDATED
INDUSTRIES, INC.
By:
---------------------------------------
Glenn R. Simmons
Chairman of the Board and Chief
Executive Officer
<PAGE> 1
EXHIBIT 10.11
DESOTO SALARIED EMPLOYEES' PENSION PRESERVATION PLAN
(effective as of December 13, 1985)
<PAGE> 2
DESOTO SALARIED EMPLOYEES' PENSION PRESERVATION PLAN
SECTION 1. - ESTABLISHMENT OF THE PLAN
1.1 Establishment of the Plan. DeSoto, Inc. hereby establishes a
supplemental retirement plan for certain of its eligible employees to be known
as the "DESOTO SALARIED EMPLOYEES' PENSION PRESERVATION PLAN" ("Plan"),
effective as to employees whose employment terminates after December 13, 1985.
SECTION 2. - DEFINITIONS
2.1 Definitions. Whenever used in the Plan, the following terms
shall have the meanings set forth below unless the context clearly indicates
otherwise:
(a) "Company" means DeSoto, Inc.
(b) "Employee" means any employee of an Employer who is eligible
to participate and who is participating in the Pension Plan.
(c) "Employer" The Company and any of its subsidiaries which is
authorized by the Board to adopt and which does adopt the
Plan.
(d) "Pension Plan" means the DeSoto Salaried Employees' Pension
Plan.
(e) "Retirement Committee" means the Retirement Committee
appointed by the Board of Directors of the Company in
accordance with applicable provisions of the Pension Plan.
2.2 Number and Gender. Except when otherwise indicated by the
context, the definition of any term herein in the singular may also include the
plural and the masculine may also include the feminine.
-2-
<PAGE> 3
SECTION 3. - BENEFITS
3.1 Eligibility for Benefits. An Employee of the Company who, on
or after completing 10 "Years of Employment" under the Pension Plan, terminates
employment for any reason and is eligible for and elects retirement or vested
benefits under the Pension Plan, shall be eligible to receive a benefit under
the Plan. For this purpose, an Employee who is receiving disability benefit
payments on the later of his 65th birthday or the date benefits under an
insured long-term disability program maintained by the Company end shall be
deemed to have terminated employment on such date.
3.2 Normal Retirement Benefit. An Employee eligible for benefits
hereunder who terminates employment for a reason other than death on or after
age 65 shall receive a monthly benefit for life beginning on the first day of
the month following his month of retirement in an amount equal to (a) 1-2/3% of
his "Average Compensation" multiplied by his total years of "Service" less
1-2/3% of his "Primary Social Security Benefit" multiplied by his total years of
"Service" (not to exceed 50% of his "Primary Social Security Benefits"),
reduced by (b) the monthly benefit for life payable pursuant to section 5.1 or
5.3 of the Pension Plan as reduced in accordance with section 6.1 of the
Pension Plan. For this purpose, the terms "Average Compensation", "Primary
Social Security Benefit", and "Service" shall be defined in accordance with the
applicable provisions of the Pension Plan.
-3-
<PAGE> 4
3.3 Early Retirement Benefit. An Employee eligible for benefits
hereunder pursuant to Section 3.1 who terminates employment for a reason other
than death prior to age 65 shall be entitled to receive a monthly benefit
determined, except as otherwise provided in this Section 3.3, as for retirement
on or after age 65 but considering only "Service" and "Average Compensation"
prior to actual retirement or termination of employment. An eligible Employee
may elect benefit payments beginning on the first day of any month following
the later of (i) his termination of employment, or (ii) his 55th birthday, in
which event the benefit determined pursuant to Section 3.2 shall be reduced by
an amount equal to 1/2 of 1% of the benefit that would otherwise be payable at
age 65 multiplied by the number of months between the commencement of payments
and the end of the month in which the Employee will attain age 65.
3.4 Survivor's Benefit. If any Employee dies while in the employ
of the Company or while he is receiving disability payments under an insured
long-term disability program maintained by the Company, and if he has at least
one "Year of Employment" under the Pension Plan, a survivor's benefit may be
paid subject to the provisions of this Section 3.4. The survivor's benefit
payable hereunder shall be a monthly benefit equal to (a) the monthly benefit
calculated pursuant to Section 5.9 of the Pension Plan without regard to the
limitations imposed by Section 6 of the Pension Plan, less (b) the aggregate
survivor's benefit payable pursuant to Section 5.8 and 5.9 of the Pension Plan
as reduced in accordance with section 6.1 of the Pension Plan. If
-4-
<PAGE> 5
on the date of death, any person qualifies as a Dependent Spouse or Dependent
Child, such benefits shall commence on the first day of the month following or
coincident with the date of death and shall continue thereafter monthly for the
period during which any person so qualifies. If at any time a spouse qualifies
for payments hereunder, payments shall be made to such spouse to the exclusion
of any dependent children. If at any time more than one child qualifies, the
benefits shall be divided equally among them. The term "Dependent Spouse" shall
mean (a) in the case of an Employee who dies after attaining age 55 and
completing 10 "Years of Employment" within the meaning of the Pension Plan, the
spouse of said Employee, and (b) in the case of an Employee who dies prior to
attaining age 55 and completing 10 Years of Employment within the meaning of
the Pension Plan, the spouse of said Employee who is residing with the Employee
at the date of his death, whose annual income in any of the three calendar
years immediately preceding the date of death was less than that of the
Employee, and who has not remarried. The term "Dependent Child" shall have the
same meaning as in the Federal Social Security Act in effect on the date of the
Employee's death. The survivor benefit hereunder shall be paid and administered
under applicable rules of the Pension Plan.
SECTION 4. - FORM OF BENEFIT
4.1 Normal Form. The normal form of payment of a benefit under the
Plan, other than a survivor's benefit, shall be a single-life annuity, payable
monthly, beginning on the date benefit payments commence under the Pension
Plan.
-5-
<PAGE> 6
4.2 Optional Forms. Upon the written request of an Employee or
former Employee who is eligible to receive benefits under the Plan, filed with
and approved by the Retirement Committee in accordance with rules governing
such requests, the benefit to which such Employee or former Employee is
entitled under section 3.2 or 3.3 shall be payable under any one of the
"Optional Forms of Benefits" specified in section 5.7 of the Pension Plan. Each
of these forms of payment shall be payable monthly and shall be the actuarial
equivalent of the normal form of benefit, determined in accordance with the
applicable provisions of the Pension Plan. In the event an Employee does not
file a written request as above provided, benefits under the Plan shall be paid
in the same optional form as is used to pay benefits under the Pension Plan.
SECTION 5. - ADMINISTRATION
5.1 Administration. The Retirement Committee shall be charged with
the administration and interpretation of the Plan, but may delegate the
administrative duties hereunder to such persons as it determines. The
Retirement Committee may adopt such rules as may be necessary or appropriate
for the proper administration of the Plan. To the extent that such rules are
not adopted, applicable rules relating to the administration of the Retirement
Plan shall govern. The decision of the Retirement Committee in all matters
involving the interpretation and application of the Plan shall be final.
-6-
<PAGE> 7
5.2 Funding of the Plan. Benefits under the Plan shall be paid out
of the general assets of the Company, and no trust or other separate fund shall
be established for funding of the Plan.
5.3 Non-alienation. No benefit payable at any time under the Plan
shall be subject in any manner to alienation, sale, transfer, assignment,
pledge, attachment, garnishment or encumbrance of any kind, and shall not be
subject to or reached by any legal or equitable process (including execution,
garnishment, attachment, pledge, bankruptcy or obligation for alimony or child
support payments) in satisfaction of any debt, liability or obligation, prior
to receipt. Any attempt to alienate, sell, transfer, assign, pledge, or
otherwise encumber any such benefit, whether presently or thereafter payable,
shall be void.
5.4 Distributions Payable to Incompetents. If any person entitled
to a distribution under the Plan shall be under legal disability, or in the
sole judgment of the Retirement Committee, shall otherwise be unable to apply
such distribution to his own best interest and advantage, the Retirement
Committee in the exercise of its discretion, may direct all or any portion of
such distribution to be made in any one or more of the following ways:
(a) Directly to such person;
(b) To his legal guardian or conservator; or
(c) To his spouse or to any other person, to be expended for his
benefit.
The decision of the Retirement Committee will, in each case, be final
and binding upon all persons, and neither the Retirement Committee nor the
Company shall not be obliged to see to the
-7-
<PAGE> 8
proper application or expenditure of any distribution so made. Any payment made
pursuant to the power herein conferred shall operate as a complete discharge of
all obligations under the Plan as to such distribution.
5.5 Amendment and Termination. The Company reserves the right to
amend, modify, terminate or partially terminate the Plan at any time by action
of its Board of Directors.
5.6 Applicable Law. The Plan and all rights hereunder shall be
governed, construed and administered in accordance with the laws of the State
of Illinois.
DESOTO, INC.
By [ILLEGIBLE]
-----------------------------------
Chairman of the Board and President
-8-
<PAGE> 9
[METROPOLITAN LIFE LETTERHEAD]
Ms. Dan Zacharski
DeSoto, Inc.
1700 S. Mt. Prospect Road
Des Plaines, IL 60017
Re: GAC 12078 - Additional lives
Dear Dan:
As we discussed, the cost of the additional 2 lives is $265,000 payable July 1,
1991. This covers the following benefits:
<TABLE>
<CAPTION>
Monthly
Name S.S. # D.O.B. Amount Form Spouse S.S. # D.O.B.
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Misser, R.R. ###-##-#### 7/3/30 1899.71 50% J&S Jacqueline ###-##-#### 3/31/33
- ----------------------------------------------------------------------------------------------------------------
Kersch, R.S. ###-##-#### 4/30/28 126.35 50% J&S Marilyn ###-##-#### 3/16/29
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
I should also note the following points:
1. We will be making payments beginning July 1, 1991 on both Misser and Kersch.
2. An interest adjustment will be made if DeSoto wishes to pay earlier or
later than July 1, 1991.
If you have any questions on the above, please give me a call at (212) 578-8109.
Sincerely,
JON ABOUAF
- ----------------------
Jon Abouaf
Non Par Associate
May 31, 1991
cc: Bob Lynch, Daisy Serrano
<PAGE> 10
reasonable adjustments to reflect medical care cost-inflation and
changes in Medicare coverages.
(c) If, at the date of Termination of Employment
the Executive is fifty-five (55) or more years old and has been
employed by the Company for ten (10) or more years, the Executive
shall continue to be provided by the Company after the close of the
Payment Period a life insurance benefit equal to fifty percent (50%)
of the Executive's Annual Base Compensation. such life insurance
benefit shall be provided by the Company without charge to the
Executive and shall remain in effect during the life of the Executive.
The Executive shall designate the beneficiary of such life insurance
benefit and may change such designation from time to time.
2. In the event of a Termination of Employment the
Executive may, at any time during the Payment Period, engage an outplacement
firm for individual outplacement services. The Company shall promptly pay the
full cost of such engagement up to an amount which does not exceed fifteen
percent (15%) of the Executive's Annual Base Compensation and Annual Bonus. In
addition, the Company shall promptly reimburse the Executive for the
Executive's income tax liability resulting from such payment by the Company or,
at the election of the Company, promptly provide to the Executive an opinion of
outside legal counsel, upon which the Executive is entitled to rely, clearly
opining that such payment by the Company is not taxable income to the
Executive. For purposes of the tax reimbursement the Executive shall be deemed
to pay all applicable income taxes at their highest marginal rates.
3. In the event of a Termination of Employment after the
Executive has earned twenty (20) years of Service under the DeSoto Salaried
Employee's Pension Plan (the "Pension Plan"), the Executive shall receive
retirement benefits in accordance with the Pension Plan. In the event of a
Termination of Employment prior to the date the Executive has earned twenty
(20) years of Service under the Pension Plan, in addition to benefits payable
to the Executive pursuant to the Pension Plan, the Executive shall be entitled
to receive supplemental retirement benefits from the Company equal in value to
the difference between (a) the benefits to which the Executive would have been
entitled under the Pension Plan assuming twenty (20) years of earned Service or
such lesser number of years of earned Service as the Executive would have
earned by continuing employment with the Company until Retirement Age (in
either case at an assumed annual salary for each year of assumed Service
following the date of the Termination of Employment equal to the Executive's
Annual Base Compensation plus the Executive's Annual Bonus) and (b) the
benefits which the Executive is entitled to receive under the Pension Plan. Any
supplemental
-3-
<PAGE> 11
retirement benefits payable by the Company shall be payable to the same extent
and in the same form as, and commencing on the date on which, benefit payments
commence under the Pension Plan (including payment pursuant to any option
thereunder, including early retirement, payment elections, and beneficiary
designations).
4. For the purposes of this Agreement, a Change in
Control shall occur at such time as:
(a) Any person (as hereinafter defined in
Paragraph 6(f)) becomes a Beneficial Owner (as hereinafter defined in
Paragraph 6(c)), directly or indirectly, of shares of the Company's
voting stock (as hereinafter defined in Paragraph 6(c)) representing
at least thirty-five percent (35%) or more of the Company's issued and
outstanding voting stock;
(b) One-third or more of the membership of the
Board consists of members not nominated for membership by the Company
or the Board; or
(c) The sale, assignment, or transfer by the
Company of one-half or more of the fixed assets of the Company or the
assets serving as the basis for one-half or more of the operating
earnings of the Company, as disclosed in the Company's financial
statements, in a transaction or related series of transactions, except
any such sales to affiliates of the Company; the termination by the
Company of its business and liquidation of its assets; or the merger,
consolidation or reorganization of the Company with or into any other
corporation or corporations other than its affiliates or the Company's
engagement in any other similar business combination or
reorganization.
5. For the purposes of this Agreement, a Termination of
Employment shall occur when, prior to the Executive reaching Retirement Age,
the Executive's employment with the Company is terminated within twenty-four
(24) months following a Change in Control (i) by the Company for any reason,
including disability or incapacity, or (ii) by the Executive "for cause," which
"cause" shall be deemed to exist upon the occurrence of any one of the
following events:
(a) the Company requests the Executive's
resignation or retirement (other than retirement upon reaching
Retirement Age);
-4-
<PAGE> 1
EXHIBIT 10.12
DESOTO EMPLOYEES RETIREMENT PLAN
(As amended and restated effective January 1, 1994)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 1
ESTABLISHMENT AND PURPOSE OF PLAN
1.1 Establishment and Purpose . . . . . . . . . . . . . . . . . . . . 1
1.2 Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2
DEFINITIONS
2.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 Gender and Number . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 3
CONTRIBUTIONS
3.1 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.2 Employers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 4
RETIREMENT DATES
4.1 Eligibility for Retirement . . . . . . . . . . . . . . . . . . . . 10
4.2 Disability Retirement . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 5
RETIREMENT BENEFITS
5.1 Normal Retirement Benefits . . . . . . . . . . . . . . . . . . . . 12
5.2 Early Retirement Benefits . . . . . . . . . . . . . . . . . . . . 14
5.3 Postponed Retirement Benefit . . . . . . . . . . . . . . . . . . . 16
5.4 Vested Benefits . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.5 Benefit in Joint and Survivor and Optional Forms . . . . . . . . . 17
5.6 Revocation of Benefit in Normal Form . . . . . . . . . . . . . . . 18
5.7 Optional Forms of Benefits . . . . . . . . . . . . . . . . . . . . 19
5.8 Statutory Survivor's Benefit . . . . . . . . . . . . . . . . . . . 20
5.9 Survivor's Benefit . . . . . . . . . . . . . . . . . . . . . . . . 21
5.10 Lump Sum Payments . . . . . . . . . . . . . . . . . . . . . . . . 22
5.11 Earned Benefits . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.12 Additional Benefits for Former Participants in DeSoto
Hourly Employees' Pension Plan and/or Former
Hourly Employees . . . . . . . . . . . . . . . . . . . . . . . . 24
5.13 Actuarial Equivalence . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 6
LIMITATIONS ON BENEFITS
6.1 Limitations on Benefits . . . . . . . . . . . . . . . . . . . . . 26
6.2 Benefits in Event of Termination . . . . . . . . . . . . . . . . . 30
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
SECTION 7
<S> <C> <C>
DESIGNATION OF BENEFICIARIES
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 8
MISCELLANEOUS PROVISIONS
8.1 Required Information to be Furnished . . . . . . . . . . . . . . . 33
8.2 Benefits Payable to Incompetents . . . . . . . . . . . . . . . . . 33
8.3 Nonassignability . . . . . . . . . . . . . . . . . . . . . . . . . 34
8.4 Employment Rights . . . . . . . . . . . . . . . . . . . . . . . . 34
8.5 Other Rights and Liabilities . . . . . . . . . . . . . . . . . . . 34
8.6 Mailing of Benefits . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 9
ADMINISTRATION
9.1 Company Powers . . . . . . . . . . . . . . . . . . . . . . . . . . 35
9.2 Retirement Committee . . . . . . . . . . . . . . . . . . . . . . . 36
9.3 Expenses of Administration . . . . . . . . . . . . . . . . . . . . 37
SECTION 10
AMENDMENT AND TERMINATION
10.1 Right to Amend or Terminate . . . . . . . . . . . . . . . . . . . 37
10.2 Qualification Under the Internal Revenue Code . . . . . . . . . . 38
10.3 Distribution on Termination . . . . . . . . . . . . . . . . . . . 38
10.4 Change in Control of Company . . . . . . . . . . . . . . . . . . . 41
10.5 Security Required Upon Adoption of Plan Amendment . . . . . . . . 42
SECTION 11
THE TRUST
11.1 Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
11.2 Benefits Supported Only by Trust . . . . . . . . . . . . . . . . . 44
11.3 Trust Applicable Only to Payment of Benefits . . . . . . . . . . . 44
11.4 Transfer, Merger or Consolidation . . . . . . . . . . . . . . . . 44
SECTION 12
CLAIMS REVIEW PROCEDURE
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 13
APPLICABLE LAW
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SUPPLEMENT ONE
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
APPENDIX A
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
APPENDIX B
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
APPENDIX C
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
</TABLE>
iii
<PAGE> 5
DESOTO EMPLOYEES RETIREMENT PLAN
(As amended and restated effective January 1, 1994)
SECTION 1
ESTABLISHMENT AND PURPOSE OF PLAN
1.1 Establishment and Purpose. DeSoto, Inc. established the DeSoto
Salaried Employees' Pension Plan, effective January 1, 1972, to provide an
income for certain of its employees upon their retirement. The plan was last
amended and restated effective January 1, 1984 in order to comply with various
amendments to the Internal Revenue Code of 1954, as amended. The restated plan
was further amended and restated effective January 1, 1987, in order to comply
with the Internal Revenue Code of 1986, as amended ("Code").
Effective January 1, 1994, the Company merged the DeSoto
Hourly Employees' Pension Plan and the J.L. Prescott Company Employees'
Retirement Plan into the DeSoto Salaried Employees' Pension Plan (the "Plan").
Due to the merger and in order to comply with recent legislation applicable to
qualified retirement plans, the Plan is hereby amended and restated as of the
merger date. Except as otherwise provided herein, the provisions of the Plan as
set forth herein shall apply only to an Employee who terminates employment with
the Employer on or after January 1, 1994. Benefits provided to former employees
who terminated employment prior to January 1, 1994, if any, shall be determined
under the terms of the applicable plan as in effect on the date of termination.
1.2 Name. The Plan, as herein amended and restated and as it may
be amended hereafter, shall be known as the "DeSoto Employees Retirement Plan."
<PAGE> 6
SECTION 2
DEFINITIONS
2.1 Definitions. Wherever used in the Plan, the following terms
shall have the meanings set forth below unless the context clearly indicates
otherwise:
(a) Appendix A: Appendix A, which relates to the transfer
of funds from, and the guaranty of benefits earned as of December 31, 1971,
under the Grays Harbor Chair & Mfg. Company Pension Plan (hereinafter called
"Grays Harbor Plan"), the Royal Incorporated Pension Plan and Trust
(hereinafter called the "Royal Plan"), and the Kerns Company Retirement Annuity
Plan (hereinafter called the "Kerns Plan") to this Plan. Said Appendix A is
attached hereto and forms a part of this Plan.
(b) Appendix B: Appendix B, which relates to the transfer
of funds from, and the guaranty of benefits earned as of December 31, 1971
under the Pension Plan for Hourly Employees of the Artcraft Fixtures Division
of Special Products Company of Tennessee, Inc. (hereinafter called "Artcraft
Plan") to this Plan. Said Appendix B is attached hereto and forms a part of
this Plan.
(c) Average Compensation: The average, computed on a
monthly basis and resulting in the highest average, of Compensation received by
an Employee for those five consecutive years (or period of employment with an
Employer, if less than five years) of the fifteen consecutive calendar years
ending with the calendar year in which he terminates employment. For purposes
of this computation, Compensation shall be annualized with appropriate
adjustment for any item of Compensation paid within such final year where the
annualization of such item would result in a distortion of his average
Compensation.
(d) Board: The Board of Directors of the Company.
(e) Company: DeSoto, Inc., a Delaware corporation.
(f) Compensation: The compensation paid to an employee by
an Employer during his Years of Employment as shown on
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his Form W-2 statement for each year, including commissions, bonuses, vacation
pay, overtime pay, and employee before and aftertax deposits under the DeSoto
Stock Ownership Plan, but excluding income arising from stock options,
severance allowances, retirement, profit sharing, or stock ownership benefits
(including benefits under this Plan), hospitalization or surgical benefits,
prizes and awards, expense allowances, moving and relocation expenses and
retainers. Notwithstanding anything herein to the contrary, in the case of a
Prescott Employee, compensation shall exclude overtime, commissions and
discretionary non-formula bonuses. For Years of Employment, and portions
thereof, beginning after December 31, 1988, and before January 1, 1994,
compensation in excess of $200,000 shall be disregarded. Such amount shall be
adjusted at the same time and in such manner as permitted under Code Section
415(d). Further, for Years of Employment, and portions thereof, beginning
after December 31, 1993, compensation in excess of $150,000 shall be
disregarded. Such amount shall be adjusted at the same time and in the same
manner as permitted under Code Section 401(a)(17)(B).
(g) Covered Compensation: The average of the Taxable Wage
Bases in effect for each calendar year in the thirty-five (35) year period
ending with the last day of the calendar year in which the Employee attains
Social Security Retirement Age. No increase in Covered Compensation shall
decrease an Employee's monthly benefit under the Plan. In determining an
Employee's Covered Compensation for a calendar year, the Taxable Wage Base in
effect for any subsequent calendar year will be assumed to be the same as the
Taxable Wage Base in effect as of the beginning of the calendar year for which
the determination is being made. An Employee's Covered Compensation for any
plan year after attainment of Social Security Retirement Age shall be the
Employee's Covered Compensation for the plan year during which the Employee
attained
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Social Security Retirement Age. An Employee's Covered Compensation shall be
automatically adjusted for each plan year.
(h) Employer: The Company and any of its subsidiaries
which is authorized by the Board to adopt and which does adopt the Plan.
(i) Hour of Service: means --
(1) Each hour for which an employee is paid, or
entitled to payment, for the performance of duties for an Employer. These hours
shall be credited to the employee for the computation period in which the
duties are performed;
(2) Each hour for which an employee is paid, or
entitled to payment, by an Employer on account of a period of time during which
no duties are performed (irrespective of whether the employment relationship is
terminated) due to vacation, holiday, illness, incapacity (including
disability), layoff, jury duty, military leave or leave of absence;
(3) Each hour for which back pay, irrespective of
mitigation of damages, is either awarded or agreed to by an Employer. The same
hours shall not be credited both under paragraph (1) or (2), as the case may
be, and under this paragraph (3). These hours shall be credited to the employee
for the computation period or periods to which the award, agreement or payment
is made.
Solely for purposes of determining whether an Employee has a
break in service each hour, based on the number of hours per week that the
Employee would have normally worked, or a pro rata portion thereof, during
which an Employee is absent from work (i) by reason of the pregnancy of the
Employee, (ii) by reason of the birth of a child of the Employee, (iii) by
reason of the placement of a child with the Employee, or (iv) due to the caring
of a child, placement or adoption of the child by the Employee. Not more than
501 Hours of Service shall be credited to any Employee under this paragraph for
any one occurrence. Such hours shall be credited to the computation period
during which the event occurs to the extent
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<PAGE> 9
necessary to prevent a break in service, and to the extent not so necessary,
to the next following computation period.
Hours under paragraphs (1), (2) and (3) hereof shall be
credited in accordance with section 2530.200b-2 of the Department of Labor
Regulations which are incorporated herein by this reference.
(j) Hourly Employee: Any employee of an Employer,
excluding Prescott Employees and leased employees, as defined in Code Section
414(n), whose Compensation is determined other than on the basis of a regular
salary without regard to hours worked; provided that (1) the employee is in a
participating unit as so designated by the Board, and (ii) a person employed by
an Employer prior to January 1, 1983 shall not be deemed to be an Employee for
any period prior to that date if he did not qualify as an Employee under the
Plan as in effect on December 31, 1982 (collectively with Salaried Employees
and Prescott Employees, "Employees").
(k) Plan Year: The fiscal year of the Company as it may
be changed from time to time. The fiscal year is currently the calendar year.
(l) Prescott Employee: Any Employee of an Employer,
excluding leased employees, as defined in Code Section 414(n), who were
participants in the J.L. Prescott Company Employees, Retirement Plan on
December 31, 1993; provided that the employee is in a participating unit as so
designated by the Board (collectively with Hourly Employees and Salaried
Employees, "Employees").
(m) Salaried Employee: Any employee of an Employer,
excluding. Prescott Employees and leased employees, as defined in Code Section
414(n), whose Compensation is determined on the basis of a regular salary
without regard to hours worked, including clerical and administrative employees
however compensated; provided, however, that (i) the employee is in a
participating unit as so designated by the Board, and (ii) a person employed by
an Employer prior to January 1, 1983 shall not be deemed to be a
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<PAGE> 10
Salaried Employee for any period prior to that date if he did not qualify as a
Salaried Employee under the Plan as in effect on December 31, 1982
(collectively with Hourly Employees and Prescott Employees, "Employees").
(n) Primary Social Security Benefit: The monthly amount
available to the Employee at Social Security Retirement Age (or upon actual
retirement, if later) under the provisions of Title II of the Social Security
Act in effect at the time of his termination of employment, without regard to
any increase in the wage base or benefit levels that take effect after the date
of termination of employment, provided that (1), if an Employee retires prior
to Social Security Retirement Age, his Primary Social Security Benefit shall be
estimated by assuming that he will have no earnings that would be treated as
earnings under the Social Security Act after he terminates employment, or (2),
if an Employee retires because of Disability and qualifies for a Disability
Insurance Benefit under the Social Security Act, his Primary Social Security
Benefit shall be the monthly amount payable as a Disability Insurance Benefit.
If record of an Employee's Compensation for any years prior to
termination of employment or Retirement are not reasonably accessible from the
records of the Employer, then for the purposes of calculating a Primary Social
Security Benefit hereunder, the amount of Compensation for any given year shall
be assumed. The assumed Compensation for any given year shall be equal to the
Employee's Compensation in the earliest calendar year for which Compensation
records are available, reduced on a compounded basis by 6% for each year that
the year in question precedes the earliest year for which Compensation records
are available. In lieu of such assumed Compensation, actual wages shall be used
if, within the time period described below, an Employee furnishes the
Retirement Committee with an accurate record of his actual wages. The
Retirement Committee shall notify an Employee of his right to
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<PAGE> 11
provide the Retirement Committee with an accurate record of his actual wages
and the Employee shall have 180 days from the later of his termination of
employment or the date of such Retirement Committee notification, to furnish
the accurate record of his actual wages.
The Retirement Committee may adopt rules which do not conflict
with the previous provisions of the subsection, but which govern the
computation of a Primary Social Security Benefit hereunder, and the fact that
an Employee does not actually receive such amount from the Social Security
Administration because of failure to apply or continuance of work, or for any
other reason, shall be disregarded.
(o) Service: An Employee's total Years of Employment with
an Employer after December 31, 1971 (or, in the case of an Employee in a unit
designated by the Board, the Employee's total Years of Employment with an
Employer after December 31, 1969), reduced by (1) Years of Employment during
which the Employee was not an Employee hereunder, and (2) Years of Employment
credited under subparagraph 2 of the second paragraph of section 2.1(s) below
except as specifically provided otherwise in Section 4.2(b), such period to be
determined in accordance with reasonable standards and policies applied on a
uniform and nondiscriminatory basis.
(p) Social Security Retirement Age: The retirement age
under Section 216(l) of the Social Security Act, applied as if the early
retirement age under Section 216(1)(2) of such Act were age 62. Accordingly,
the Social Security Retirement Age is 65 for an Employee attaining age 62
before January 1, 2000 (i.e., born before January 1, 1938), 66 for an Employee
age 62 after December 31, 1999 and before January 1, 2017 (i.e., born after
December 31, 1937, but before January 1, 1955), and 67 for an Employee
attaining age 62 after December 31, 2016 (i.e., born after December 31, 1954).
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(q) Taxable Wage Base: The amount equal to one twelfth of
the contribution and benefit base in effect under Section 230 of the Social
Security Act at the beginning of the calendar year.
(r) Trust: DeSoto Salaried Employees' Pension Trust
established January 14, 1972, and amended and restated effective January 1,
1976, as amended.
(s) Years of Employment: With respect to employment prior
to January 1, 1983, Years of Employment shall be determined in accordance with
the Plan as in effect on December 31, 1982. With respect to employment
beginning after December 31, 1982, Years of Employment shall mean the period,
measured in years and fractions thereof to completed days, beginning on the
later of January 1, 1983 and the date the Employee first completes an Hour of
Service, and ending on the date the Employee separates from service.
Subsequent to December 31, 1982, an Employee shall be deemed
to separate from service, for purposes of the Plan, upon the earlier of --
(1) the date the Employee terminates employment
with all Employers, and
(2) the first anniversary of the first day of a
period in which said Employee remains absent from service (with or without pay)
for any reason other than termination of employment; provided, however, that
this paragraph shall not apply to an Employee during a period in which the
Employee (i) is receiving disability payments under an insured long-term
disability program maintained by an Employer, or (ii) is on an approved leave
of absence granted by an Employer in accordance with the Employer's established
personnel policy applied on a uniform and nondiscriminatory basis so long as
the Employee resumes active employment with an Employer at the expiration of
such leave or dies prior to the expiration of such leave.
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However, regardless of the above, if an Employee who separates
from service is reemployed within one year of the date of separation from
service, the separation shall be disregarded and his Years of Employment will
be deemed to include the period between the Employee's separation from service
and his reemployment commencement date. In addition, in the case of a reemployed
Employee who did not have a nonforfeitable right to a benefit immediately prior
to his separation from service, Years of Employment occurring prior to said
separation shall not be taken into account if the period between his initial
separation from service and his reemployment commencement date (i) equals or
exceeds his prior Years of Employment, and (ii) is at least five years in
duration.
2.2 Gender and Number. Except as otherwise indicated by the
context, masculine terminology shall include the feminine and the singular
shall include the plural.
SECTION 3
CONTRIBUTIONS
3.1 Employees. Employees shall not make any contributions under
the Plan.
3.2 Employers. The Company and the other Employers intend, subject
to the right of amendment and permanent discontinuance as hereinafter provided,
to make such contributions to the Trust as will be required to provide for the
benefits under the Plan as they come due. The Employers' contribution for each
year shall be paid by the Employers into the Trust as soon as practicable after
the amount thereof has been determined but not later than the time prescribed
for filing its federal income tax return, including extensions thereof;
provided, however, that a contribution made by an Employer by a mistake of fact
may be returned to that Employer within one year of the date of payment.
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<PAGE> 14
SECTION 4
RETIREMENT DATES
4.1 Eligibility for Retirement. An Employee may retire at his
applicable Retirement Date. Normal retirement age shall be any time after the
attainment of age 65 and completion of 5 Years of Employment, but an Employee
may retire at any time after attaining age 55 and completing 10 Years of
Employment; provided, however, that for purposes of the Plan, an Employee who
attains age 70-1/2 shall be deemed to have retired on his Postponed Retirement
Date not later than April 1 following the close of such year. The Normal,
Early or Postponed Retirement Date is the first day of the month coincident
with or next following the date on which the Employee attains 65 and completes
5 Years of Employment or the date he actually retires upon attaining age 55 and
completing 10 Years of Employment or subsequent thereto, as the case may be.
4.2 Disability Retirement.
(a) An Hourly Employee or Salaried Employee who is
receiving disability payments under an insured long-term disability program
maintained by an Employer at his Normal Retirement Date shall be eligible to
retire on such date.
(b) A Prescott Employee shall be eligible for a
Disability Retirement Pension if his employment is terminated by reason of
disability prior to his Normal Retirement Date, provided that (1) he is then
age 50 or over and has completed 10 or more Years of Employment and (2) he is
eligible for disability benefits under the Social Security Act. Such date shall
be known as his Disability Retirement Date. A Prescott Employee shall commence
to receive his Disability Retirement Pension commencing on his Normal
Retirement Date. For purposes of this subsection Disability shall be defined as
entitlement to disability benefits under Title II of the Social Security Act.
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<PAGE> 15
Notwithstanding any other provision of this Section, no
Prescott Employee shall qualify for a Disability Retirement Pension if the
Employer determines on the basis of a medical examination that his disability
results from: (a) chronic alcoholism, (b) addiction to narcotics, (c) an
injury suffered while engaged in a felonious or criminal act or enterprise, or
(d) service in the armed forces of the United States which entitles the
Prescott Employee to a veteran's disability pension; but this provision shall
not prevent the Prescott Employee from qualifying for a pension under another
provision of the Plan.
Disability shall be considered to have ended and entitlement
to a Disability Retirement Pension shall cease if, prior to his Normal
Retirement Date, the Prescott Employee (a) is reemployed by the Employer, or
(b) engages in any substantially gainful activity, except for such employment
as is found by the Committee to be for the primary purpose of rehabilitation or
not incompatible with a finding of total and permanent disability. If
entitlement to a Disability Retirement Pension ceases in accordance with
provisions of this paragraph for a reason other than reemployment by the
Employer, such a Prescott Employee shall not be prevented from qualifying for a
pension under another provision of the Plan based on his Service and
Compensation prior to Disability Retirement. If a Prescott Employee becomes
entitled to a Disability Retirement Pension and such Disability terminates and
he returns to active employment with the Employer, the period of such
Disability shall be considered as Service and Years of Employment and his
Average Compensation for each plan year during such period shall be deemed to
be the same as his Compensation during the 12 month period ending with the date
of termination of his employment by reason of Disability.
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<PAGE> 16
SECTION 5
RETIREMENT BENEFITS
5.1 Normal Retirement Benefits. An Employee who retires as of his
Normal Retirement Date shall, subject to the provisions of Section 5.5 through
5.7, be entitled to receive a monthly benefit, commencing at his Normal
Retirement Date and payable thereafter for life, of an amount equal to:
(a) for a Salaried Employee, the greater of:
(i) his accrued benefit as of December 31, 1988; or
(ii) 1 and 2/3% of his Average Compensation multiplied by
his total years of Service while a Salaried Employee
(not in excess of 35 years) reduced by the Social
Security Allowance. The Social Security Allowance
shall be equal to one-half of one percent for each
year of Service up to 35 years, multiplied by the
lesser of:
(1) The Participant's Social Security Final
Average Compensation, or
(2) The Participant's Covered Compensation as
defined in Section 401(l)(5)(E) of the
Internal Revenue Code.
In the event the Social Security Allowance applies to
a Participant more than 5 years prior to his Social
Security Normal Retirement Age, but on or after age
55, the Social Security Allowance shall be reduced at
the rate of 1/30 for each year in excess of 5 years
up to 10 years and, to the extent necessary, by an
actuarial equivalent reduction for additional years
in excess of 10.
Social Security Final Average Compensation
means the average of the Participant's
Earnings
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<PAGE> 17
over the three consecutive completed Plan Years
preceding his current date of retirement, date of
termination of employment, date of death or the date
of the termination of the Plan, but excluding
compensation in any such year in excess of the Social
Security Taxable Wage Base.
Social Security Normal Retirement Age is the
earliest age at which the Employee is entitled to
receive unreduced old age benefits from Social
Security.
Social Security Taxable Wage Base means the
amount of wages from which Social Security Taxes are
required to be withheld in accordance with the
Federal Insurance Contributions Act, or any successor
act, regulation, or ruling pertaining thereto, which
is in effect at the beginning of the Plan Year.
(b) For an Hourly Employee, 1% of his Average Compensation
multiplied by his total years of Service while an Hourly
Employee. The monthly benefit for Hourly Employees under this
Section 5.1 shall not be less than $50 nor shall it be less
than the benefit to which the Hourly Employee would have been
entitled had he retired on the Early Retirement Date at which
his benefit would have been the greatest.
(c) Except as otherwise provided in Section 5.12, for an Employee
who has transferred from an Hourly Employee to a Salaried
Employee, the sum of the benefits calculated under (a) and (b)
above.
(d) For a Prescott Employee, the greater of:
(i) $15.00 multiplied by his years of Service, but not in
excess of 40 years; or
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(ii) 3/4% of the Prescott Employee's Compensation up to
Covered Compensation plus 1-1/4% of the Prescott
Employee's Average Compensation in excess of Covered
Compensation, all multiplied by his years of Service,
but not in excess of 35 years; or
(iii) 1-1/4% of the Prescott Employee's Average
Compensation (without regard to the limitation on
Compensation described in Section 2.1(f)) as of
December 31, 1988 multiplied by his years of Service
to December 31, 1988, but not in excess of 40 years,
reduced by 1-1/4% of his monthly Primary Social
Security Benefit, multiplied by his years of Service
to December 31, 1988, but not in excess of 40 years.
Notwithstanding any other provision of this Plan, the benefit
payable under this Plan to a Prescott Employee shall not be
less than the amount determined in accordance with the
provisions of the J. L. Prescott Company Employees'
Retirement Plan in effect on December 31, 1988, based on the
Prescott Employee's Average Compensation, Service and Primary
Social Security Benefit determined as of December 31, 1988.
5.2 Early Retirement Benefits. An Employee who retires as of an
Early Retirement Date shall be entitled to receive a monthly benefit
determined, except as otherwise provided in this Section 5.2, as for retirement
at his Normal Retirement Date but considering only Service and Compensation
prior to actual retirement. The monthly benefit payable under the Plan to any
such retired Employee may, upon the written request of the Employee, commence
at actual
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<PAGE> 19
retirement or at any time thereafter, but not later than his Normal Retirement
Date, and shall be payable thereafter for life.
If benefit payments for an Hourly Employee or a Salaried
Employee begin prior to attainment of age 62, the amount of the benefit shall
be reduced by an amount equal to 1/2 of 1% of the benefit which would otherwise
be payable at age 62, multiplied by the number of months between the
commencement of payments and the end of the month in which the Employee would
attain age 62 and, for Salaried Employees, then further reduced by the Social
Security Allowance. Provided, however, that solely for purposes of determining
the early commencement reduction, 5 years shall be added to the actual age of
all employees (or such lesser number of years as is necessary to increase the
age of such employee to age 62) who are described in any one of the four
following clauses:
(a) An individual who terminates employment between
October 1, 1989 and December 31, 1989 as a result of the restructuring of the
Company after attaining age 55 with at least 10 years of service.
(b) An individual who is employed at the Company's
"Packaging Product Line" who, prior to December 31, 1989, (i) was notified
that he or she was in a group of employees who was being terminated due to the
restructuring of the Company, (ii) continued in employment beyond December 31,
1989 at the request of the Company, and (iii) had attained age 55 with at least
10 or more years of service on or before the date he or she terminated
employment with the Company.
(c) An individual who is employed at the Company's
"Appliance and Paper Group" who (i) was notified prior to December 31, 1989
that his or her employment would be terminated unless the individual chose to
relocate to the Company's Columbus, Ohio plant, (ii) indicated that he or she
would not relocate, (iii) continued in employment beyond December 31, 1989 at
the request of the Company, and (iv) had attained age 55 with at least 10 years
of
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<PAGE> 20
service on the date the individual terminated employment with the Company.
(d) An individual who (i) was employed at the Company's
Chicago Heights Resin plant ("Plant") immediately prior to his or her
termination of employment with the Company, (ii) terminated employment with the
Company after attaining age 55 with at least 10 years of service due to the
sale of the Plant, and (iii) is notified by the "ultimate purchaser" of the
Plant no more than 30 days after the Company sells the Plant to the
intermediate purchaser that his or her employment with the ultimate purchaser
is being terminated. For this purpose, the term "intermediate purchaser" shall
refer to that corporation which purchases the Plant from the Company, and the
term "ultimate purchaser" shall refer to that corporation which purchases the
Plant from the intermediate purchaser.
If benefit payments for a Prescott Employee begin prior to the
Prescott Employee's Normal Retirement Date, the amount of the benefit shall be
reduced by 3/10 of 1% for each of the first 60 months plus 5/10 of 1% for each
month in excess of 60 by which the commencement date of the benefit preceded
his Normal Retirement Date.
5.3 Postponed Retirement Benefit. An Employee who retires as of a
Postponed Retirement Date shall be entitled to receive a monthly benefit
commencing on his Postponed Retirement Date and payable thereafter for life,
determined as for retirement at his Normal Retirement Date but considering
Service and Compensation to his Postponed Retirement Date; provided, however,
that in no event shall said benefit be less than the benefit to which the
Employee would have been entitled had he retired on his Normal Retirement Date.
5.4 Vested Benefits. In the event an Employee terminates his
employment other than for retirement, death or disability after completing five
years of Employment, he shall be entitled to
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<PAGE> 21
receive a monthly benefit, determined under Section 5.1 but considering only
Service and Compensation prior to actual termination of employment and, for
Hourly Employees, not taking into account the minimum monthly benefit
provisions of the last sentence of Section 5.1(b), such benefit to be payable
commencing at his Early Retirement Date or such later date on which application
therefor is made, and shall be payable thereafter for life. Provided further,
that if benefit payments begin prior to attainment of age 65, the amount of the
benefit for a Prescott Employee shall be reduced as provided for Prescott
Employees in Section 5.2 and the amount of the benefit for an Hourly Employee
or a Salaried Employee shall be reduced by an amount equal to 1/2 of 1% of the
benefit which would otherwise be payable at age 65 multiplied by the number of
months between the commencement of payments and the end of the month in which
the Employee would attain age 65 and, for Salaried Employees, then further
reduced by the Social Security Allowance.
5.5 Benefit in Joint and Survivor and Optional Forms.
Notwithstanding any other provisions of Section 5, if an Employee or former
Employee eligible to receive pension benefits pursuant to Section 5.1, 5.2, 5.3
or 5.4 is legally married on the date benefit payments are to commence, his
benefit shall be paid in the form of a joint and survivor annuity, as described
below, with his spouse as the contingent beneficiary; provided, however, that:
(a) an Employee or former Employee who would normally
receive his benefit in the joint and survivor form may elect, as provided for
in Sections 5.6 and 5.7, to have his pension benefit paid to him in the form
specified in Section 5.1, 5.2, 5.3 or 5.4, as applicable, and all Employees and
former Employees may elect, as provided for in Sections 5.6 and 5.7, to have
pension benefits paid in any one of the optional forms provided for in Section
5.7.
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<PAGE> 22
(b) no amount shall be payable to an Employee's spouse
under this Section 5.5 unless said spouse presents evidence satisfactory to the
Retirement Committee that she was legally married to the Employee throughout
the one-year period ending on the earlier of the date said Employee's death and
the date said Employee's annuity payments commenced.
For purposes of this Plan, the term joint and survivor annuity
means a reduced annuity payable for the life of the former Employee with a
survivor annuity payable for the life of the spouse who is his contingent
beneficiary which is equal to one-half of the amount of the monthly reduced
annuity payable during the life of the former Employee, and which together are
Actuarially Equivalent to a single life annuity for the life of the former
Employee determined in accordance with the applicable provisions of this
Section 5.
5.6 Revocation of Benefit in Normal Form. Not less than 270 days
immediately prior to the date on which an Employee's or former Employee's
benefits are to commence, the Company shall provide him with a written
explanation of the terms and conditions of the normal form of annuity payable
to him, and the effect of an election by said Employee or former Employee to
have benefits paid to him as specified in Section 5.1, 5.2, 5.3, 5.4 or 5.5, if
applicable, or in any one of the optional forms provided for in Section 5.7.
Thereafter, an Employee or former Employee whose benefits
would otherwise be payable in the normal form may elect at any time prior to
the 90 days preceding the date his annuity payments are to commence, to have
his benefits paid to him in the form specified in Section 5.1, 5.2, 5.3 or
5.4, if applicable, or in any one of the optional forms provided for in Section
5.7. Any election under this section shall be made in writing and on such forms
as the Company shall determined; provided, however, that an election by a
married Employee or former Employee made after
18
<PAGE> 23
December 31, 1984, to receive benefits in a form other than the joint and
survivor form specified in Section 5.5 shall only be effective if it is
consented to in writing by the individual's spouse, and such spouse's consent
acknowledges the effect of such election and is either notarized or made in the
presence of a representative of an Employer, unless the Retirement Committee
finds that said spouse cannot be located, or unless such other circumstances as
the Secretary of the Treasury may by regulations prescribe.
5.7 Optional Forms of Benefits. The Actuarial Equivalent Value of
a benefit otherwise described in Section 5.1, 5.2, 5.3 or 5.4 may, at the
election of the Employee, retired Employee or terminated Employee made pursuant
to Section 5.6, be paid in any one of the following forms:
(a) As a reduced benefit for the life of the Employee,
retired Employee or terminated Employee, and in the event of his death before
receiving 120 monthly payments, the same reduced benefit shall be paid to his
designated beneficiary for the balance of such 120 month period; or
(b) As a joint and survivor option with his spouse or
other designated beneficiary, under which the Employee, retired Employee or
terminated Employee shall receive a reduced pension payable for his life, with
payments continuing during the lifetime of his spouse or other designated
beneficiary in that percentage of such reduced amount - - 100%, 75%, or 50%
thereof -- as he shall elect, such payment to the Employee, retired Employee,
or terminated Employee to commence not later than the date the normal benefit
under Section 5.1 would commence.
If an Employee elects a joint and survivor option under (b)
above with a designated beneficiary other than his spouse, the present value of
the benefits payable to the Employee must be more than 50% of the present value
of the total benefits payable to the Employee and the designated beneficiary.
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<PAGE> 24
An Employee may elect or revoke an option under this Section
5.7 without the approval of the Retirement Committee if his election or
revocation is filed in writing not more than 360 days and not less than 90 days
prior to his retirement date, but no such election or revocation shall be
effective if the Employee dies, from other than accidental causes, within 30
days after such election or revocation. The Retirement Committee shall
establish such other rules of uniform application dealing with elections under
this Section 5.7 as may be necessary, including rules similar to those adopted
under Section 5.6 requiring the written consent of the Employee's or former
Employee's spouse to elections and revocations of elections by married
Employees and former employees.
5.8 Statutory Survivor's Benefit. In the event an Employee or
former Employee dies while eligible for coverage for benefits provided under
this Section 5.8, as determined below, a survivor annuity shall be paid to his
spouse for life, subject to the further provisions of this Section 5.8.
A survivor's benefit payable to a spouse hereunder shall
commence on the first day of the month coincident with or next following the
later of the Employee or former Employee's death, and the date the Employee or
former Employee would have attained age 55, and shall consist of a benefit
payable monthly to the spouse which is equal to the monthly amount that would
have been payable to the spouse in the joint and survivor annuity form under
Section 5.5, (i) based upon the eligible Employee or former Employees's
Compensation and years of Service to date of death, and (ii) assuming that the
Employee or former Employee survived to the benefit commencement date
determined above and commenced receipt of benefits on that date. However,
regardless of the above, no amount shall be payable to an Employee's or former
Employee's spouse in accordance with this section until said spouse presents
evidence
20
<PAGE> 25
satisfactory to the Company that she was legally married to the Employee or
former Employee throughout the one-year period immediately preceding said
Employee's or former Employee's date of death, and further provided that no
amount hereunder shall be payable to a spouse for any month for which such
spouse is eligible to receive a Survivor's Benefit pursuant to Section 5.9.
An Employee or former Employee is covered under a statutory
survivor's benefit, as described above, if, on his date of death, he was vested
in benefits payable under the Plan, and either --
(A) he died prior to termination of employment but after
either (i) attaining age 55, or (ii) August 23, 1984, or
(B) he died after termination of employment but prior to
the date benefit payments to him commenced, provided that either (i) he
terminated employment on or after his 55th birthday, or (ii) he terminated
employment after December 31, 1975 and died after August 23, 1984.
5.9 Survivor's Benefit. If an Hourly Employee or Salaried Employee
dies while in the employ of an Employer or while he is receiving disability
payments under an insured long-term disability program maintained by an
Employer, and if he has at least one Year of Employment, a survivor's benefit
may be paid subject to the provisions of this Section 5.9. The Survivor's
Benefit shall be a monthly benefit equal to the amount which the survivor would
have received if the Hourly Employee or Salaried Employee were to receive a 50%
joint and survivor annuity under Section 5.5 determined, in the case of an
Hourly Employee or Salaried Employee who died prior to attaining age 65, an if
said Hourly Employee or Salaried Employee had attained age 65 on the date of
his death, based on his Compensation to date of death and years of Service he
would have had to age 65, and in the case of an Hourly Employee or Salaried
Employee who dies after having attained age 65, based on his Compensation and
years of Service to date of death; provided,
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<PAGE> 26
however, that the benefit to any Dependent Child shall be reduced by an amount
equal to any benefit received by the spouse pursuant to Section 5.8. If on the
date of death, any person qualifies as a Dependent Spouse or Dependent Child,
such benefits shall commence from the first day of the month following or
coincident with the date of death and shall continue thereafter monthly for the
period during which any person so qualifies. If at any time a spouse qualifies
for payments hereunder, payments shall be made to such spouse to the exclusion
of any dependent children. If at any time more than one child qualifies, the
benefits shall be divided equally among them. The term "Dependent Spouse" shall
mean (a) in the case of an Hourly Employee or Salaried Employee who dies after
attaining age 55 and completing 10 years of Employment, the spouse of said
Hourly Employee or Salaried Employee, and (b) in the case of an Hourly Employee
or Salaried Employee who dies prior to attaining age 55 and completing 10 years
of Employment, the spouse of said Hourly Employee or Salaried Employee who is
residing with the Hourly Employee or Salaried Employee at the date of his
death, whose annual income in any of the three calendar years immediately
preceding the date of death was less than that of the Hourly Employee or
Salaried Employee, and who has not remarried. The term "Dependent Child" shall
have the same meaning as in the Federal Social Security Act in effect on the
date of the Hourly Employee or Salaried Employee's death.
5.10 Lump Sum Payments. If the present actuarial value of any
benefits otherwise payable under this Section 5 and any other defined benefit
plans maintained by an Employer in $3,000 or less, such amount shall be paid in
a single lump sum. If the present actuarial value of such benefits is over
$3,500 but the actual benefits will be $500 or less per year, the present
actuarial value of such benefits shall be paid in a single lump sum provided
that the Employee or his beneficiary consents in writing to such payment. In
the event of any lump sum payment pursuant to this
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<PAGE> 27
Section 5.10, Years of Employment prior to such payment shall not constitute
years of Service in determining any future benefits under the Plan in the event
of reemployment.
This paragraph applies to distributions made on or after
January 1, 1993. Notwithstanding any provision of the Plan to the contrary that
would otherwise limit a distributee's election under this paragraph, a
distributee may elect, at the time and in the manner prescribed by the
Retirement Committee, to have any portion of an eligible rollover distribution
paid directly to an eligible retirement plan specified by the distributee in a
direct rollover. For purposes of this paragraph, the following terms shall have
the following meaning:
(1) Eligible Rollover Distribution. An eligible rollover
distribution is any distribution of all or any portion of the balance to the
credit of the distributee, except that an eligible rollover distribution does
not include: any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for the life (or
life expectancy) of the distributee or the joint lives (or joint life
expectancies) of the distributee or the distributee's designated beneficiary,
or for a specified period of ten years or more; any distribution to the extent
such distribution is required under Section 401(a)(9) of the Code; and the
portion of any distribution that is not includable in gross income (determined
without regard to the exclusion for net unrealized appreciation with respect to
employer securities).
(2) Eligible Retirement Plan. An eligible retirement plan
is an individual retirement account described in Section 408(a) of the Code, an
individual retirement annuity described in Section 408(b) of the Code, an
annuity plan described in Section 403(a) of the Code, or a qualified trust
described in Section 401(a) of the Code, that accepts the distributee's
eligible rollover distribution. However, in the case of an eligible
23
<PAGE> 28
rollover distribution to the surviving spouse, an eligible retirement plan in
an individual retirement account or individual retirement annuity.
(3) Distributee. A distributee includes an Employee or
former employee. In addition, the Employee's or former Employee's surviving
spouse and the Employee's or former employee's spouse or former spouse who is
the alternate payee under a qualified domestic relations order, as defined in
Section 414(p) of the Code, are distributees with regard to the interest of the
spouse or former spouse.
(4) Direct Rollover. A direct rollover is a payment by
the Plan to the eligible retirement plan specified by the distributee.
If a distribution is one to which Sections 401(a)(11) and 417 of the
Code do not apply, such distribution may commence less than 30 days after the
notice required under Section 1.411(a)-11(c) of the Income Tax Regulations is
given, provided that:
(a) the Retirement Committee clearly informs the Employee
that the Employee has a right to a period of at least 30 days after receiving
the notice to consider the decision of whether or not to elect a distribution
and, if applicable, a particular distribution option, and
(b) the Employee, after receiving the notice,
affirmatively elects a distribution.
5.11 Earned Benefits. A Salaried Employee who on December 31, 1971
was a participant in the Grays Harbor Plan, Royal Plan or Kerns Plan shall, in
addition to benefits otherwise payable under the Plan, be entitled to receive
the benefits provided for in the Appendix A.
5.12 Additional Benefits for Former Participants in DeSoto Hourly
Employees' Pension Plan and/or Former Hourly Employees. If a former participant
in the DeSoto Hourly Employees' Pension Plan ("Hourly Plan") and/or former
Hourly Employee who has become a
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<PAGE> 29
Salaried Employee retires or terminates employment while a Salaried Employee,
in addition to benefits otherwise payable under the Plan based upon Service as
a Salaried Employee, he shall be entitled to receive a benefit determined under
Section 5.1(a) based solely upon his service under the Hourly Plan and/or as
an Hourly Employee reduced by the benefit payable under the Hourly Plan and/or
under Section 5.1(b).
5.13 Actuarial Equivalence.
(a) The Actuarial Equivalent Value means the benefit or
benefits, or payment or payments, which is of equal value as of the date of
determination to the benefits for which they are to be substituted. Equivalence
of value, except as specifically provided above and in paragraph (b) below,
shall be determined by actuarial calculations based on interest rates,
mortality tables, and other actuarial assumptions used by the Pension Benefit
Guaranty Corporation (PBGC), as of the first date of the calendar year that
includes the computation date, for determining the present value of an
immediate annuity (assuming a male participant and a male beneficiary), under a
terminating, trusteeship by the Pension Benefit Guaranty Corporation.
(b) In the case of the 10 years certain and life annuity
and in the case of the joint and survivor annuity forms of benefit set forth
below, if the beneficiary to receive the survivor annuity is the Participant's
spouse or a non-spouse whose age is within 10 years of age of the Participant,
the equivalence of value shall be computed using the following actuarial
adjustment factors:
<TABLE>
<S> <C> <C>
- 10 years certain and life annuity -- 91%;
- 50% joint and survivor annuity -- 90%
(Participant), 45% (Beneficiary)
- 75% joint and survivor annuity -- 80%
(Participant), 60% (Beneficiary)
- 100% joint and survivor annuity -- 75%
(Participant), 75% (Beneficiary).
</TABLE>
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<PAGE> 30
In the case of a joint and survivor annuity in any of the forms set forth above
where the beneficiary to receive the surviving annuity is a non-spouse whose
age is not within 10 years of the age of the Participant, the equivalence of
value shall be computed using the following actuarial assumptions:
Interest - 8%
Mortality Table - UP-84
(c) Notwithstanding anything being to the contrary,
equivalence of value for Prescott Employees shall, except as provided below, be
based on the tables set forth in Appendix C to the Plan. However, with respect
to any lump sum payment that may be payable to a Prescott Employee under this
Plan, the Actuarial Equivalent lump sum value for payments made in any Plan
Year shall be based on the interest rate which would be used (as of the
beginning of the plan year) by the Pension Benefit Guaranty Corporation for
purposes of valuing immediate and deferred annuities on a plan termination and
the Group Annuity Mortality Table for 1965 weighted to reflect an employee
population composed of 70% male and 30% female.
SECTION 6
LIMITATIONS ON BENEFITS
6.1 Limitations on Benefits. Notwithstanding any other provisions
of this Plan to the contrary, the annual benefit provided under the Plan and
any other "defined benefit plan" maintained by an Employer or any affiliate of
an Employer for any Employee or former Employee for any calendar year, which
shall be the limitation year, shall in no event exceed the lesser of (a) or (b)
below:
(a) An amount equal to the lesser of paragraph (1) or (2)
below:
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<PAGE> 31
(1) Defined Benefit Plan Limitation. Whichever is
applicable of subparagraph (A) or (B)--
(A) $90,000 (as adjusted as permitted
under Code Section 415(d)) payable commencing at or after age 65; or the
smaller equivalent value thereof, if payments begin before age 65;
(B) the larger equivalent value of
$90,000 (as adjusted as permitted under Code Section 415(d)) if payments begin
after the Participant's Normal Retirement Age.
Equivalent value calculations for purposes of
this Section 6.1 shall be made using a 5 percent interest assumption and the
mortality assumption specified in Section 5.15.
(2) An amount equal to 10 percent of the annual
average of the highest three consecutive calendar years of compensation paid to
the Employee or former Employee by the Employer or affiliate during the
Employee's active participation in the defined benefit plan; multiplied by the
number of the Employee's Years of Employment, not to exceed ten years. The
amount in paragraph (1) above shall be automatically adjusted annually for each
Employee and former Employee whose retirement benefit payments have not
commenced, but not before each year in which an adjustment takes effect, for
increases in the cost of living in accordance with regulations prescribed by the
Secretary of the Treasury.
Provided, however, that the limitation under
this subsection (a) for any person who was an Employee on December 31, 1982
shall not be lower than the amount of such Employee's accrued benefit, not to
exceed $136,425, under the defined benefit plan as of December 31, 1982.
(b) Dual Plan Limitation. If an Employee or former
Employee is also a participant in any defined contribution plan of the Employer
or an affiliate, and if the sum of the individual's defined benefit plan
fraction and defined contribution plan
27
<PAGE> 32
fraction for any year exceeds one, an amount of annual benefit hereunder shall
be reduced to the extent necessary to reduce such sum to one.
(c) Applicable Terms. For purposes of Computing the
limitations under this Section 6.1--
(1) "Annual benefit" means an Employee's or
former Employee's retirement or vested benefit computed under Section 5.1,
5-2, 5.3 or 5.4 of the Plan, expressed as--
(A) 50 percent joint and survivor
annuity form of payment, for any married Employee or former Employee if the
automatic election under Section 5.5 applies to such Employee or former
Employee; or
(B) a straight life annuity form of
payment, for any other Employee or former Employee.
(2) "The defined benefit plan" means this Plan
and all other defined benefit plans of the Employers and each affiliate of an
Employer, considered as one plan; except that after the limitations have been
determined, any reduction in benefits in the defined benefit plan will be made
in this Plan first and in all other defined benefit plans next.
(3) "Any defined contribution plan" of an Employer
means all defined contribution plans of the Employers or an affiliate of an
Employer considered as one plan (and it is intended to reduce the annual benefit
under any defined benefit plan to the extent possible, if necessary to prevent
the sum of the fractions in subsection (b) above from exceeding one, before
reducing annual additions under any defined contribution plan).
(4) "Defined benefit plan fraction" for any year
is a fraction--
(A) the numerator of which is the
projected annual benefit of the Employee or former Employee under the defined
benefit plan determined as of the close of the year, and
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<PAGE> 33
(B) the denominator of which is the lesser
of--
(i) 1.25, multiplied by $90,000 (as
adjusted for cost-of-living increases) for such year, or
(ii) 1.4, multiplied by the amount
which may be taken into account under subsection (a)(2) above (as adjusted for
cost-of-living increases) with respect to the Employee or former Employee under
the defined benefit plan for such year.
(5) "The defined contribution plan fraction" for any year is a
fraction--
(A) the numerator of which is the sum of the
annual additions to the Employee's or former Employee's account as of the
close of the year (reduced, if applicable, in accordance with regulations
issued pursuant to Section 235(g)(3) of the Tax Equity and Fiscal
Responsibility Act of 1982), and
(B) the denominator of which is the sum of the
lesser of the following amounts determined for such year and for each prior
year of service with the Employers and affiliates--
(i) 1.25, multiplied by the dollar
limitation in effect under Code Section 415(c)(1)(A) for each year, or
(ii) 1.4, multiplied by the amount
which may be taken into account under Code Section 415(c)(1)(B) with respect to
the Employees under such plan for such year.
The denominator of the defined contribution plan
fraction shall be multiplied by the "transition fraction" (as defined in Code
Section 415(e)(6)(B)), if the Retirement Committee has so elected.
(6) For this purpose "annual additions" shall mean the
sum of--
29
<PAGE> 34
(A) the aggregate of the Employer's contribution
made for the account for an Employee or former Employee under all defined
contribution plans for the year, and the Employee's before tax contributions
under section 401(k) of the Code to all defined contribution plans for the year,
and
(B) the Employee's or former Employee's deposits
or other after-tax contributions to such defined contribution plan for the
year; and
(C) forfeitures allocated to the Employee or
former Employee under the defined contribution plan for the year; and
(D) contributions allocated on the Employee or
former Employee's behalf to any individual medical account under Code Sections
401(h)(6) and 419A(d).
6.2 Benefits in Event of Termination. The provisions of this
Section 6.2 shall apply only in respect of retirement benefits payable under
the Plan to or on account of the 25 highest paid Employees of each Employer,
determined as of the effective date, who are covered hereunder and whose
monthly retirement benefits under the Plan, upon normal retirement, will exceed
$125, and will so apply only if the Plan is terminated or if benefits of any
said 25 highest paid Employees become payable before ten years after the
effective date or if the Plan is terminated any time thereafter and the full
current cost of the Plan for the ten years then ended have not then been
funded, and shall apply notwithstanding any other distribution provisions under
this Plan. If the Plan should at any time be adopted by a subsidiary of the
Company, the restrictions of this Section 6.2 shall apply to the benefits
payable to the Employees of such Employer-subsidiary as if the date of adoption
were the effective date. If the Plan should at any time be amended so as to
substantially increase the benefits payable hereunder, the restrictions of this
Section 6.2 shall apply to the increased benefits as if the date of amendment
were the Effective Date.
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<PAGE> 35
If, at any time during which this limitation applies, the Plan
is terminated or the full current costs thereof are not met, the retirement
benefits payable to or on account of an Employee to whom the provisions of this
Section 6.2 are applicable shall not exceed the retirement benefit which could
be provided from the contributions of the Employer with respect to him, if such
contributions did not exceed the larger of the following amounts: (i) $20,000
or (ii) 20% of the average annual Compensation of such Employee for the 5
calendar years immediately preceding retirement which is not in excess of
$50,000, multiplied by the number of years elapsed since the effective date and
the first to occur of (a) the date of the termination of the Plan, (b) the date
a retirement benefit becomes payable to any one of said 25 highest paid
Employees, or (c) the date a retirement benefit becomes payable to any one of
said 25 highest paid Employees when the full current costs of the Plan have not
then been funded. In the event the restrictions of this Section 6.2 are
applicable, that portion of the asset value of the Trust arising from
contributions made under the Plan to the extent that such contributions are
subject to the limitations specified herein, will be apportioned and
distributed to the other Employees not so restricted, in accordance with the
provisions of Section 11.4. As long as this Plan has not been terminated and
its full current costs have been met, the provisions of this Section 6.2 shall
not restrict the payments of full retirement or termination benefits to a
retired or terminated Employee.
SECTION 7
DESIGNATION OF BENEFICIARIES
Beneficiaries. Each Employee, retired Employee or terminated Employee
shall designate upon such forms as may be provided for that purpose a
beneficiary or beneficiaries who may receive the benefits, if any, payable
under the Plan after his death (other than the benefits described in Section
5.7(b) hereof, as to which
31
<PAGE> 36
separate designations shall be made). An Employee, retired Employee, or
terminated Employee may, on the forms provided for this purpose, change or
revoke his beneficiary or beneficiaries. The designation, change, or revocation
of a beneficiary or beneficiaries shall not be effective for any purpose
unless and until it has been received by the Retirement Committee during the
Employee's, retired Employee's, or terminated Employee's lifetime. However,
regardless of the above, the designation change or revocation by a married
Employee, retired Employee or terminated Employee of a beneficiary other than
that person's spouse which is made after December 31, 1984 shall not be
effective unless such designation, change or revocation is consented to in
writing by the individual's spouse with such consent being made in accordance
with rules and regulations of the Retirement Committee similar to those for
spousal consents under Section 5.6.
In the event that an Employee, retired Employee, or terminated
Employee does not designate a beneficiary or beneficiaries in the manner above
provided, or if for any reason such designation shall be legally ineffective or
revoked, or if such beneficiary or beneficiaries predecease him or should die
prior to payment of the benefits payable under the Plan after his death, then
the Trustees shall distribute the benefits, if any, then payable to the then
surviving members of the following classes of persons, with preference for
classes in the order listed, in equal shares among class members should there
be more than one class member then living:
(a) spouse;
(b) children (including children by adoption);
(c) parents (including adopting parents);
(d) brothers and sisters (including brothers and sisters
of the half blood and brothers and sisters by adoption); and
(e) the executor or administrator of the Employee's or
retired Employee's or terminated Employee's estate.
32
<PAGE> 37
SECTION 8
MISCELLANEOUS PROVISIONS
8.1 Required Information to be Furnished. Each Employee, former
Employee and beneficiary shall furnish to the Retirement Committee such
information as the Retirement Committee considers necessary or desirable for
the purpose of administering the Plan and regardless of any Plan provision to
the contrary, the payment of benefits hereunder is conditioned upon the
furnishing of such information. Each Employee and former Employee will submit
proof of his age (and, in the case of a joint and survivor option, proof of the
age of the spouse or other designated beneficiary) to the Retirement Committee
at such time as it may be required. The Retirement Committee will, if such
proof of age is not submitted as required, use as conclusive evidence thereof
such information as is deemed by it to be reliable, regardless of the source of
such information. Any adjustment required by reason of lack of proof or the
misstatement of the age of any person entitled to benefits hereunder will be in
such manner as the Retirement Committee deems equitable.
Any notice or information which may be required according to
the Plan or any rule established by the Retirement Committee pursuant to the
terms of the Plan shall be deemed to be furnished if addressed and either
delivered in person or mailed, postage fully prepaid, to the Retirement
Committee, c/o DeSoto, Inc., 16750 South Vincennes Road, South Holland,
Illinois 60473.
8.2 Benefits Payable to Incompetents. If any person entitled to
benefit payments hereunder shall be under a legal disability or, in the sole
judgment of the Retirement Committee, shall otherwise be unable to apply such
payments to his own best interest and advantage, the Retirement Committee, in
the exercise of its discretion, may direct all or any portion of such benefit
payments to be made in any one or more of the following ways:
(a) Directly to such person;
(b) To his legal guardian or conservator, or
33
<PAGE> 38
(c) To his spouse or to any other person, to be
expended for his benefit.
The decision of the Retirement Committee will, in each case,
be final and binding upon all persons, and the Retirement Committee shall not
be obliged to see to the proper application or expenditure of any payments so
made. Any payment made pursuant to the power herein conferred upon the
Retirement Committee shall operate as a complete discharge of all obligations
under the Plan as to such benefit payments.
8.3 Nonassignability. It is a condition of the Plan to which all
rights of any person shall be subject, that payments hereunder shall be made
only to those persons entitled thereto under the terms of this Plan, and no
right or interest in the Plan or Trust shall be transferable or assignable;
such right or interest may not be anticipated, charged or encumbered, and shall
not be subject to or reached by any legal or equitable process (including
execution, garnishment, attachment, pledge or bankruptcy) in satisfaction of
any debt, liability or obligation, prior to its receipt, including any
liability or obligation for alimony, separate maintenance or child support
payments; provided, however, that nothing herein shall be deemed to preclude
the Plan from complying with an order which the Retirement Committee determines
to be a qualified domestic relations order" within the meaning of Section
401(a)(13)(b) of the Code.
8.4 Employment Rights. This Plan shall not be construed to create
a contract of employment between an Employer and any Employee, or to create a
right in any Employee to be continued in the employment of an Employer, or to
limit an Employer's right to discharge any Employee with or without cause.
8.5 Other Rights and Liabilities. No employee shall have any right
to, or interest in, any part of the assets held under the Plan upon termination
of employment or otherwise, except as provided under the Plan and then only to
the extent of the benefits payable to such Employee from the Trust. All
payments of benefits
34
<PAGE> 39
provided for in the Plan shall be made solely out of the Trust, and neither the
Company nor any other Employer nor the Retirement Committee nor any Trustee
shall in any manner be liable therefor. Neither the Company nor any other
Employer nor the Retirement Committee nor any Trustee in any manner guarantees
that the Trust will not depreciate, or sustain losses, or otherwise be reduced.
8.6 Mailing of Benefits. Each person entitled to benefits
hereunder shall file with the Retirement Committee in writing his complete
mailing address and each change of mailing address, and any check representing
payment hereunder and any communication addressed to an Employee, a retired
Employee, a terminated Employee or to any other person at his last address so
filed, or if no such address has been filed, then at his last address indicated
on the records of the Employer, shall be deemed to have been received by such
person for all purposes of the Plan, and neither the Retirement Committee, nor
the Company, nor the Trustees shall be obliged to search for or ascertain the
location of any person. If in the judgment of the Retirement Committee there is
any doubt that benefits are being received by the person entitled thereto, the
Retirement Committee may hold such benefits for the benefit of such person.
SECTION 9
ADMINISTRATION
9.1 Company Powers. The Company shall be the Plan Administrator of
the Plan and shall be responsible for the administration of the Plan and shall
exercise such powers as may be necessary to carry out its provisions. The
Company may make supplementary rules and regulations for the administration of
the Plan and shall have the exclusive right to decide questions of
interpretation or to resolve ambiguities. All interpretations, determinations
and decisions of the Company shall be final, conclusive and binding upon all
persons having or claiming any interest under the Plan.
35
<PAGE> 40
9.2 Retirement Committee. All the powers and rights of the
Company, subject to such restrictions, limitations, and conditions as may be
imposed by the Board, shall be exercised by a Retirement Committee, consisting
of one or more persons appointed by resolution of the Board, and which
Retirement Committee shall be a Named Fiduciary for purposes of ERISA. Each
member of the Retirement Committee shall continue in office until he resigns or
in discharged by a resolution of the Board.
A majority of the members of the Retirement Committee in
office shall constitute a quorum for the transaction of business. All
resolutions or other actions taken by the Retirement Committee at any meeting
shall be by vote of a majority of those persons present at such meeting.
The Retirement Committee shall perform all of the duties and
may exercise all of the powers specifically granted to it in the Plan and those
powers delegated to it by the Company. The Retirement Committee shall adopt or
cause to be prepared all actuarial tables and computations which shall be
necessary or desirable to carry out the terms of the Plan, and shall be
authorized to change such tables as such changes may become necessary or
desirable in the judgment of the Retirement Committee.
The Retirement Committee shall maintain or cause to be
maintained such records and accounts as may be necessary or desirable in
connection with the management and operation of the Plan. In the conduct of its
affairs, the Retirement Committee may employ counsel (who may be counsel to the
Company) and such clerical, medical and actuarial services as are necessary or
desirable.
The Retirement Committee shall have the right, from time to
time, to delegate in writing to any individual member of the Retirement
Committee or to any other person or persons, subject to such terms, conditions
and restrictions as they may prescribe, such of their rights, powers,
authorities, discretions and duties hereunder, except those dealing with
interpretation of the
36
<PAGE> 41
provisions of the Plan, as they shall determine; and all actions taken by any
such person or persons pursuant to and in accordance with any such delegations
shall be effective and binding upon all parties to the same extent as though
taken by the Retirement Committee.
The members of the Retirement Committee shall discharge their
duties with respect to the Plan solely in the interests of the participants and
beneficiaries and with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in a like capacity and
familiar with such matters would use in the conduct of an enterprise of a like
character and with like aims, but no member shall be personally liable upon any
contract, agreement, bond or other instrument made or executed by him or on his
behalf as a member of the Retirement Committee; nor for any mistake of judgment
made by him or any other member of the Retirement Committee; nor for any loss
unless resulting from his own gross negligence or willful misconduct; and no
member shall be liable for the neglect, omissions or wrongdoing of any other
member or members, or of the agents, employees or counsel of the Retirement
Committee.
9.3 Expenses of Administration. The Employers will pay all
expenses incurred in the administration of the Plan, including expenses and
fees of the Trustees, if any, except that, if not so paid, such expenses and
fees shall be paid from the Trust.
SECTION 10
AMENDMENT AND TERMINATION
10.1 Right to Amend or Terminate. The Company expects the Plan to
be permanent, but since future conditions affecting the Company cannot be
anticipated or foreseen, subject to the provisions of Section 10.4, the Company
must necessarily and does hereby reserve the right to amend, modify or
terminate the Plan, including without limitation of the foregoing the right to
reduce or discontinue contributions at any time by the action of the Board.
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<PAGE> 42
However, no such amendment shall cause any reduction in the Accrued Benefit of
any Participant (except to the extent permitted under Code Section 412(c)(8)).
10.2 Qualification Under the Internal Revenue Code. It is intended
that the Plan shall qualify and hereafter continue to qualify under the Code
and ERISA, and that all contributions made under the Plan shall be deductible
for federal income tax purposes under section 404 of the Code. Without limiting
the generality of the provisions of Section 10.1 hereof, the Company reserves
the right at all times to modify or amend the Plan in any respect whatsoever in
order to meet the requirements of the Code or ERISA as now in effect or as
hereafter amended.
10.3 Distribution on Termination. It is the intention of the
Company to continue the Plan and make contributions each year, but subject to
the provisions of Section 10.4, the Company by resolution of the Board may, for
any reason, temporarily suspend or permanently discontinue contributions, or
reduce such contributions below amounts deemed sufficient under the provisions
hereof.
Subject to the provisions of Section 10.4, the Plan may be
terminated at any time by the Board subject to and in accordance with all
applicable provisions of law, and shall be terminated in case the Company
permanently discontinues contributions as provided in the paragraph above or
(except where, in the case of the merger or consolidation of the Company with
or into another corporation, or the transfer of substantially all of the assets
and business of the Company to another corporation, the resulting or acquiring
corporation, as the case may be, elects, with the consent of the Company,
within a period of six months after the effective date of any such event to
continue the Plan with respect to the transferred Employees) if the Company
ceases to exist.
In the event of termination or partial termination of the Plan
for any reason, payment of retirement benefits shall forthwith ease and a
valuation of the assets of the Trust shall be
38
<PAGE> 43
made as soon as possible. Upon completion of such valuation and after payment
of all expenses, if any, that are not paid by the Employers, the assets of the
Trust then held under the Plan shall be allocated in accordance with Section
4044 of ERISA to the extent such assets are available to provide, after all
expenses of administration or liquidation, Plan benefits in the following
manner and order:
(a) First, to provide retirement benefits equal to the
smallest benefit which could be provided under the Plan based on the provisions
of the Plan as in effect during the five year period ending on the termination
date of the Plan for each person who was receiving benefit payments, and each
person who was eligible to begin receiving benefits, as of the beginning of the
three year period ending on the termination date, without reference to the
order in which such persons became or could have become entitled to receive
such benefits.
(b) Second, if any assets of the Trust remain after the
application of subsection (a) above, to provide all or that part of the
retirement benefit guaranteed under Section 4022 of ERISA arrived at by
determining the smallest benefit which could be provided under the Plan based
on the provisions of the Plan as in effect during the five-year period ending
on the termination date for those persons specified in subsection (a) hereof.
(c) Third, to provide those benefits not provided by
application of subsections (a) and (b) above which would be provided under the
Plan in effect five years prior to the termination date, and then to provide
such benefits which would be provided under each successive amendment of the
Plan. If assets are insufficient to provide such benefits at any step in the
foregoing manner of distribution, distribution shall be pro rata based upon
present value of each person's benefit as of the termination date.
39
<PAGE> 44
(d) Fourth, to provide all other benefits accrued under
the Plan, in the order of priority described in subsection (c) above.
(e) Except as otherwise provided in the second sentence
of this Subsection 10.3(e) or any other provision of the Plan, if any assets of
the Trust remain, they may revert to the Company, provided that there are no
other groups of Employees remaining in the Plan. However, regardless of the
first sentence of this subsection 10.3(e), upon the termination of the Plan
at any time during the five-year period following a "Change in Control" of the
Company as defined in Section 10.4, if any assets of the Trust remain, in lieu
of the reversion to the Company provided for above, such assets shall be
applied to provide additional lump sum benefits to Employees and former
Employees who are employed by an Employer on the date of such termination. The
lump sum benefit to be paid to each such Employee and former Employee shall be
determined by multiplying the remaining assets of the Trust by a fraction the
numerator of which is the equivalent actuarial value, based on the factors for
actuarial equivalence contained in Section 5.15, of the benefit such Employee
or former Employee is eligible to receive under the preceding subsections of
this Section 10.3, and the denominator of which is the aggregate of the
equivalent actuarial values, based on the actuarial factors of the benefits all
such Employees and former Employees are eligible to receive under the preceding
subsections of this Section 10.3.
Notwithstanding the foregoing, in the event the Plan
terminates, or there is a spinoff of part of the Plan (in excess of the 3
percent of the Plan assets permitted under regulation Section
1.414(1)-1(n)(2)), within five years following the date of any merger of
another plan into the Plan (the "Merger Date"), and if the sum of the assets in
the Plan after such merger was less than the sum of the present value of the
accrued benefits (whether or not vested) of both the Plan and such other plan
on a termina-
40
<PAGE> 45
tion basis on the Merger Date, then a special schedule of benefits shall be
created from the necessary (as identified by an enrolled actuary) data
maintained by the Company and shall be inserted in and modify the allocation
priorities set forth above in this Section 10.3 at the time of such termination
or spinoff, in accordance with regulation Sections 1.414(l)-1(e) through (j).
If Plan assets available for allocation under subsection (a)
or (b) above are insufficient to satisfy in full the retirement benefits of all
persons described in that subsection, such assets shall be allocated pro rata
among such persons on the basis of the present value as of the termination date
of their respective benefits described in that subsection.
The retirement benefits to be provided by the allocations as
provided in this Section 10.3 shall be fully vested and nonforfeitable as of
the termination date for distribution to the persons entitled thereto, and
distribution may be implemented through the continuance of the trust fund, or
by purchase of nontransferable annuity contracts, or by a combination thereof.
The Company may direct that any or all of such benefits to be provided by such
allocations may be computed on an actuarial basis and distributed as an
actuarially equivalent immediate cash payment.
10.4 Change in Control of Company. In the event there is a "Change
in Control" of the Company, as defined below, the following subsections of this
Section 10.4 shall apply regardless of any provisions of the Plan to the
contrary.
(a) The Plan may not be terminated or partially
terminated by the Board or otherwise at any time during the five-year period
beginning on the date of a Change in Control.
(b) Provisions of the Plan under which Employees accrue
benefits, and provisions of the Plan under which optional forms of benefit and
the actuarial value thereof are determined, cannot be amended to reduce such
benefit accruals, or to modify or
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<PAGE> 46
eliminate an optional form of benefit or reduce the value thereof, at any time
during the five-year period beginning on the date of a Change in Control.
(c) Subsections 10.3(e) and 10.4(a), (b), (c), and (d),
and Section 11.4 cannot be amended by the Board or otherwise in any way which
would limit or reduce the effect of said section and subsections.
(d) For purposes of this Section 10.4, a "Change in
Control, shall be deemed to have occurred at such time as (1) without the prior
approval of two-thirds of the Whole Board and a majority of the Continuing
Directors (but not less than one Continuing Director), any New Substantial
Stockholder becomes a Beneficial Owner directly or indirectly, of 35 percent or
more of the voting power of the Voting Stock of the Company; or (2) one-third or
more of the Board consists of members not nominated for membership by the
Company or the Board. The meanings of the capitalized terms used in, and any
determinations or computations made pursuant to, this subsection 10.4(d) shall
be as set forth in Article Sixth of the Certificate of Incorporation of the
Company, except that, for purposes of this section 10.4(d), a person shall be
considered a Beneficial Owner of Voting Stock which such person has a proxy
(other than a proxy solicited by or on behalf of the Company or the Board) to
vote for the election of the Company.
10.5 Security Required Upon Adoption of Plan Amendment. In the
event the Plan adopts an amendment which would increase current liability
under the Plan for a plan year in which such amendment takes effect and the
funded current liability percentage of the Plan (for the plan year) is less
than 60 percent, including the amount of the unfunded current liability under
the Plan attributable to such amendment, the Employer shall provide security to
the Plan or if such security is not provided then such amendment shall not be
effective.
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<PAGE> 47
The security required under this Section 10.5 shall consist of
(a) a bond issued by a corporate surety company that is an acceptable surety
for purposes of ERISA Section 412; (b) cash, or United States obligations which
mature in 3 years or less, held in escrow by a bank or similar financial
institution or (c) such other form of security as is satisfactory to the
Secretary of the Treasury and the parties involved.
The amount of the security shall be the excess of the lesser
of (a) the amount of additional Plan assets which would be necessary to
increase the funded current liability percentage under the Plan to 60 percent,
including the amount of the unfunded current liability under the Plan
attributable to the Plan amendment and any other Plan amendments adopted after
December 22, 1987 and before such Plan amendment, or (b) the amount of the
increase in current liability under the Plan attributable to the Plan amendment
over $10,000,000.
The security shall be released (and any amounts thereunder
shall be refunded together with any interest accrued thereon) at the end of the
first plan year which ends after the security is provided and for which the
funded current liability percentage under the Plan is not less than 60 percent.
For purposes of this Section 10.5, the terms "current
liability", "funded current liability percentage", and "unfunded current
liability" shall have the meanings given such terms in Code Section 412(1),
except that in computing unfunded current liability any unamortized portion of
the unfunded old liability amount as of the close of the plan year shall not be
taken into account.
SECTION 11
THE TRUST
11.1 Trust. The trust shall be comprised of all of the assets
held for the purposes of the Plan, including therein all contributions hereto
and the earnings thereon and increments
43
<PAGE> 48
thereto. The Trust will be invested and administered by the Trustees in
accordance with the terms of the Trust agreement. The Trustees shall be a Named
Fiduciary of the Plan and shall establish a funding policy for the Trust.
11.2 Benefits Supported Only by Trust. Any person having any claim
under the Plan will look solely to the assets of the Trust for satisfaction. In
no event will the Company or any other Employer, or any of their officers,
members of their Boards of Directors, members of the Retirement Committee, or
the Trustees or successor Trustees be liable in their individual capacities to
any person whomsoever under the provisions of the Plan or the Trust Agreement.
11.3 Trust Applicable Only to Payment of Benefits. The assets of
the Trust will be used and applied in accordance with the provisions of the
Plan to provide the benefits thereof, and no part of the corpus or income of
the Trust will be used for, or diverted to, purposes other than for the
exclusive benefit of the Employees, retired Employees, terminated Employees and
other persons entitled to benefits hereunder, except to the extent provided in
Sections 9.3 and 10.3(e) hereof.
11.4 Transfer, Merger or Consolidation. If an Employer shall sell
or otherwise transfer any of its assets to another person or entity, and in
connection therewith any Employees of such Employer shall become employees of
such other person or entity, the Company in its discretion, may direct the
Trustee to pay such amount or transfer such assets from the Trust as the
Company may determine to a trustee or trustees of one or more trusts which are
qualified trusts as described in section 401(a) of the Code established by such
other person or entity for the purpose of providing pensions for the former
Employees, or to a life insurance company or companies under a contract or
contracts entered into by such other person or entity for such purpose.
The Plan may not merge or consolidate with, or transfer its
assets or liabilities to, any other plan unless each Employee
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<PAGE> 49
would (if the other plan then terminated) receive a benefit immediately after
the merger, consolidation or transfer which is equal to or greater than the
benefit the Employee would have been entitled to receive immediately before the
merger, consolidation or transfer (if the Plan had then terminated). In
addition, no other plan may transfer its assets or liabilities to the Plan
during the five-year period beginning on the date of a "Change in Control," as
defined in Section 10.4, unless each Employee in the Plan would (if the Plan
had then terminated) receive a benefit immediately following the transfer which
is equal to or greater than the benefit the Employee would have been entitled
to receive immediately before the transfer (if the plan had then terminated.)
For purposes of this Section 11.4, the benefit an Employee
would have been entitled to receive immediately before or after a merger,
consolidation or transfer (if the Plan had then terminated) shall be determined
in accordance with the applicable provisions of Section 10.3, including, but
not limited to, subsection 10.3(e), if applicable.
SECTION 12
CLAIMS REVIEW PROCEDURE
Claims Review Procedure. A Participant or beneficiary shall make all
claims for benefits under the Plan in writing addressed to the Retirement
Committee at the address of the Company. Each claim shall be reviewed by the
Retirement Committee within a reasonable time after it is submitted, but in no
event longer than 90 days after it is received by the Retirement Committee. If
a claim is wholly or partially denied, the claimant shall be sent written
notice of such fact within 14 days of the denial. The denial notice, which
shall be written in a manner calculated to be understood by the claimant, shall
contain (i) the specific reason or reasons for the denial, (ii) specific
reference to pertinent Plan and Trust provisions on which the denial is based,
(iii) a description of any additional material information necessary for
45
<PAGE> 50
the claimant to perfect his claim and an explanation of why such material or
information is necessary, and (iv) an explanation of the Plan's claim review
procedure.
Within 60 days after receipt by the claimant of written notice
of the denial, the claimant or his duly authorized representative may appeal
such denial by filing a written application for review with the Chairman of
the Board of Directors of the Company. Such application shall be addressed to
the Chairman at the address of the Company, and may include a statement of the
issues and other comments. Each such application shall state the grounds
upon which the claimant seeks to have the claim reviewed. The claimant or his
representative shall have access to all pertinent documents relative to the
claim for the purpose of preparing the application. The Chairman of the Board
shall then review the decision and notify the claimant in writing of the
results of the redetermination within 60 days of receipt of the application for
review, which decision shall be in writing, written in a manner calculated to
be understood by the claimant and include specific reasons for the decision and
specific reference to the pertinent Plan and Trust provisions on which the
decision is based. The 60 day period for the decision of the Chairman of the
Board may be extended if specific circumstances require an extension of time
for processing, in which case the decision shall be rendered as soon as
possible, but not later than 120 days after receipt of the application for
review.
SECTION 13
APPLICABLE LAW
Applicable Law. Since the Company's principal office and the Trustee's
domicile are in the State of Illinois, and since it is contemplated that the
situs of administration of the Plan and Trust will continue in such State, all
rights under the Plan and Trust shall be governed, construed and administered
in accordance with the laws of the State of Illinois to the extent such laws
are not superseded pursuant to the provisions of Section 514 of ERISA.
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<PAGE> 51
IN WITNESS WHEREOF, the Company has caused this instrument to be
signed and the Company corporate seal to be affixed by its duly authorized
officers have hereunto set their hands and seals as of this 30th day of
December, 1993.
DeSOTO, INC.
By: [ILLEGIBLE]
-----------------------------
(Corporate Seal)
ATTEST: [ILLEGIBLE]
----------------------------
Secretary
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<PAGE> 52
SUPPLEMENT ONE
(Effective as of January 1, 1987)
to the
DeSOTO SALARIED EMPLOYEES' PENSION PLAN
TOP HEAVY AND RELATED PROVISIONS
1.1 Application of Top-Heavy Provisions.
(a) Single Plan Determination. Except as provided in
subsection (b) (2), if as of a Determination Date the sum of the amount of the
Section 416 Benefit of Key Employees and the beneficiaries of deceased Key
Employees exceeds 60 percent of the amount of the Section 416 Benefit of all
Employees, and beneficiaries other than former Key Employees, the Plan is
top-heavy and the provisions of this Supplement shall become applicable.
(b) Aggregation Group Determination.
(1) If as of a Determination Date this Plan is
part of an Aggregation Group which is top-heavy, the provisions of this
Supplement shall become applicable. Top-heaviness for purposes of this
subsection shall be determined with respect to the Aggregation Group in the
same manner as described in subsection (a).
(2) If this Plan is top-heavy under subsection
(a), but the Aggregation Group is not top-heavy, this Supplement shall not be
applicable.
(c) Calculations. The Retirement Committee shall have
responsibility to make all calculations to determine whether this Plan is
top-heavy.
(d) Effective Date. This Supplement shall be effective
with respect to any plan years beginning on and after January 1, 1987.
1.2 Special Terms. For purposes of this Supplement, the following
terms shall have the following meanings:
(a) "Aggregation Group" means collectively this Plan and
all other plans maintained by the Company and its Affiliates which cover a Key
Employee and any other plan which enables a plan covering a Key Employee to
meet the requirements of Code sections 401(a)(4) or 410. In addition, at the
election of the Retirement Committee, the Aggregation Group may be expanded to
include any other qualified plan maintained by the Employers or an affiliate if
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<PAGE> 53
such Aggregation Group meets the requirements of Code sections 401(a)(4) and
410.
(b) "Compensation" means an Employee's earnings received
from the Employer and affiliates reportable for federal withholding purposes
for the calendar year.
(c) "Determination Date" means the last day of the plan
year immediately preceding the plan year for which top-heaviness is to be
determined, or in the case of the first plan year of a new plan, the last day
of such plan year.
(d) "Key Employee" means an Employee who for the plan
year containing the Determination Date or any of the four preceding plan years
is--
(1) an officer of an Employer or an affiliate
whose annual Compensation is greater than 50 percent of the amount in effect
under Code Section 415(b)(1)(A) for such plan year; provided, however, that
no more than the lesser of--
(A) 50 Employees, or
(B) the greater of (i) three Employees
or (ii) 10 percent of all Employees, shall be treated as officers, and such
officers shall be those with the highest annual Compensation in the five-year
period;
(2) one of the ten Employees having annual
Compensation from the Employer for such plan year greater than the dollar limit
specified in Code section 415(c)(1)(A), and owning (or considered as owning
pursuant to Code section 318) both more than a one-half of 1 percent interest
and one of the ten largest interests in the Employer or affiliate.
(3) a 5 percent owner of an Employer or
affiliate; or
(4) a 1 percent owner of an Employer or
affiliate having an annual Compensation of more than $150,000.
Key Employee shall also include a beneficiary of a deceased
Key Employee.
Ownership shall be determined in accordance with Code section
416(i)(1)(B) and (C). For purposes of paragraph (2), if two Employees have
the same ownership interest in an Employer or affiliate, the Employee having
the greater annual Compensation from an Employer or affiliate shall be treated
as having a larger interest.
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<PAGE> 54
(e) "Section 416 Benefit" means the sum of--
(1) the present value of the accrued
benefit credited as of a Determination Date to an Employee, former Employee or
beneficiary under the Plan and any other qualified defined benefit plan which
is part of an Aggregation Group;
(2) the amount credited to an Employee's,
former Employee's beneficiary's account under a qualified defined
contribution plan which is part of an Aggregation Group; and
(3) the amount of distributions to the
Employee, former Employee or beneficiary during the five-year period ending on
the Determination Date other than a distribution which is a tax-free rollover
contribution (or similar transfer) that in not initiated by said person or
that is contributed to a plan which is maintained by an Employer or affiliate;
reduced by--
(4) the amount of rollover contributions
(or similar transfer) and earnings thereon credited as of a Determination Date
under the Plan or a plan forming part of an Aggregation Group which is
attributable to a rollover contribution (or similar transfer) initiated by the
Employee or former Employee and derived from a plan not maintained by an
Employer or affiliate.
The present value of the accrued benefits shall be determined
as of the most recent valuation date used for purposes of Code section 412
which is within the 12-month period ending on the Determination Date. The
accrued benefit of an Employee shall be determined as if the Employee
terminated service as of such valuation date. Reasonable interest rate and
mortality assumptions shall be used to compute the present value of the accrued
benefits.
The account or accrued benefit of an Employee or former
Employee who was a Key Employee and who subsequently meets none of the
conditions of subsection (d) above for the plan year containing the
Determination Date and the preceding four plan years is not a Section 416
Benefit and shall be excluded from all computations under this Supplement.
Furthermore, if an Employee or former Employee has not received any
compensation from the Employer or affiliates (other than benefits under the
Plan) during the five-year period ending on the Determination Date, any accrued
benefit for such person (and any account of such Member) shall not be taken
into account in determining top-heaviness under this Supplement.
1.3 Vesting Requirements. If the Plan is determined to be
top-heavy with respect to a Plan Year under the provisions of section 1.1, then
an Employee's or former Employee's interest in
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<PAGE> 55
the accrued benefit shall vest in accordance with the following schedule:
<TABLE>
<CAPTION>
Years of Vesting
Employment Percentage
- ---------- ----------
<S> <C>
Less than 2 0%
2 20%
3 40%
4 60%
5 or more 100%
</TABLE>
The foregoing vesting provision shall not apply to an Employee
or former Employee who does not have an Hour of Service after the Plan becomes
top-heavy. If in a subsequent plan year the Plan is no longer top-heavy, the
vesting provisions that were in effect prior to the time the Plan became
top-heavy shall be reinstated; provided, however, that any portion of an
Employee's or former Employee's accrued benefit which was vested prior to the
time the Plan was no longer top-heavy shall remain vested, and provided
further, that an Employee or former Employee who has at least three Years of
Employment at the start of such plan Year shall have the option of remaining
under the vesting schedule in effect while the Plan was top-heavy.
1.4 Minimum Benefit.
(a) Minimum Accrual Formula. If the Plan is determined to
be top-heavy under the provisions of section 1.1 with respect to a plan year,
the accrued benefit, when expressed as an Annual Retirement Benefit (as defined
below), of an Employee or former Employee who is not a Key Employee shall not
be less than the difference between (1) and (2) where--
(1) is the product of--
(A) the number of years of Top-Heavy
Service (as defined below); and
(B) 2 percent of the Employee's or
former Employee's average Compensation during the period of the five
consecutive years of Top-Heavy Service during which the individual had the
greatest aggregate Compensation;
but such product shall not exceed 20 percent of the average Compensation; and
(2) is the amount of the Annual Retirement
Benefit that would be provided by the Employee or former Employee's account
balance attributable to Employer contributions under a
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<PAGE> 56
defined contribution plan which is included in an Aggregation Group.
(b) Definitions.
(1) Annual Retirement Benefit means a benefit
payable annually in the form of a single life annuity and which commences at
age 65. If the benefit is payable in another form or commences at another time,
the amount described in subsection (a) above shall be adjusted on an equivalent
basis. Preretirement death benefits shall not cause a reduction in the amount
of the benefit.
(2) A year of Top-Heavy Service shall be credited
for each year of Credited Service which is credited with respect to a plan year
in which the Plan is top-heavy.
1.5 Limit on Annual Compensation Taken into Account. If this Plan
is determined to be top-heavy under section 1.1 above, the annual Compensation
of each Employee that may be taken into account under the Plan shall not exceed
the first $200,000 (as adjusted by the Secretary of the Treasury under Code
section 416(d)).
1.6 Limit on Annual Additions: Combined Plan Limit.
(a) General. If this Plan is determined to be topheavy
under section 1.1 above, Section 6.1(c)(4)(B)(i) and 6.1(c)(5)(B)(i) of the Plan
shall be applied by substituting "1.0" for "1.25" in each place it appears. The
transitional rule of Code section 415(e)(6)(B)(i) shall be applied by
substituting "$41,500" for "$51,875".
(b) Exception. Subsection (a) shall not be applicable if
(1) section 1.3 above is applied by substituting
"4 percent" for "3 percent", and
(2) this Plan would not be top-heavy if "90
percent" is substituted for "60 percent" in section 1.1(a) above.
(c) Transitional Rule. If, but for this subsection (c),
subsection (a) would begin to apply with respect to the Plan, the application
of subsection (a) shall be suspended with respect to an Employee so long as
there are--
(1) no Employer contributions, forfeitures, or
voluntary nondeductible contributions allocated to such Employee, and
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<PAGE> 57
(2) no accruals under a qualified defined benefit
plan for such Employee.
53
<PAGE> 58
APPENDIX A
The provisions of this Appendix A shall be applicable to certain
Salaried Employees who were participants in the Grays Harbor Plan (hereinafter
called "Grays Harbor Participants"), the Royal Plan (hereinafter called "Royal
Participants") and the Kerns Plan (hereinafter called "Kerns Participants").
Said Grays Harbor Participants, Royal Participants and Kerns Participants
shall, in addition to benefits otherwise payable under the Plan, be entitled to
receive the benefits provided for in this Appendix A. Such benefits earned
under said Grays Harbor Plan, Royal Plan and Kerns Plan as of December 31, 1971
shall be fully vested as of January 1, 1972 in said Grays Harbor Participants,
Royal Participants and Kerns Participants.
1. Benefits for Grays Harbor Participants. Each Grays Harbor
Participant shall, commencing on the first day of the month coincident with or
next following the date on which said Grays Harbor Participant attains age 65,
be entitled to receive, whether or not he is a Salaried Employee at that time,
a monthly benefit payable thereafter for life of the amount set forth opposite
his name on Schedule 1 of this Appendix A. A Grays Harbor Participant who
terminates his employment with the Company prior to attaining age 65 shall have
the right to elect to receive, in lieu of benefits payable at age 65, a monthly
benefit, commencing the first day of the month coincident with or next
following the later of the date said Grays Harbor Participant attains age 55 or
terminates his employment and payable thereafter for life, of the amount set
forth opposite his name of Schedule 1 of this Appendix A reduced in accordance
with the principles of Section 5.2.
2. Benefits for Royal Participants. Each Royal Participant shall,
commencing on the first day of the month coincident with or next following the
date on which said Royal Participant attains age 65, be entitled to receive,
whether or not he is a Salaried Employee at that time, a monthly benefit
payable thereafter for life, but not less than for 60 payments, of the amount
set forth opposite his name in Column I of Schedule 2 of this Appendix A. A
Royal Participant shall have the right to elect to receive at age 65, in lieu
of monthly benefits, a single lump sum of the amount set forth opposite his
name in Column II of Schedule 2 of this Appendix A. If a Royal Participant
terminates his employment with the Company prior to attaining age 65, he shall
have the right to elect to receive, in lieu of monthly or lump sum benefits
payable at age 65, either (a) a single lump sum in an amount equal to the
amount set forth opposite his name in Column III of Schedule 2 of this Appendix
A plus interest from January 1, 1972 to his termination of employment at the
effective rate sufficient to accumulate at age 65 the lump sum amount in Column
II of Schedule 2 of this Appendix A over the period between January 1, 1972 and
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<PAGE> 59
the date he will attain age 65, or (b) a monthly benefit, commencing the first
day of the month coincident with or next following the later of the date said
Royal Participant attains age 55 or terminates his employment and payable
thereafter for life, of the amount set forth opposite his name in Column I of
Schedule 2 of this Appendix A reduced in accordance with the principles of
Section 5.2. If a Royal Participant dies prior to attaining age 65, his
beneficiary or beneficiaries shall receive a single lump sum payment of the
amount the Participant would have been entitled to receive as a single lump sum
payment under the preceding sentence had he terminated his employment
immediately prior to his death.
3. Benefits for Kerns Participants. Each Kerns Participant shall,
commencing on the first day of the month coincident with or next following the
date on which said Kerns Participant attains age 65, be entitled to receive,
whether or not he is a Salaried Employee at that time, a monthly benefit
payable thereafter for life, but not less than for 60 payments, of the amount
set forth opposite his name in Column I of Schedule 3 of this Appendix A. A
Kerns Participant shall have the right to elect to receive at age 65, in lieu
of monthly benefits, a single lump sum of the amount set forth opposite his
name in Column II of Schedule 3 of this Appendix A. If a Kerns Participant
terminates his employment with the Company prior to attaining age 65, he shall
have the right to elect to receive, in lieu of monthly or lump sum benefits
payable at age 65, either (a) a single lump sum in an amount equal to the
amount set forth opposite his name in Column III of Schedule 3 of this Appendix
A plus interest from January 1, 1972 to his termination of employment at the
effective rate sufficient to accumulate at age 65 the lump amount in Column II
of Schedule 3 of this Appendix A over the period between January 1, 1972 and
the date he will attain age 65, or (b) a monthly benefit, commencing the first
day of the month coincident with or next following the later of the date said
Kerns Participant attains age 55 or terminates his employment and payable
thereafter for life, of the amount set forth opposite his name in Column I of
Schedule 3 of this Appendix A reduced in accordance with the principles of
Section 5.2. If a Kerns Participant dies prior to attaining age 65, his
beneficiary or beneficiaries shall receive a single lump sum payment of the
amount the Participant would have been entitled to receive as a single lump sum
payment under the preceding sentence had he terminated his employment
immediately prior to his death.
4. Optional Forms of Benefits. Any optional form of benefit
available under Section 5.7 shall, at the election of a Grays Harbor
Participant, Royal Participant or Kerns Participant, be available for benefits
under this Appendix A on an actuarial equivalent basis.
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<PAGE> 60
5. Designation of Beneficiary. Each Royal Participant and Kerns
Participant shall, in accordance with the rules of Section 7.1, designate a
beneficiary or beneficiaries who may receive the benefits payable under this
Appendix A after his death.
6. Termination. The earned benefits under this Appendix A shall
be provided by Policy GR 2126A of the Traveler's Insurance Company. In the
event of termination of the Plan for any reason, the provisions of Section 10.3
shall not apply to said Policy.
7. Consistency with the Plan. All provisions of the Plan not
inconsistent with this Appendix A shall apply to Grays Harbor Participants,
Royal Participants and Kerns Participants and to the benefits provided for in
this Appendix A and, unless the context clearly indicates contrary, any term or
phrase used or defined in the Plan shall have a similar meaning for purposes of
this Appendix A.
56
<PAGE> 61
APPENDIX A
SCHEDULE 1
BENEFITS FOR GRAY HARBOR PARTICIPANTS
Grays Harbor Monthly
Participant Benefit
------------ -------
Clarence Holm $367.88
Victor Nieznalski 235.69
Cecile Nicholas 122.17
57
<PAGE> 62
APPENDIX A
SCHEDULE 2
BENEFITS FOR ROYAL PARTICIPANTS
<TABLE>
<CAPTION>
Column I Column III Column II
Royal Age at Monthly Lump Sum Lump Sum at
Participant 1/1/72 Benefit at 1/1/72 Age 65
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
R. Hines 54 $128.95 $13,114.86 $13,704.12
- ----------------------------------------------------------------------------
P. Hickey 62 376.87 38,802.29 40,338.23
- ----------------------------------------------------------------------------
W. Dailey 61 292.46 28,180.82 31,114.07
- ----------------------------------------------------------------------------
A. Leo 60 197.46 19,168.45 20,206.70
- ----------------------------------------------------------------------------
F. Barresi 60 261.34 22,296.90 27,715.62
- ----------------------------------------------------------------------------
R. Smith 60 94.71 9,457.80 10,089.07
- ----------------------------------------------------------------------------
M. O'Keefe 59 109.10 10,205.21 11,618.25
- ----------------------------------------------------------------------------
R. Ziegler 58 91.76 7,416.45 9,530.96
- ----------------------------------------------------------------------------
A. Dangelas 58 40.73 3,670.73 4,326.01
- ----------------------------------------------------------------------------
H. Langlais 58 156.05 12,160.69 16,797.70
- ----------------------------------------------------------------------------
N. Deboer 57 108.58 9,423.79 11,544.41
- ----------------------------------------------------------------------------
J. Jacomino 56 280.76 23,824.34 28,851.90
- ----------------------------------------------------------------------------
A. Moore 56 160.80 11,244.73 16,598.25
- ----------------------------------------------------------------------------
M. Acosta 56 138.33 11,121.42 14,342.66
- ----------------------------------------------------------------------------
H. Waller 56 94.92 6,980.83 10,677.63
- ----------------------------------------------------------------------------
I. Radnai 55 32.90 1,889.39 3,370.62
- ----------------------------------------------------------------------------
P. Hansard 55 107.89 5,754.41 11,404.06
- ----------------------------------------------------------------------------
T. Benham 53 87.71 6,722.06 8,858.18
- ----------------------------------------------------------------------------
J. Parker 53 71.84 5,496.24 8,186.57
- ----------------------------------------------------------------------------
W. Botelho 52 66.30 3,228.80 6,681.90
- ----------------------------------------------------------------------------
R. Arthur 52 48.29 3,585.96 5,043.68
- ----------------------------------------------------------------------------
L. Costa 52 123.67 7,202.80 12,974.51
- ----------------------------------------------------------------------------
T. Jacomino 52 96.77 5,979.10 10,243.36
- ----------------------------------------------------------------------------
</TABLE>
58
<PAGE> 63
APPENDIX A
SCHEDULE 2
BENEFITS FOR ROYAL PARTICIPANTS
<TABLE>
<CAPTION>
Column I Column III Column II
Royal Age at Monthly Lump Sum Lump Sum at
Participant 1/1/72 Benefit at 1/1/72 Age 65
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
D. Beck 51 $ 67.34 $ 4,596.44 $ 6,953.42
- ----------------------------------------------------------------------------
H. Dyer 51 58.69 2,156.16 6,169.38
- ----------------------------------------------------------------------------
R. Grime 50 84.36 7,347.63 9,749.13
- ----------------------------------------------------------------------------
S. Fuzesi 50 186.81 13,697.35 18,815.78
- ----------------------------------------------------------------------------
G. St. Martin 50 174.23 9,708.59 17,627.14
- ----------------------------------------------------------------------------
F. Bertonci 50 59.36 3,580.50 6,032.38
- ----------------------------------------------------------------------------
R. Gilbert 50 94.09 6,386.26 9,647.53
- ----------------------------------------------------------------------------
C. Powers 49 59.37 2,778.65 6,210.81
- ----------------------------------------------------------------------------
A. Talbot 49 119.89 5,893.67 12,598.07
- ----------------------------------------------------------------------------
L. Manning 48 25.52 1,087.47 2,995.35
- ----------------------------------------------------------------------------
P. Lappin 48 72.33 4,602.52 7,716.12
- ----------------------------------------------------------------------------
T. Kawasaki 48 44.74 2,972.35 5,251.13
- ----------------------------------------------------------------------------
T. Bailey 48 101.55 6,237.05 10,930.36
- ----------------------------------------------------------------------------
H. Weatherly 47 320.84 21,299.36 33,671.41
- ----------------------------------------------------------------------------
W. Lentz 46 126.51 6,833.86 13,651.05
- ----------------------------------------------------------------------------
F. Broome 46 55.68 2,277.09 6,171.14
- ----------------------------------------------------------------------------
W. Swafford 46 43.40 2,459.31 4,853.25
- ----------------------------------------------------------------------------
R. Caron 45 44.94 2,792.76 5,052.18
- ----------------------------------------------------------------------------
G. Tipton 45 91.19 4,600.41 10,343.53
- ----------------------------------------------------------------------------
J. Foley 44 36.55 2,199.07 4,069.57
- ----------------------------------------------------------------------------
L. Northcut 44 69.04 3,656.62 7,825.39
- ----------------------------------------------------------------------------
W. Howington 44 16.24 925.25 1,848.99
- ----------------------------------------------------------------------------
D. Foster 43 27.62 1,801.73 3,167.15
- ----------------------------------------------------------------------------
N. Sherman 43 32.75 1,825.37 3,823.03
- ----------------------------------------------------------------------------
</TABLE>
59
<PAGE> 64
APPENDIX A
SCHEDULE 2
BENEFITS FOR ROYAL PARTICIPANTS
<TABLE>
<CAPTION>
Column I Column III Column II
Royal Age at Monthly Lump Sum Lump Sum at
Participant 1/1/72 Benefit at 1/1/72 Age 65
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
E. West 43 $18.91 $1,262.33 $ 2,207.44
- ----------------------------------------------------------------------------
E. Burn 43 33.09 1,277.66 3,922.22
- ----------------------------------------------------------------------------
A. Spivey 42 28.92 1,354.64 3,413.49
- ----------------------------------------------------------------------------
W. Grider 41 42.81 726.99 5,106.31
- ----------------------------------------------------------------------------
C. Mello 41 88.97 2,592.93 10,851.63
- ----------------------------------------------------------------------------
J. Furtado 41 28.04 604.87 3,512.81
- ----------------------------------------------------------------------------
J. Norris 40 29.87 1,034.02 3,646.90
- ----------------------------------------------------------------------------
L. Desrache 40 25.35 1,657.66 3,164.86
- ----------------------------------------------------------------------------
T. Reed 40 25.05 1,163.71 3,183.73
- ----------------------------------------------------------------------------
K. Mock 39 51.14 2,497.13 6,294.75
- ----------------------------------------------------------------------------
C. Niles, Jr. 39 29.82 590.26 3,719.96
- ----------------------------------------------------------------------------
C. Thomas 39 26.55 1,497.91 3,525.48
- ----------------------------------------------------------------------------
C. Brown 38 24.31 1,280.44 3,055.60
- ----------------------------------------------------------------------------
G. Collins 37 24.00 1,203.55 3,040.32
- ----------------------------------------------------------------------------
A. Pacheco 34 10.40 373.05 1,319.62
- ----------------------------------------------------------------------------
R. Pereira 33 26.39 738.21 3,241.20
- ----------------------------------------------------------------------------
F. Texeria 33 11.89 478.29 1,460.30
- ----------------------------------------------------------------------------
H. Santos 33 16.67 603.53 2,084.25
- ----------------------------------------------------------------------------
W. Hudson 32 5.32 250.58 664.14
- ----------------------------------------------------------------------------
P. Brock 31 27.37 722.96 3,368.02
- ----------------------------------------------------------------------------
J. Anderson 30 8.64 378.23 1,067.08
- ----------------------------------------------------------------------------
F. Owen 29 10.49 461.76 1,282.98
- ----------------------------------------------------------------------------
</TABLE>
60
<PAGE> 65
APPENDIX A
SCHEDULE 2
BENEFITS FOR ROYAL PARTICIPANTS
<TABLE>
<CAPTION>
Column I Column III Column II
Royal Age at Monthly Lump Sum Lump Sum at
Participant 1/1/72 Benefit at 1/1/72 Age 65
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
R. Johnson 26 $ 2.88 $ 106.92 $ 349.49
- ----------------------------------------------------------------------------
B. Sturgill 61 47.26 3,332.96 5,644.34
- ----------------------------------------------------------------------------
R. Brown 54 33.23 1,833.00 3,792.68
- ----------------------------------------------------------------------------
I. Rapoza 53 48.88 3,347.81 5,654.01
- ----------------------------------------------------------------------------
V. Urban 52 41.15 2,854.44 4,782.14
- ----------------------------------------------------------------------------
R. Lindgren 51 11.33 349.33 1,463.99
- ----------------------------------------------------------------------------
T. Lorenz 50 49.67 3,278.17 5,566.38
- ----------------------------------------------------------------------------
M. Chism 50 85.54 6,321.18 9,715.42
- ----------------------------------------------------------------------------
M. Prophate 49 30.90 2,084.52 3,505.20
- ----------------------------------------------------------------------------
J. Rachlin 49 9.84 427.13 1,126.23
- ----------------------------------------------------------------------------
S. McLenden 49 28.90 2,144.59 3,427.91
- ----------------------------------------------------------------------------
L. Massey 48 13.80 1,066.02 1,641.67
- ----------------------------------------------------------------------------
E. Winkler 47 26.50 1,691.38 3,533.92
- ----------------------------------------------------------------------------
H. Cummings 46 20.51 1,315.31 2,473.00
- ----------------------------------------------------------------------------
L. Guay 45 21.53 1,447.11 2,670.08
- ----------------------------------------------------------------------------
B. Durham 43 11.19 586.79 1,483.22
- ----------------------------------------------------------------------------
B. Price 42 18.77 1,221.52 2,507.49
- ----------------------------------------------------------------------------
J. Campbell 41 9.61 514.79 1,333.52
- ----------------------------------------------------------------------------
P. Larkin 35 7.74 383.06 1,089.07
- ----------------------------------------------------------------------------
M. Goyette 34 9.13 510.08 1,254.18
- ----------------------------------------------------------------------------
E. Ufers 33 6.83 298.70 929.26
- ----------------------------------------------------------------------------
L. Thorn 26 2.66 129.61 370.00
- ----------------------------------------------------------------------------
B. Plourde 26 3.40 146.02 475.15
- ----------------------------------------------------------------------------
</TABLE>
61
<PAGE> 66
APPENDIX A
SCHEDULE 2
BENEFITS FOR ROYAL PARTICIPANTS
<TABLE>
<CAPTION>
Column I Column III Column II
Royal Age at Monthly Lump Sum Lump Sum at
Participant 1/1/72 Benefit at 1/1/72 Age 65
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
J. Souza 23 $ 1.17 $ 27.61 $ 162.28
- ----------------------------------------------------------------------------
H. Burdette 52 28.82 1,208.59 2,930.61
- ----------------------------------------------------------------------------
</TABLE>
62
<PAGE> 67
APPENDIX A
SCHEDULE 3
BENEFITS FOR KERNS PARTICIPANTS
<TABLE>
<CAPTION>
Column I Column III Column II
Kerns Age at Monthly Lump Sum Lump Sum at
Participant 1/1/72 Benefit at 1/1/72 Age 65
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
R. Holden 64 $386.14 $37,529.64 $41,962.75
- ----------------------------------------------------------------------------
R. Peterson 63 155.07 14,114.24 16,873.79
- ----------------------------------------------------------------------------
H. Fromong 62 402.72 34,328.93 41,593.77
- ----------------------------------------------------------------------------
T. Eady 56 299.99 18,452.88 30,965.84
- ----------------------------------------------------------------------------
S. Morser 56 77.98 4,796.67 8,085.29
- ----------------------------------------------------------------------------
R. Porter 55 49.69 2,875.50 5,159.38
- ----------------------------------------------------------------------------
E. Begrin 54 128.46 7,028.60 13,127.81
- ----------------------------------------------------------------------------
D. Chapman 52 260.02 13,074.52 30,631.31
- ----------------------------------------------------------------------------
J. Frank 52 44.97 2,199.67 4,655.18
- ----------------------------------------------------------------------------
J. Chrustic 51 184.47 8,531.39 19,218.80
- ----------------------------------------------------------------------------
D. Downey 50 97.96 4,283.27 10,179.68
- ----------------------------------------------------------------------------
P. Shiffer 49 170.76 7,188.39 18,185.23
- ----------------------------------------------------------------------------
A. Luther 46 82.12 3,077.59 8,861.14
- ----------------------------------------------------------------------------
J. Stephen 46 19.14 717.31 2,111.90
- ----------------------------------------------------------------------------
J. Theisen 45 86.36 3,111.72 9,368.23
- ----------------------------------------------------------------------------
W. Hollingsworth 43 35.11 1,196.13 3,990.26
- ----------------------------------------------------------------------------
E. Bacho 40 54.22 1,689.91 6,679.14
- ----------------------------------------------------------------------------
C. Lyons 40 16.54 515.53 2,037.57
- ----------------------------------------------------------------------------
J. Cason 37 8.31 219.87 1,029.54
- ----------------------------------------------------------------------------
J. McDonald 37 3.23 85.47 401.96
- ----------------------------------------------------------------------------
P. Beland 33 6.10 129.74 755.95
- ----------------------------------------------------------------------------
J. Libal 33 13.19 280.61 1,649.76
- ----------------------------------------------------------------------------
N. Neil 26 5.88 85.31 716.69
- ----------------------------------------------------------------------------
B. Smith 58 23.61 1,821.55 2,746.35
- ----------------------------------------------------------------------------
J. Olson 53 32.75 1,884.76 3,831.72
- ----------------------------------------------------------------------------
</TABLE>
63
<PAGE> 68
APPENDIX B
The provisions of this Appendix B shall be applicable to certain
Hourly Employees who were prior to January 1, 1972 participants in, and certain
former Hourly Employees were receiving benefits under, the Artcraft Plan
(hereinafter called "Artcraft Participants" and "Former Artcraft
Participants"). Said Artcraft Participants and Former Artcraft Participants
shall, in addition to benefits otherwise payable under the Plan, be entitled to
receive the benefits provided for in this Appendix B. Such benefits earned
under said Artcraft Plan as of December 31, 1971 shall be fully vested as of
January 1, 1972 in said Participants.
1. Benefits for Former Artcraft Participants. Each Former
Artcraft Participant shall be entitled to receive a monthly benefit payable for
life of the amount set forth opposite his name on Schedule 1 of this Appendix
B.
2. Benefits for Artcraft Participants. Each Artcraft Participant
shall, commencing on the first day of the month coincident with or next
following the date on which said Artcraft Participant attains age 65, be
entitled to receive, whether or not he is an Hourly Employee at that time, a
monthly benefit payable thereafter for life of the amount set forth opposite
his name on Schedule 2 of this Appendix B. An Artcraft Participant who
terminates his employment with the Company prior to attaining age 65 shall have
the right to elect to receive, in lieu of benefits payable at age 65, a monthly
benefit, commencing the first day of
64
<PAGE> 69
the month coincident with or next following the later of the date said Artcraft
Participant attains age 55 or terminates his employment and payable thereafter
for life, of the amount set forth opposite his name on Schedule 2 of this
Appendix B reduced in accordance with the principles of Section 5.2.
3. Optional Forms of Benefits. Any optional form of benefit
available under Section 5.7 shall, at the election of an Artcraft Participant,
be available for benefits under this Appendix B on an actuarial equivalent
basis.
4. Termination. The earned benefits under this Appendix B shall
be provided by Policy GR 2126 of the Traveler's Insurance Company. In the event
of termination of the Plan for any reason, the provisions of Section 10.3 shall
not apply to said Policy.
5. Consistency with the Plan. All provisions of the Plan not
inconsistent with this Appendix B shall apply to the Participants, and to the
benefits provided for in this Appendix B and, unless the context clearly
indicates contrary, any term or phrase used or defined in the Plan shall have a
similar meaning for purposes of this Appendix B.
65
<PAGE> 70
APPENDIX B
SCHEDULE I
BENEFITS FOR FORMER ARTCRAFT PARTICIPANTS
<TABLE>
<CAPTION>
Former Artcraft Monthly
Participant Benefit
- --------------- -------
<S> <C>
Georgiana Botelho $22.01
Lauretta Ouellette 21.79
Jeannette Charette 12.20
Nelson R. Tripp 10.80
Alice Ouellette 22.80
James F. Rogers 22.10
Irene Lemay 20.40
</TABLE>
66
<PAGE> 71
APPENDIX B
SCHEDULE 2
BENEFITS FOR ARTCRAFT PARTICIPANTS
<TABLE>
<CAPTION>
Artcraft Monthly
Participant Benefit
- ----------- -------
<S> <C>
Manuel Albergaria $ 9.40
Edward Allen 24.00
E. Alves 2.40
I. Almeida 2.40
Virginia Amaral 5.00
P. Ambrose 2.40
R. Andrade 2.40
Robert Angelini 5.20
C. Antaya 2.40
Hector Anataya 22.20
Ivo Araujo 5.00
Antone Arruda 4.00
L. Arruda 2.40
Albert Aspden 24.00
E. Aubin 2.40
John Azevedo 24.00
Roland Banville 17.80
Honorato Barbosa 24.00
Maria Barbosa 5.40
George Barboza 24.00
Leo Barre 24.00
Rene Bernier 24.00
A. Bettencourt 2.40
E. Beliveau 2.40
Howard Blackburn 9.40
Annette Bliss 20.80
Margaret Booth 24.00
Jane Borges 4.40
S. Botelho 2.40
A. Brady 2.40
Mary Branco 4.20
Edith Brooks 24.00
Amelia Brown 24.00
E. Brush 2.40
Doris Burke 17.80
Grace Burton 21.80
S. Cabral 2.40
D. Colon 2.40
Benoit Canuel 11.80
Leona Canuel 9.20
Mary Isabel Capeto 18.60
</TABLE>
67
<PAGE> 72
APPENDIX B
SCHEDULE 2
BENEFITS FOR ARTCRAFT PARTICIPANTS
<TABLE>
<CAPTION>
Artcraft Monthly
Participant Benefit
- ----------- -------
<S> <C>
Leo Coppinger 17.60
Amos Carreiro 24.00
Brian Carroll 9.40
John Carvalho, Jr. 24.00
L. Carvalho 2.40
Antonio Chaves 24.00
Irene Coderre 24.00
William Collard 17.80
L. Connearney 2.40
M. Cordeiro 2.40
M. Cordeiro 2.40
C. Correia 2.40
Evelyn Correia 24.00
Ramona Correia 24.00
Richard Correia 13.60
D. Costa 2.40
Robert Coupe 24.00
Annette Couture 24.00
P. Couto 2.40
C. Dagwan 2.40
Dennis Daigle 10.00
William DeMarco 17.00
L. DeMello 2.40
Rita DeMille 21.80
Frank DeNardo 24.00
G. Desrosiers 2.40
Warren Dewhurst 9.40
Norman Dextradeur 24.00
John Dias 24.00
Aileen Dixon 9.80
George Donald 6.40
Leo Dostou 16.20
B. Douthit, Jr. 2.40
Norma Dube 17.80
V. Dubois 2.40
Leo J. Dufault 24.00
J. Dyer 2.40
William Eddy 16.00
Phyllis Erwin 9.40
John Estrella, Jr. 8.80
Manuel Farias 6.60
</TABLE>
68
<PAGE> 73
APPENDIX B
SCHEDULE 2
BENEFITS FOR ARTCRAFT PARTICIPANTS
<TABLE>
<CAPTION>
Artcraft Monthly
Participant Benefit
- ----------- -------
<S> <C>
Albertina Ferreiral 8.60
J. Ferreira 2.40
Manuel Ferreira, Jr. 18.20
Edgar Ferris 24.00
Louis Fillippi 24.00
Hilda Foila 24.00
P. Foley 2.40
D. Fournier 2.40
P. Fournier 2.40
Manuel Franco 18.60
Anthony Freitas 24.00
Alfred Furtado 24.00
Anna Furtado 16.20
Manuel Furtado 24.00
Sophie Furze 19.80
Mary Gallant 24.00
M. Gannon 2.40
Armand Garand 24.00
Louise Gaspar 9.40
Theresa Gaudreau 24.00
D. Giasson 2.40
J. Golenski 2.40
D. Gouette 2.40
Catherine Grandfield 24.00
Leonard Greenhalgh 6.40
Michael Griffin 8.80
Joseph Guay 24.00
Nassip Habib 24.00
William Halpen 24.00
N. Hamell 2.40
Russell Heap 24.00
Stephen Hebert 8.45
Paul Heraux 3.80
Horst Hetzler 24.00
Doris Ironfield 6.20
Mitchell Jezak 4.20
William Joaquim, Jr. 6.00
R. Johnson 2.40
Margaret Kennedy 24.00
T. Klek 2.40
</TABLE>
69
<PAGE> 74
APPENDIX B
SCHEDULE 2
BENEFITS FOR ARTCRAFT PARTICIPANTS
<TABLE>
<CAPTION>
Artcraft Monthly
Participant Benefit
- ----------- -------
<S> <C>
Thomas Krupa 24.00
Evelyn Kupiec 13.20
James Kuttner 3.80
Ruth Lackey 18.60
Albert Lafex 6.40
Henry R. Langlais 24.00
David Lariviere 5.80
Rene Lavinge 24.00
Donald Leduc 5.40
Blanche Levesque 24.00
Hilda Levesque 4.60
Lucy Lester 9.60
M. Lima 2.40
John Linhares 24.00
Joseph Linhares 24.00
M. Loiselle 2.40
A. Machado 2.40
Margaret Marchand 24.00
David Martin 13.20
R. Martin 2.40
Joseph Mauricio 9.20
Richard Maynard 24.00
C. Medeiros 2.40
Henry Medeiros 5.20
C. Mello 2.40
M. Mello 2.40
P. Mello 2.40
Robert Mello 13.80
D. Michaud 2.40
Mary Miranda 24.00
Madeline Monteiro 5.20
L. Morgan 2.40
L. Morris 2.40
M. Morrissette 2.40
Leonard McMullen 6.60
Edmond Neves 24.00
Manuel Nunes, Jr. 24.00
John O'Gara 24.00
I. Ojemaye 2.40
Rose Oliveira 24.00
J. Ortiz 2.40
</TABLE>
70
<PAGE> 75
APPENDIX B
SCHEDULE 2
BENEFITS FOR ARTCRAFT PARTICIPANTS
<TABLE>
<CAPTION>
Artcraft Monthly
Participant Benefit
- ----------- -------
<S> <C>
D. Pacheco 2.40
Manuel Pacheco 24.00
J. Paiva 2.40
Virgil Paradise 24.00
Dorothy Pavao 24.00
William Pavao 21.00
Leon Pelletier 24.00
Normand Pelletier 24.00
P. Pelletier 2.40
Claire Peloquin 4.40
Jordan Pereira 10.00
Louis Pereira 2.40
R. Perreault 2.40
M. Perry 2.40
Raymond J. Perry 6.00
Alphonso Petrasso 24.00
Irene Petrasso 24.00
Valeda Picard 24.00
Manuel Pimental 4.40
R. Pineau 2.40
Albert Potvin 24.00
Sylvia Powell 4.60
S. Price 2.40
Matthew Przybycien 24.00
Robert Rachel 13.00
Arthur Ramos 24.00
L. Rapoza 2.40
Louis Raposa 24.00
Michael Ray 3.80
M. Rego 2.40
James Richard, Jr. 3.60
Michael R. Rioux 9.40
William Roberts 24.00
Mary Russell 24.00
Edward Ryan 21.20
Joseph Saccone 24.00
Walter Sanocki 24.00
Stella Senuick 21.80
E. Silvia 2.40
Henry Silvia 24.00
Joseph Silvia 3.60
</TABLE>
71
<PAGE> 76
APPENDIX B
SCHEDULE 2
BENEFITS FOR ARTCRAFT PARTICIPANTS
<TABLE>
<CAPTION>
Artcraft Monthly
Participant Benefit
- ----------- -------
<S> <C>
Nancy Silvia 5.40
Julia Smith 21.20
M. Smith 2.40
J. Smyka 2.40
D. Soares 2.40
Judith Solomon 9.20
Edward Souza 24.00
George Souza 24.00
Barbara Stone 9.00
John Szydlowski 24.00
Milton Tobiasz 7.00
Paul Talbot 7.40
J. Tavares 2.40
J. Teixeira 2.40
Richard Texeira 10.20
Rene Thibault 24.00
Roger Thibeault 10.60
A. Torres 2.40
Barbara Travassos 17.80
Dudley Trott 4.60
Joseph Valiquette 4.60
R. Vanasse 2.40
A. Velez 2.40
Louis Vieira, Jr. 24.00
Manuel Vieira 6.60
Hilda Vioak 4.20
B. Whipp 2.40
Walter Wojciechowski 19.80
Bertha Yelle 16.20
-----
</TABLE>
72
<PAGE> 77
APPENDIX C
ACTUARIALLY EQUIVALENT CERTAIN PERIOD AND LIFE
CONVERSION FACTORS
(Applicable to Both Male and Female Participants)
CERTAIN PERIOD (YEARS)
ROUNDED AGE --------------------------------------------------------
OF PARTICIPANT 5 10 15 20
- ----------------------------------------------------------------------------
55 .9938 .9761 .9485 .9128
- ----------------------------------------------------------------------------
56 .9932 .9736 .9432 .9042
- ----------------------------------------------------------------------------
57 .9924 .9707 .9372 .8945
- ----------------------------------------------------------------------------
58 .9916 .9675 .9305 .8841
- ----------------------------------------------------------------------------
59 .9906 .9638 .9230 .8726
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
60 .9895 .9596 .9145 .8600
- ----------------------------------------------------------------------------
61 .9883 .9549 .9053 .8452
- ----------------------------------------------------------------------------
62 .9868 .9495 .8948 .8312
- ----------------------------------------------------------------------------
63 .9851 .9434 .8832 .8150
- ----------------------------------------------------------------------------
64 .9831 .9365 .8704 .7976
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
65 .9808 .9286 .8563 .7791
- ----------------------------------------------------------------------------
66 .9782 .9199 .8409 .7595
- ----------------------------------------------------------------------------
67 .9753 .9101 .8243 .7391
- ----------------------------------------------------------------------------
68 .9720 .8992 .8063 .7178
- ----------------------------------------------------------------------------
69 .9682 .8868 .7869 .6955
- ----------------------------------------------------------------------------
73
<PAGE> 78
APPENDIX C
100% CONTINGENT ANNUITY FACTORS
<TABLE>
<CAPTION>
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT
CONTINGENT -------------------------------------------------------------------------------------------------------------
ANNUITANT 55 56 57 58 59 60 61 62 63 64
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
35 .7433 .7294 .7151 .7003 .6850 .6694 .6532 .6367 .6197 .6024
- ------------------------------------------------------------------------------------------------------------------------------
36 .7475 .7337 .7193 .7045 .6893 .6735 .6574 .6408 .6238 .6064
- ------------------------------------------------------------------------------------------------------------------------------
37 .7520 .7381 .7238 .7090 .6937 .6779 .6617 .6451 .6280 .6106
- ------------------------------------------------------------------------------------------------------------------------------
38 .7566 .7427 .7284 .7136 .6983 .6825 .6662 .6495 .6324 .6149
- ------------------------------------------------------------------------------------------------------------------------------
39 .7613 .7475 .7332 .7184 .7031 .6873 .6710 .6542 .6370 .6195
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
40 .7663 .7525 .7382 .7234 .7081 .6922 .6759 .6591 .6419 .6243
- ------------------------------------------------------------------------------------------------------------------------------
41 .7714 .7576 .7434 .7286 .7133 .6974 .6811 .6642 .6470 .6293
- ------------------------------------------------------------------------------------------------------------------------------
42 .7767 .7630 .7487 .7340 .7186 .7028 .6865 .6696 .6523 .6345
- ------------------------------------------------------------------------------------------------------------------------------
43 .7821 .7685 .7543 .7395 .7243 .7084 .6920 .6752 .6578 .6400
- ------------------------------------------------------------------------------------------------------------------------------
44 .7877 .7741 .7600 .7453 .7301 .7142 .6979 .6810 .6636 .6457
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
45 .7934 .7799 .7659 .7513 .7361 .7203 .7039 .6870 .6696 .6517
- ------------------------------------------------------------------------------------------------------------------------------
46 .7993 .7859 .7720 .7574 .7423 .7265 .7102 .6933 .6758 .6579
- ------------------------------------------------------------------------------------------------------------------------------
47 .8053 .7921 .7782 .7638 .7487 .7330 .7167 .6998 .6823 .6644
- ------------------------------------------------------------------------------------------------------------------------------
48 .8115 .7984 .7846 .7703 .7553 .7397 .7234 .7065 .6891 .6711
- ------------------------------------------------------------------------------------------------------------------------------
49 .8177 .8048 .7912 .7770 .7621 .7466 .7304 .7135 .6961 .6781
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
74
<PAGE> 79
APPENDIX C
100% CONTINGENT ANNUITY FACTORS
<TABLE>
<CAPTION>
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT
CONTINGENT -------------------------------------------------------------------------------------------------------------
ANNUITANT 55 56 57 58 59 60 61 62 63 64
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
50 .8241 .8113 .7979 .7838 .7691 .7537 .7375 .7208 .7034 .6854
- ------------------------------------------------------------------------------------------------------------------------------
51 .8305 .8180 .8048 .7909 .7762 .7609 .7449 .7282 .7109 .6929
- ------------------------------------------------------------------------------------------------------------------------------
52 .8370 .8247 .8117 .7980 .7836 .7684 .7525 .7359 .7187 .7008
- ------------------------------------------------------------------------------------------------------------------------------
53 .8436 .8315 .8188 .8053 .7911 .7761 .7603 .7439 .7267 .7089
- ------------------------------------------------------------------------------------------------------------------------------
54 .8502 .8384 .8259 .8127 .7987 .7839 .7683 .7520 .7350 .7172
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
55 .8569 .8454 .8332 .8202 .8064 .7919 .7765 .7604 .7435 .7258
- ------------------------------------------------------------------------------------------------------------------------------
56 .8635 .8524 .8405 .8278 .8143 .8000 .7849 .7689 .7522 .7347
- ------------------------------------------------------------------------------------------------------------------------------
57 .8702 .8594 .8478 .8354 .8222 .8082 .7934 .7777 .7612 .7439
- ------------------------------------------------------------------------------------------------------------------------------
58 .8768 .8663 .8551 .8431 .8302 .8165 .8020 .7866 .7703 .7532
- ------------------------------------------------------------------------------------------------------------------------------
59 .8833 .8733 .8624 .8508 .8383 .8249 .8107 .7956 .7796 .7627
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
60 .8898 .8801 .8697 .8584 .8463 .8333 .8195 .8047 .7890 .7724
- ------------------------------------------------------------------------------------------------------------------------------
61 .8962 .8869 .8769 .8660 .8543 .8418 .8283 .8139 .7985 .7873
- ------------------------------------------------------------------------------------------------------------------------------
62 .9024 .8936 .8840 .8735 .8623 .8502 .8371 .8231 .8081 .7923
- ------------------------------------------------------------------------------------------------------------------------------
63 .9085 .9001 .8909 .8810 .8702 .8585 .8459 .8323 .8178 .8023
- ------------------------------------------------------------------------------------------------------------------------------
64 .9145 .9065 .8978 .8883 .8779 .8667 .8546 .8415 .8274 .8124
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
75
<PAGE> 80
APPENDIX C
100% CONTINGENT ANNUITY FACTORS
<TABLE>
<CAPTION>
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT
CONTINGENT -------------------------------------------------------------------------------------------------------------
ANNUITANT 55 56 57 58 59 60 61 62 63 64
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
65 .9203 .9127 .9044 .8954 .8856 .8749 .8632 .8506 .8370 .8225
- ------------------------------------------------------------------------------------------------------------------------------
66 .9259 .9187 .9109 .9024 .8930 .8828 .8717 .8596 .8466 .8325
- ------------------------------------------------------------------------------------------------------------------------------
67 .9313 .9246 .9172 .9092 .9003 .8907 .8801 .8685 .8560 .8425
- ------------------------------------------------------------------------------------------------------------------------------
68 .9364 .9302 .9233 .9157 .9074 .8983 .8882 .8773 .8653 .8524
- ------------------------------------------------------------------------------------------------------------------------------
69 .9414 .9356 .9292 .9221 .9143 .9057 .8962 .8858 .8745 .8621
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
70 .9462 .9408 .9348 .9282 .9209 .9128 .9039 .8941 .8834 .8717
- ------------------------------------------------------------------------------------------------------------------------------
71 .9506 .9457 .9401 .9340 .9272 .9197 .9113 .9021 .8920 .8809
- ------------------------------------------------------------------------------------------------------------------------------
72 .9549 .9503 .9452 .9395 .9332 .9262 .9184 .9098 .9003 .8899
- ------------------------------------------------------------------------------------------------------------------------------
73 .9588 .9546 .9499 .9446 .9388 .9323 .9251 .9171 .9082 .8984
- ------------------------------------------------------------------------------------------------------------------------------
74 .9625 .9586 .9543 .9495 .9441 .9381 .9314 .9240 .9157 .9065
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
75 .9659 .9623 .9584 .9540 .9490 .9435 .9373 .9304 .9227 .9142
- ------------------------------------------------------------------------------------------------------------------------------
76 .9690 .9658 .9622 .9582 .9536 .9486 .9429 .9365 .9294 .9214
- ------------------------------------------------------------------------------------------------------------------------------
77 .9720 .9690 .9657 .9620 .9579 .9533 .9480 .9422 .9356 .9282
- ------------------------------------------------------------------------------------------------------------------------------
78 .9746 .9720 .9690 .9656 .9619 .9576 .9528 .9474 .9414 .9346
- ------------------------------------------------------------------------------------------------------------------------------
79 .9771 .9747 .9720 .9689 .9655 .9616 .9573 .9523 .9468 .9405
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
76
<PAGE> 81
APPENDIX C
100% CONTINGENT ANNUITY FACTORS
<TABLE>
<CAPTION>
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT
CONTINGENT -------------------------------------------------------------------------------------------------------------
ANNUITANT 55 56 57 58 59 60 61 62 63 64
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
80 .9793 .9772 .9747 .9719 .9688 .9653 .9613 .9568 .9518 .9460
- ------------------------------------------------------------------------------------------------------------------------------
81 .9814 .9794 .9772 .9747 .9719 .9687 .9651 .9610 .9563 .9511
- ------------------------------------------------------------------------------------------------------------------------------
82 .9833 .9815 .9795 .9772 .9747 .9718 .9685 .9648 .9606 .9558
- ------------------------------------------------------------------------------------------------------------------------------
83 .9850 .9834 .9816 .9795 .9773 .9747 .9717 .9683 .9645 .9601
- ------------------------------------------------------------------------------------------------------------------------------
84 .9865 .9851 .9835 .9817 .9796 .9772 .9746 .9715 .9680 .9641
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
85 .9879 .9867 .9852 .9836 .9817 .9796 .9772 .9745 .9713 .9677
- ------------------------------------------------------------------------------------------------------------------------------
86 .9892 .9881 .9868 .9853 .9837 .9818 .9796 .9771 .9743 .9711
- ------------------------------------------------------------------------------------------------------------------------------
87 .9904 .9894 .9882 .9869 .9854 .9838 .9818 .9796 .9771 .9742
- ------------------------------------------------------------------------------------------------------------------------------
88 .9915 .9906 .9895 .9884 .9870 .9855 .9838 .9818 .9795 .9769
- ------------------------------------------------------------------------------------------------------------------------------
89 .9924 .9916 .9907 .9897 .9885 .9872 .9856 .9838 .9818 .9795
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
90 .9933 .9926 .9918 .9908 .9898 .9886 .9872 .9857 .9838 .9818
- ------------------------------------------------------------------------------------------------------------------------------
91 .9941 .9934 .9927 .9919 .9910 .9899 .9887 .9873 .9857 .9838
- ------------------------------------------------------------------------------------------------------------------------------
92 .9948 .9942 .9936 .9929 .9920 .9911 .9900 .9888 .9874 .9857
- ------------------------------------------------------------------------------------------------------------------------------
93 .9954 .9949 .9944 .9937 .9930 .9922 .9913 .9902 .9889 .9875
- ------------------------------------------------------------------------------------------------------------------------------
94 .9960 .9956 .9951 .9945 .9939 .9932 .9924 .9914 .9903 .9890
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
77
<PAGE> 82
APPENDIX C
100% CONTINGENT ANNUITY FACTORS
<TABLE>
<CAPTION>
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT
CONTINGENT -------------------------------------------------------------------------------------------------------------
ANNUITANT 65 66 67 68 69 70 71 72 73 74
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
35 .5848 .5670 .5490 .5308 .5124 .4937 .4749 .4561 .4375 .4192
- ------------------------------------------------------------------------------------------------------------------------------
36 .5887 .5708 .5527 .5344 .5159 .4971 .4782 .4593 .4406 .4221
- ------------------------------------------------------------------------------------------------------------------------------
37 .5928 .5748 .5566 .5382 .5196 .5007 .4817 .4627 .4439 .4253
- ------------------------------------------------------------------------------------------------------------------------------
38 .5971 .5790 .5607 .5423 .5235 .5045 .4854 .4663 .4473 .4286
- ------------------------------------------------------------------------------------------------------------------------------
39 .6016 .5834 .5650 .5465 .5276 .5085 .4893 .4700 .4510 .4321
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
40 .6063 .5880 .5696 .5509 .5320 .5127 .4933 .4740 .4548 .4358
- ------------------------------------------------------------------------------------------------------------------------------
41 .6112 .5929 .5743 .5556 .5365 .5172 .4976 .4782 .4588 .4397
- ------------------------------------------------------------------------------------------------------------------------------
42 .6164 .5980 .5793 .5605 .5413 .5218 .5022 .4825 .4631 .4438
- ------------------------------------------------------------------------------------------------------------------------------
43 .6218 .6033 .5846 .5656 .5463 .5267 .5069 .4872 .4675 .4481
- ------------------------------------------------------------------------------------------------------------------------------
44 .6274 .6089 .5900 .5710 .5516 .5319 .5119 .4920 .4722 .4526
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
45 .6334 .6147 .5958 .5766 .5571 .5372 .5172 .4971 .4772 .4574
- ------------------------------------------------------------------------------------------------------------------------------
46 .6395 .6208 .6018 .5825 .5629 .5429 .5227 .5025 .4824 .4625
- ------------------------------------------------------------------------------------------------------------------------------
47 .6459 .6272 .6081 .5887 .5690 .5489 .5285 .5081 .4879 .4678
- ------------------------------------------------------------------------------------------------------------------------------
48 .6526 .6338 .6146 .5952 .5753 .5551 .5346 .5141 .4936 .4734
- ------------------------------------------------------------------------------------------------------------------------------
49 .6596 .6407 .6215 .6019 .5820 .5616 .5410 .5203 .4997 .4792
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
78
<PAGE> 83
APPENDIX C
100% CONTINGENT ANNUITY FACTORS
<TABLE>
<CAPTION>
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT
CONTINGENT -------------------------------------------------------------------------------------------------------------
ANNUITANT 65 66 67 68 69 70 71 72 73 74
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
50 .6669 .6480 .6287 .6090 .5890 .5685 .5477 .5268 .5061 .4854
- ------------------------------------------------------------------------------------------------------------------------------
51 .6744 .6555 .6361 .6164 .5963 .5757 .5547 .5337 .5128 .4919
- ------------------------------------------------------------------------------------------------------------------------------
52 .6823 .6633 .6439 .6242 .6039 .5832 .5621 .5410 .5198 .4988
- ------------------------------------------------------------------------------------------------------------------------------
53 .6904 .6715 .6521 .6322 .6119 .5911 .5699 .5486 .5273 .5061
- ------------------------------------------------------------------------------------------------------------------------------
54 .6988 .6799 .6605 .6407 .6203 .5993 .5780 .5566 .5351 .5137
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
55 .7076 .6887 .6693 .6494 .6290 .6080 .5866 .5649 .5433 .5217
- ------------------------------------------------------------------------------------------------------------------------------
56 .7165 .6977 .6784 .6586 .6381 .6170 .5955 .5738 .5520 .5302
- ------------------------------------------------------------------------------------------------------------------------------
57 .7258 .7071 .6879 .6680 .6476 .6265 .6048 .5830 .5611 .5391
- ------------------------------------------------------------------------------------------------------------------------------
58 .7353 .7168 .6976 .6779 .6574 .6363 .6146 .5927 .5706 .5485
- ------------------------------------------------------------------------------------------------------------------------------
59 .7451 .7267 .7077 .6880 .6676 .6465 .6248 .6028 .5806 .5583
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
60 .7551 .7369 .7180 .6985 .6782 .6571 .6354 .6133 .5910 .5686
- ------------------------------------------------------------------------------------------------------------------------------
61 .7652 .7473 .7287 .7093 .6891 .6681 .6464 .6243 .6019 .5794
- ------------------------------------------------------------------------------------------------------------------------------
62 .7755 .7579 .7395 .7203 .7003 .6794 .6578 .6357 .6133 .5907
- ------------------------------------------------------------------------------------------------------------------------------
63 .7859 .7686 .7505 .7316 .7118 .6911 .6695 .6475 .6251 .6024
- ------------------------------------------------------------------------------------------------------------------------------
64 .7964 .7795 .7618 .7432 .7236 .7031 .6817 .6597 .6373 .6146
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
79
<PAGE> 84
APPENDIX C
100% CONTINGENT ANNUITY FACTORS
<TABLE>
<CAPTION>
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT
CONTINGENT -------------------------------------------------------------------------------------------------------------
ANNUITANT 65 66 67 68 69 70 71 72 73 74
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
65 .8069 .7905 .7731 .7549 .7356 .7153 .6941 .6723 .6500 .6273
- ------------------------------------------------------------------------------------------------------------------------------
66 .8175 .8015 .7846 .7667 .7478 .7279 .7069 .6853 .6631 .6405
- ------------------------------------------------------------------------------------------------------------------------------
67 .8280 .8125 .7961 .7787 .7602 .7406 .7200 .6986 .6766 .6541
- ------------------------------------------------------------------------------------------------------------------------------
68 .8384 .8235 .8076 .7907 .7727 .7535 .7332 .7122 .6904 .6681
- ------------------------------------------------------------------------------------------------------------------------------
69 .8488 .8344 .8191 .8028 .7853 .7666 .7467 .7260 .7046 .6825
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
70 .8589 .8452 .8305 .8148 .7979 .7797 .7604 .7401 .7190 .6972
- ------------------------------------------------------------------------------------------------------------------------------
71 .8689 .8558 .8418 .8267 .8104 .7928 .7740 .7542 .7336 .7122
- ------------------------------------------------------------------------------------------------------------------------------
72 .8784 .8660 .8527 .8383 .8226 .8057 .7875 .7683 .7481 .7272
- ------------------------------------------------------------------------------------------------------------------------------
73 .8876 .8759 .8633 .8495 .8346 .8183 .8008 .7822 .7626 .7421
- ------------------------------------------------------------------------------------------------------------------------------
74 .8964 .8854 .8734 .8604 .8462 .8306 .8138 .7958 .7769 .7570
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
75 .9047 .8944 .8831 .8709 .8574 .8426 .8264 .8092 .7909 .7716
- ------------------------------------------------------------------------------------------------------------------------------
76 .9126 .9030 .8924 .8809 .8681 .8541 .8387 .8222 .8046 .7860
- ------------------------------------------------------------------------------------------------------------------------------
77 .9201 .9111 .9012 .8904 .8784 .8652 .8506 .8348 .8180 .8001
- ------------------------------------------------------------------------------------------------------------------------------
78 .9271 .9187 .9095 .8994 .8882 .8757 .8619 .8470 .8309 .8138
- ------------------------------------------------------------------------------------------------------------------------------
79 .9336 .9259 .9174 .9079 .8975 .8857 .8728 .8586 .8434 .8270
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
80
<PAGE> 85
APPENDIX C
100% CONTINGENT ANNUITY FACTORS
<TABLE>
<CAPTION>
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT
CONTINGENT -------------------------------------------------------------------------------------------------------------
ANNUITANT 65 66 67 68 69 70 71 72 73 74
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
80 .9396 .9325 .9246 .9159 .9062 .8952 .8830 .8697 .8553 .8397
- ------------------------------------------------------------------------------------------------------------------------------
81 .9452 .9387 .9314 .9234 .9143 .9041 .8927 .8802 .8666 .8519
- ------------------------------------------------------------------------------------------------------------------------------
82 .9504 .9444 .9378 .9303 .9220 .9125 .9019 .8902 .8774 .8635
- ------------------------------------------------------------------------------------------------------------------------------
83 .9552 .9497 .9436 .9368 .9291 .9204 .9105 .8996 .8876 .8746
- ------------------------------------------------------------------------------------------------------------------------------
84 .9596 .9546 .9491 .9428 .9358 .9277 .9186 .9084 .8973 .8851
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
85 .9637 .9592 .9541 .9484 .9419 .9345 .9261 .9167 .9064 .8950
- ------------------------------------------------------------------------------------------------------------------------------
86 .9674 .9633 .9587 .9536 .9477 .9409 .9332 .9245 .9149 .9043
- ------------------------------------------------------------------------------------------------------------------------------
87 .9709 .9671 .9630 .9583 .9530 .9468 .9397 .9318 .9229 .9132
- ------------------------------------------------------------------------------------------------------------------------------
88 .9740 .9706 .9669 .9627 .9578 .9522 .9458 .9385 .9304 .9214
- ------------------------------------------------------------------------------------------------------------------------------
89 .9768 .9738 .9704 .9666 .9623 .9572 .9513 .9447 .9373 .9290
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
90 .9794 .9767 .9737 .9703 .9663 .9618 .9564 .9504 .9437 .9361
- ------------------------------------------------------------------------------------------------------------------------------
91 .9817 .9793 .9766 .9736 .9700 .9659 .9611 .9557 .9496 .9427
- ------------------------------------------------------------------------------------------------------------------------------
92 .9838 .9817 .9793 .9766 .9734 .9698 .9654 .9605 .9550 .9488
- ------------------------------------------------------------------------------------------------------------------------------
93 .9858 .9839 .9818 .9794 .9766 .9733 .9694 .9651 .9601 .9545
- ------------------------------------------------------------------------------------------------------------------------------
94 .9876 .9859 .9840 .9819 .9795 .9765 .9731 .9692 .9648 .9598
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
81
<PAGE> 86
APPENDIX C
50% CONTINGENT ANNUITY FACTORS
<TABLE>
<CAPTION>
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT
CONTINGENT -------------------------------------------------------------------------------------------------------------
ANNUITANT 55 56 57 58 59 60 61 62 63 64
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
35 .8527 .8435 .8339 .8237 .8131 .8019 .7902 .7780 .7652 .7519
- ------------------------------------------------------------------------------------------------------------------------------
36 .8555 .8464 .8368 .8267 .8161 .8049 .7933 .7811 .7683 .7550
- ------------------------------------------------------------------------------------------------------------------------------
37 .8584 .8493 .8397 .8297 .8191 .8080 .7964 .7842 .7715 .7582
- ------------------------------------------------------------------------------------------------------------------------------
38 .8614 .8524 .8429 .8328 .8223 .8113 .7997 .7875 .7748 .7615
- ------------------------------------------------------------------------------------------------------------------------------
39 .8645 .8555 .8461 .8361 .8256 .8146 .8031 .7910 .7783 .7650
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
40 .8677 .8588 .8494 .8395 .8291 .8181 .8066 .7945 .7819 .7687
- ------------------------------------------------------------------------------------------------------------------------------
41 .8709 .8621 .8528 .8430 .8326 .8217 .8103 .7983 .7856 .7725
- ------------------------------------------------------------------------------------------------------------------------------
42 .8743 .8655 .8563 .8466 .8363 .8255 .8141 .8021 .7895 .7764
- ------------------------------------------------------------------------------------------------------------------------------
43 .8777 .8691 .8599 .8503 .8401 .8293 .8180 .8061 .7936 .7805
- ------------------------------------------------------------------------------------------------------------------------------
44 .8812 .8727 .8636 .8541 .8440 .8333 .8221 .8102 .7978 .7847
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
45 .8848 .8764 .8674 .8580 .8480 .8374 .8262 .8145 .8021 .7891
- ------------------------------------------------------------------------------------------------------------------------------
46 .8885 .8801 .8713 .8620 .8521 .8416 .8305 .8189 .8066 .7936
- ------------------------------------------------------------------------------------------------------------------------------
47 .8922 .8840 .8753 .8661 .8563 .8459 .8350 .8234 .8112 .7983
- ------------------------------------------------------------------------------------------------------------------------------
48 .8959 .8879 .8793 .8702 .8606 .8504 .8395 .8280 .8159 .8032
- ------------------------------------------------------------------------------------------------------------------------------
49 .8997 .8918 .8834 .8745 .8650 .8549 .8442 .8328 .8208 .8082
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
82
<PAGE> 87
APPENDIX C
50% CONTINGENT ANNUITY FACTORS
<TABLE>
<CAPTION>
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT
CONTINGENT -------------------------------------------------------------------------------------------------------------
ANNUITANT 55 56 57 58 59 60 61 62 63 64
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
50 .9035 .8958 .8876 .8788 .8695 .8595 .8489 .8377 .8259 .8133
- ------------------------------------------------------------------------------------------------------------------------------
51 .9074 .8999 .8918 .8832 .8740 .8642 .8538 .8427 .8310 .8186
- ------------------------------------------------------------------------------------------------------------------------------
52 .9113 .9039 .8961 .8877 .8787 .8690 .8588 .8479 .8363 .8241
- ------------------------------------------------------------------------------------------------------------------------------
53 .9152 .9080 .9004 .8921 .8833 .8739 .8639 .8531 .8417 .8296
- ------------------------------------------------------------------------------------------------------------------------------
54 .9191 .9121 .9047 .8967 .8881 .8789 .8690 .8585 .8472 .8353
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
55 .9229 .9162 .9090 .9012 .8928 .8839 .8742 .8639 .8529 .8411
- ------------------------------------------------------------------------------------------------------------------------------
56 .9268 .9203 .9133 .9058 .8976 .8889 .8795 .8694 .8586 .8471
- ------------------------------------------------------------------------------------------------------------------------------
57 .9306 .9244 .9176 .9103 .9024 .8939 .8848 .8749 .8644 .8531
- ------------------------------------------------------------------------------------------------------------------------------
58 .9344 .9284 .9219 .9149 .9072 .8990 .8901 .8805 .8702 .8592
- ------------------------------------------------------------------------------------------------------------------------------
59 .9381 .9323 .9261 .9194 .9120 .9041 .8955 .8862 .8761 .8654
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
60 .9417 .9362 .9303 .9238 .9168 .9091 .9008 .8918 .8821 .8716
- ------------------------------------------------------------------------------------------------------------------------------
61 .9453 .9401 .9344 .9282 .9214 .9141 .9061 .8974 .8880 .8779
- ------------------------------------------------------------------------------------------------------------------------------
62 .9487 .9438 .9384 .9325 .9261 .9190 .9113 .9030 .8939 .8841
- ------------------------------------------------------------------------------------------------------------------------------
63 .9521 .9474 .9423 .9367 .9306 .9239 .9165 .9085 .8998 .8903
- ------------------------------------------------------------------------------------------------------------------------------
64 .9553 .9509 .9461 .9408 .9350 .9286 .9216 .9139 .9056 .8965
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
83
<PAGE> 88
APPENDIX C
50% CONTINGENT ANNUITY FACTORS
<TABLE>
<CAPTION>
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT
CONTINGENT -------------------------------------------------------------------------------------------------------------
ANNUITANT 55 56 57 58 59 60 61 62 63 64
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
65 .9585 .9544 .9498 .9488 .9393 .9333 .9266 .9193 .9113 .9026
- ------------------------------------------------------------------------------------------------------------------------------
66 .9615 .9576 .9534 .9487 .9435 .9378 .9315 .9245 .9169 .9086
- ------------------------------------------------------------------------------------------------------------------------------
67 .9644 .9608 .9568 .9524 .9476 .9422 .9362 .9296 .9224 .9145
- ------------------------------------------------------------------------------------------------------------------------------
68 .9672 .9638 .9601 .9560 .9515 .9464 .9408 .9346 .9278 .9203
- ------------------------------------------------------------------------------------------------------------------------------
69 .9698 .9667 .9633 .9595 .9552 .9505 .9453 .9395 .9330 .9260
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
70 .9723 .9695 .9663 .9628 .9588 .9544 .9495 .9441 .9381 .9314
- ------------------------------------------------------------------------------------------------------------------------------
71 .9747 .9721 .9691 .9659 .9622 .9582 .9536 .9486 .9429 .9367
- ------------------------------------------------------------------------------------------------------------------------------
72 .9769 .9745 .9718 .9688 .9654 .9617 .9575 .9528 .9475 .9417
- ------------------------------------------------------------------------------------------------------------------------------
73 .9790 .9768 .9743 .9715 .9684 .9650 .9611 .9567 .9519 .9465
- ------------------------------------------------------------------------------------------------------------------------------
74 .9809 .9789 .9766 .9741 .9713 .9681 .9645 .9605 .9560 .9510
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
75 .9826 .9808 .9788 .9764 .9739 .9709 .9677 .9640 .9598 .9552
- ------------------------------------------------------------------------------------------------------------------------------
76 .9843 .9826 .9807 .9786 .9763 .9736 .9706 .9672 .9634 .9591
- ------------------------------------------------------------------------------------------------------------------------------
77 .9858 .9843 .9826 .9807 .9785 .9761 .9733 .9702 .9667 .9628
- ------------------------------------------------------------------------------------------------------------------------------
78 .9872 .9858 .9842 .9825 .9806 .9784 .9758 .9730 .9698 .9662
- ------------------------------------------------------------------------------------------------------------------------------
79 .9884 .9872 .9858 .9842 .9824 .9804 .9782 .9756 .9727 .9694
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
84
<PAGE> 89
APPENDIX C
50% CONTINGENT ANNUITY FACTORS
<TABLE>
<CAPTION>
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT
CONTINGENT -------------------------------------------------------------------------------------------------------------
ANNUITANT 55 56 57 58 59 60 61 62 63 64
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
80 .9896 .9884 .9872 .9858 .9842 .9824 .9803 .9779 .9753 .9723
- ------------------------------------------------------------------------------------------------------------------------------
81 .9906 .9896 .9885 .9872 .9857 .9841 .9822 .9801 .9777 .9749
- ------------------------------------------------------------------------------------------------------------------------------
82 .9916 .9907 .9896 .9885 .9872 .9857 .9840 .9821 .9799 .9774
- ------------------------------------------------------------------------------------------------------------------------------
83 .9924 .9916 .9907 .9897 .9885 .9872 .9856 .9839 .9819 .9797
- ------------------------------------------------------------------------------------------------------------------------------
84 .9932 .9925 .9917 .9907 .9897 .9885 .9871 .9856 .9838 .9817
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
85 .9939 .9933 .9926 .9917 .9908 .9897 .9885 .9871 .9855 .9836
- ------------------------------------------------------------------------------------------------------------------------------
86 .9946 .9940 .9934 .9926 .9918 .9908 .9897 .9884 .9870 .9853
- ------------------------------------------------------------------------------------------------------------------------------
87 .9952 .9947 .9941 .9934 .9927 .9918 .9908 .9897 .9884 .9869
- ------------------------------------------------------------------------------------------------------------------------------
88 .9957 .9953 .9947 .9941 .9935 .9927 .9918 .9908 .9897 .9883
- ------------------------------------------------------------------------------------------------------------------------------
89 .9962 .9958 .9953 .9948 .9942 .9935 .9928 .9919 .9908 .9896
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
90 .9966 .9963 .9959 .9954 .9949 .9943 .9936 .9928 .9919 .9908
- ------------------------------------------------------------------------------------------------------------------------------
91 .9970 .9967 .9963 .9959 .9955 .9949 .9943 .9936 .9928 .9918
- ------------------------------------------------------------------------------------------------------------------------------
92 .9974 .9971 .9968 .9964 .9960 .9955 .9950 .9944 .9936 .9928
- ------------------------------------------------------------------------------------------------------------------------------
93 .9977 .9974 .9972 .9969 .9965 .9961 .9956 .9951 .9944 .9937
- ------------------------------------------------------------------------------------------------------------------------------
94 .9980 .9978 .9975 .9973 .9969 .9966 .9962 .9957 .9951 .9945
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
85
<PAGE> 90
APPENDIX C
50% CONTINGENT ANNUITY FACTORS
<TABLE>
<CAPTION>
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT
CONTINGENT -------------------------------------------------------------------------------------------------------------
ANNUITANT 65 66 67 68 69 70 71 72 73 74
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
35 .7380 .7237 .7088 .6935 .6776 .6610 .6440 .6265 .6087 .5907
- ------------------------------------------------------------------------------------------------------------------------------
36 .7411 .7268 .7119 .6966 .6807 .6641 .6470 .6295 .6117 .5937
- ------------------------------------------------------------------------------------------------------------------------------
37 .7444 .7300 .7152 .6998 .6839 .6673 .6502 .6327 .6149 .5968
- ------------------------------------------------------------------------------------------------------------------------------
38 .7477 .7334 .7185 .7032 .6873 .6707 .6535 .6360 .6182 .6000
- ------------------------------------------------------------------------------------------------------------------------------
39 .7512 .7369 .7221 .7067 .6908 .6742 .6571 .6395 .6216 .6035
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
40 .7549 .7406 .7258 .7104 .6945 .6779 .6607 .6431 .6252 .6070
- ------------------------------------------------------------------------------------------------------------------------------
41 .7587 .7444 .7296 .7143 .6984 .6818 .6646 .6470 .6290 .6108
- ------------------------------------------------------------------------------------------------------------------------------
42 .7627 .7484 .7336 .7183 .7024 .6858 .6686 .6510 .6330 .6147
- ------------------------------------------------------------------------------------------------------------------------------
43 .7668 .7526 .7378 .7225 .7066 .6900 .6728 .6551 .6372 .6189
- ------------------------------------------------------------------------------------------------------------------------------
44 .7711 .7569 .7422 .7269 .7110 .6944 .6772 .6595 .6415 .6232
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
45 .7755 .7614 .7467 .7314 .7156 .6990 .6818 .6641 .6461 .6277
- ------------------------------------------------------------------------------------------------------------------------------
46 .7801 .7660 .7514 .7362 .7203 .7037 .6865 .6689 .6508 .6324
- ------------------------------------------------------------------------------------------------------------------------------
47 .7849 .7709 .7563 .7411 .7253 .7087 .6915 .6738 .6558 .6374
- ------------------------------------------------------------------------------------------------------------------------------
48 .7898 .7759 .7613 .7462 .7304 .7139 .6967 .6790 .6610 .6435
- ------------------------------------------------------------------------------------------------------------------------------
49 .7949 .7810 .7666 .7515 .7358 .7193 .7021 .6845 .6664 .6479
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
86
<PAGE> 91
APPENDIX C
50% CONTINGENT ANNUITY FACTORS
<TABLE>
<CAPTION>
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT
CONTINGENT -------------------------------------------------------------------------------------------------------------
ANNUITANT 65 66 67 68 69 70 71 72 73 74
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
50 .8002 .7864 .7720 .7570 .7413 .7249 .7077 .6901 .6720 .6536
- ------------------------------------------------------------------------------------------------------------------------------
51 .8056 .7919 .7776 .7627 .7471 .7307 .7136 .6960 .6779 .6595
- ------------------------------------------------------------------------------------------------------------------------------
52 .8111 .7976 .7834 .7686 .7531 .7367 .7197 .7021 .6841 .6656
- ------------------------------------------------------------------------------------------------------------------------------
53 .8169 .8034 .7894 .7747 .7592 .7430 .7260 .7085 .6905 .6720
- ------------------------------------------------------------------------------------------------------------------------------
54 .8227 .8095 .7956 .7810 .7656 .7495 .7326 .7151 .6971 .6787
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
55 .8287 .8156 .8019 .7875 .7723 .7562 .7394 .7220 .7041 .6857
- ------------------------------------------------------------------------------------------------------------------------------
56 .8349 .8220 .8084 .7941 .7791 .7632 .7465 .7292 .7113 .6930
- ------------------------------------------------------------------------------------------------------------------------------
57 .8411 .8284 .8151 .8010 .7861 .7703 .7538 .7366 .7188 .7005
- ------------------------------------------------------------------------------------------------------------------------------
58 .8475 .8350 .8219 .8080 .7933 .7777 .7613 .7442 .7266 .7084
- ------------------------------------------------------------------------------------------------------------------------------
59 .8539 .8417 .8288 .8152 .8007 .7853 .7691 .7522 .7346 .7165
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
60 .8604 .8485 .8359 .8225 .8082 .7931 .7770 .7603 .7429 .7250
- ------------------------------------------------------------------------------------------------------------------------------
61 .8670 .8554 .8430 .8299 .8159 .8010 .7852 .7687 .7515 .7337
- ------------------------------------------------------------------------------------------------------------------------------
62 .8736 .8623 .8502 .8374 .8238 .8091 .7936 .7773 .7603 .7427
- ------------------------------------------------------------------------------------------------------------------------------
63 .8801 .8692 .8575 .8450 .8317 .8173 .8021 .7860 .7693 .7519
- ------------------------------------------------------------------------------------------------------------------------------
64 .8867 .8761 .8648 .8527 .8396 .8257 .8107 .7950 .7785 .7613
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
87
<PAGE> 92
APPENDIX C
50% CONTINGENT ANNUITY FACTORS
<TABLE>
<CAPTION>
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT
CONTINGENT -------------------------------------------------------------------------------------------------------------
ANNUITANT 65 66 67 68 69 70 71 72 73 74
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
65 .8932 .8830 .8720 .8603 .8477 .8341 .8195 .8040 .7879 .7710
- ------------------------------------------------------------------------------------------------------------------------------
66 .8996 .8898 .8793 .8680 .8557 .8425 .8283 .8132 .7974 .7808
- ------------------------------------------------------------------------------------------------------------------------------
67 .9059 .8965 .8865 .8756 .8638 .8510 .8372 .8225 .8071 .7909
- ------------------------------------------------------------------------------------------------------------------------------
68 .9121 .9032 .8936 .8831 .8718 .8594 .8461 .8319 .8169 .8010
- ------------------------------------------------------------------------------------------------------------------------------
69 .9182 .9097 .9006 .8906 .8797 .8679 .8550 .8413 .8267 .8113
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
70 .9241 .9161 .9074 .8980 .8876 .8762 .8639 .8506 .8365 .8216
- ------------------------------------------------------------------------------------------------------------------------------
71 .9298 .9223 .9141 .9051 .8953 .8844 .8726 .8599 .8463 .8319
- ------------------------------------------------------------------------------------------------------------------------------
72 .9353 .9282 .9205 .9120 .9027 .8924 .8811 .8690 .8559 .8420
- ------------------------------------------------------------------------------------------------------------------------------
73 .9405 .9339 .9266 .9186 .9098 .9001 .8894 .8778 .8653 .8520
- ------------------------------------------------------------------------------------------------------------------------------
74 .9454 .9392 .9324 .9250 .9167 .9075 .8973 .8863 .8744 .8617
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
75 .9500 .9443 .9379 .9310 .9232 .9146 .9050 .8945 .8832 .8711
- ------------------------------------------------------------------------------------------------------------------------------
76 .9543 .9490 .9432 .9367 .9294 .9213 .9123 .9024 .8917 .8802
- ------------------------------------------------------------------------------------------------------------------------------
77 .9584 .9535 .9481 .9420 .9353 .9277 .9192 .9100 .8999 .8890
- ------------------------------------------------------------------------------------------------------------------------------
78 .9622 .9576 .9526 .9471 .9408 .9337 .9258 .9172 .9077 .8973
- ------------------------------------------------------------------------------------------------------------------------------
79 .9656 .9615 .9569 .9518 .9460 .9394 .9321 .9239 .9150 .9053
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
88
<PAGE> 93
APPENDIX C
50% CONTINGENT ANNUITY FACTORS
<TABLE>
<CAPTION>
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT
CONTINGENT -------------------------------------------------------------------------------------------------------------
ANNUITANT 65 66 67 68 69 70 71 72 73 74
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
80 .9689 .9651 .9608 .9561 .9508 .9447 .9397 .9303 .9220 .9129
- ------------------------------------------------------------------------------------------------------------------------------
81 .9718 .9684 .9645 .9602 .9553 .9497 .9433 .9363 .9285 .9200
- ------------------------------------------------------------------------------------------------------------------------------
82 .9746 .9714 .9679 .9639 .9594 .9543 .9484 .9419 .9347 .9268
- ------------------------------------------------------------------------------------------------------------------------------
83 .9771 .9742 .9710 .9674 .9633 .9585 .9531 .9471 .9405 .9331
- ------------------------------------------------------------------------------------------------------------------------------
84 .9794 .9768 .9739 .9706 .9668 .9625 .9576 .9520 .9459 .9390
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
85 .9815 .9792 .9765 .9735 .9701 .9662 .9616 .9566 .9509 .9446
- ------------------------------------------------------------------------------------------------------------------------------
86 .9834 .9813 .9789 .9762 .9731 .9695 .9654 .9608 .9556 .9498
- ------------------------------------------------------------------------------------------------------------------------------
87 .9852 .9833 .9811 .9787 .9759 .9727 .9689 .9647 .9599 .9546
- ------------------------------------------------------------------------------------------------------------------------------
88 .9868 .9851 .9832 .9810 .9785 .9755 .9721 .9683 .9639 .9591
- ------------------------------------------------------------------------------------------------------------------------------
89 .9883 .9867 .9850 .9830 .9808 .9781 .9751 .9716 .9676 .9632
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
90 .9896 .9882 .9867 .9849 .9829 .9805 .9777 .9746 .9710 .9670
- ------------------------------------------------------------------------------------------------------------------------------
91 .9908 .9895 .9882 .9866 .9848 .9827 .9802 .9773 .9741 .9705
- ------------------------------------------------------------------------------------------------------------------------------
92 .9919 .9908 .9895 .9882 .9865 .9846 .9824 .9799 .9770 .9737
- ------------------------------------------------------------------------------------------------------------------------------
93 .9928 .9919 .9908 .9896 .9882 .9865 .9845 .9822 .9796 .9767
- ------------------------------------------------------------------------------------------------------------------------------
94 .9937 .9929 .9919 .9909 .9896 .9881 .9864 .9844 .9821 .9795
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
89
<PAGE> 94
AMENDMENT NO. 1 TO THE
DESOTO EMPLOYEES RETIREMENT PLAN
This Amendment No. 1 to the DeSoto Employees Retirement Plan is made
this ____ day of ________, 1996 by DeSoto, Inc. (the "Employer"), a Delaware
corporation.
R E C I T A L S
Effective January 1, 1972, the Employer originally established the
DeSoto Employees Retirement Plan (the "Plan"), formerly known as the DeSoto
Salaried Employees' Pension Plan. The Plan was last amended and restated
effective January 1, 1994 as a result of the merger of the DeSoto Hourly
Employees' Pension Plan and the J.L. Prescott Company Pension Plan into the
DeSoto Salaried Employees' Pension Plan, intending that it continue to qualify
under the applicable provisions of the Internal Revenue Code. The Employer,
pursuant to the powers reserved to it in the Plan hereby adopts this Amendment
No. 1 to the Plan effective as of the date set forth herein.
AMENDMENT
Section 5.1 of the Plan is hereby amended, effective as to retirements
and terminations of employment occurring on or after January 1, 1996, to read
as follows:
5.1 Normal Retirement Benefits. An Employee who retires
as of his Normal Retirement Date shall, subject to the provisions of
Section 5.5 through 5.7, be entitled to receive a monthly benefit,
commencing at his Normal Retirement Date and payable thereafter for
life, of an amount equal to:
(a) for a Salaried Employee or a Prescott
Employee the greater of:
(i) his accrued benefit as of December
31, 1995; or
(ii) 1 and 2/3% of his Average
Compensation multiplied by his total years of Service while a Salaried
Employee or a Prescott Employee (not in excess of thirty-five (35)
years) reduced by the Social Security Allowance. The Social Security
Allowance shall
1
<PAGE> 95
be equal to one-half of one percent for each year of Service up to
thirty-five (35) years, multiplied by the lesser of:
(1) The Participant's social
Security Final Average Compensation, or
(2) The Participant's Covered
Compensation as defined in Section 401(l)(5)(E) of the Internal
Revenue Code.
In the event the Social Security Allowance
applies to a Participant more than five (5) years prior to his Social
Security Normal Retirement Age, but on or after age fifty-five (55),
the Social Security Allowance shall be reduced at the rate of 1/30 for
each year in excess of five (5) years up to ten (10) years and, to the
extent necessary, by an actuarial equivalent reduction for additional
years in excess of ten (10).
Social Security Final Average Compensation
means the average of the Participant's Earnings over the three (3)
consecutive completed Plan Years preceding his current date of
retirement, date of termination of employment, date of death or the
date of the termination of the Plan, but excluding compensation in any
such year in excess of the Social Security Taxable Wage Base.
Social Security Normal Retirement Age is the
earliest age at which the Employee is entitled to receive unreduced
old age benefits from Social Security.
Social Security Taxable Wage Base means the
amount of wages from which Social Security Taxes are required to be
withheld in accordance with the Federal Insurance Contributions Act,
or any successor act, regulation, or ruling pertaining thereto, which
is in effect at the beginning of the Plan Year.
(b) For an Hourly Employee, 1% of his Average
Compensation multiplied by his total years of Service while an Hourly
Employee. The monthly benefit for Hourly Employees under this Section
5.1 shall not be less than $50 nor shall it be less than the benefit
to which the Hourly Employee would have been entitled had he retired
on the Early Retirement Date at which his benefit would have been the
greatest.
2
<PAGE> 96
(c) Except as otherwise provided in Section 5.12,
for an Employee who has transferred from an Hourly Employee to a
Salaried Employee, the sum of the benefits calculated under (a) and
(b) above.
IN WITNESS WHEREOF, DeSoto, Inc. has caused this agreement to be
executed upon the signatures of its duly qualified officers who have hereto set
their hands as of the date first set forth above.
DESOTO, INC.
ATTEST:
By:
-----------------------------------
Its:
- ------------------------------ -------------------------------
Secretary
3
<PAGE> 97
AMENDMENT NO. 2 TO THE
DESOTO EMPLOYEES RETIREMENT PLAN
This Amendment No. 2 to the DeSoto Employees Retirement Plan is made
this ____ day of ________________, 1996 by DeSoto, Inc. (the "Employer"), a
Delaware corporation.
R E C I T A L S
Effective January 1, 1972, the Employer originally established the
DeSoto Employees Retirement Plan (the "Plan"), formerly known as the DeSoto
Salaried Employees' Pension Plan. The Plan was last amended and restated
effective January 1, 1994 as a result of the merger of the DeSoto Hourly
Employees' Pension Plan and the J.L. Prescott Company Pension Plan into the
DeSoto Salaried Employees' Pension Plan, intending that it continue to qualify
under the applicable provisions of the Internal Revenue Code. The Employer,
pursuant to the powers reserved to it in the Plan hereby adopts this Amendment
No. 2 to the Plan effective as of January 31, 1996.
AMENDMENT
1. Section 5.1 of the Plan is hereby amended, effective January
31, 1996, by adding the following sentence at the end thereof; with said
sentence to read as follows:
Provided, however, that notwithstanding anything in this Plan to the
contrary, all benefits accruals hereunder shall close on January 31,
1996, and benefits hereunder shall be frozen as of said date.
2. The first sentence of Subsection 10.3(e) of the Plan is hereby
amended effective January 31, 1996, to read as follows:
(e) Except as otherwise provided in the second sentence
of this Subsection 10.3(e) or any other provision of the Plan, if any
assets of the Trust remain, they may revert to the Company or all or a
portion of the remaining assets may be transferred to a qualified
replacement plan as defined in Internal Revenue Code Section 4980(d),
in the sole discretion of the Company, provided that there are no
other groups of Employees remaining in the Plan.
1
<PAGE> 98
IN WITNESS WHEREOF, DeSoto, Inc. has caused this agreement to be
executed upon the signatures of its duly qualified officers who have hereto set
their hands as of the date first set forth above.
DESOTO, INC.
ATTEST:
By:
-----------------------------------
Its:
- ------------------------------ -------------------------------
Secretary
2
<PAGE> 99
PROPOSED RESOLUTIONS OF THE BOARD OF DIRECTORS
OF DESOTO, INC.
WHEREAS, DeSoto, Inc. (the "Company") maintains the DeSoto Employees'
Retirement Plan (the "Retirement Plan") for the benefit of those of its
employees who are eligible to participate therein; and
WHEREAS, the Retirement Plan was last amended and restated effective
January 1, 1994, as a result of the merger of the DeSoto Hourly Employees'
Retirement Plan and the J.L. Prescott Company Pension Plan into the DeSoto
Salaried Employees' Pension Plan; and
WHEREAS, this Board of Directors desires to amend the benefit formula
under the Retirement Plan as applicable to its active Prescott Employees;
WHEREAS, an Amendment No. 1 to the Retirement Plan has been prepared
to effectuate the foregoing resolution;
NOW, THEREFORE, BE IT RESOLVED, that the Retirement Plan be and is
hereby amended, effective as to retirements and terminations of employment
occurring on or after January 1, 1996, by the adoption of Amendment No.1, as
previously circulated among the Members of this Board of Directors, with such
Amendment No.1 to be incorporated herein and made a part hereof by reference;
FURTHER RESOLVED, that the appropriate officers of the Company be and
are each hereby authorized and directed to take any and all actions that shall
be deemed necessary or desirable, with the advise of counsel, to implement and
effectuate the foregoing resolutions, including but not limited to the adoption
of any amendments to the Retirement Plan required in order to obtain any
necessary or desirable government approvals.
* * * * * * * *
1
<PAGE> 100
PROPOSED RESOLUTIONS OF THE BOARD OF DIRECTORS
OF DESOTO, INC.
WHEREAS, DeSoto, Inc. (the "Company") maintains the DeSoto Employees'
Retirement Plan (the "Retirement Plan") for the benefit of those of its
employees who are eligible to participate therein; and
WHEREAS, the Retirement Plan was last amended and restated effective
January 1, 1994, as a result of the merger of the DeSoto Hourly Employees'
Retirement Plan and the J.L. Prescott Company Pension Plan into the DeSoto
Salaried Employees' Pension Plan; and
WHEREAS, this Board of Directors believes it to be in the best
interests of the Company and its employees to cease benefit accruals under the
Retirement Plan for all employees effective January 31, 1996; and
WHEREAS, this Board of Directors also believes it to be in the best
interests of the Company and its employees to terminate the Retirement Plan as
of April 15, 1996; and
WHEREAS, an Amendment No. 2 to the Retirement Plan has been prepared
to effectuate the foregoing resolutions; and
WHEREAS, this Board of Directors believes it to be in the best
interests of the Company and its employees to establish a defined contribution
plan which qualifies as a qualified replacement plan as defined in Section
4980(d) of the Internal Revenue Code of 1986, as amended;
NOW, THEREFORE, BE IT RESOLVED, that the Retirement Plan be and is
hereby amended, effective January 31, 1996, by the adoption of Amendment No. 2,
as previously circulated among the Members of this Board of Directors, with
such Amendment No. 2 to be incorporated herein and made a part hereof by
reference;
FURTHER RESOLVED, that the Retirement Plan be and is hereby
terminated, effective April 15, 1996, contingent upon receipt of all necessary
or desirable government approvals, and also upon the further contingency that
any excise or similar tax payable by the Company with respect to any assets
that are reverted to the Company from the Retirement Plan shall not exceed 20%
of the amount so reverted to the Company;
FURTHER RESOLVED, that appropriate corporate officers be and are each
authorized and directed to adopt a defined contribution plan, effective April
15, 1996 or on such later date as of which the termination of the Retirement
Plan becomes effective, which qualifies as a qualified replacement plan as
defined in Internal
1
<PAGE> 101
Revenue Code Section 4980(d) (the "Replacement Plan") which shall contain such
terms as shall be approved by the Chairman of the Board of the Company;
FURTHER RESOLVED, that following the completion of the termination of
the Retirement Plan and the adoption of the Replacement Plan, 25% of the assets
in the Retirement Plan remaining after payment of all vested accrued benefits
shall be transferred to the Replacement Plan and any remaining Retirement Plan
assets shall be distributed to the Company;
FURTHER RESOLVED, that the appropriate officers of the Company be and
are each hereby authorized and directed to take any and all actions that shall
be deemed necessary or desirable, with the advise of counsel, to implement and
effectuate the foregoing resolutions, including but not limited to the adoption
of any amendments to the Retirement Plan required in order to obtain any
necessary or desirable government approvals.
* * * * * * * *
2
<PAGE> 102
AMENDMENT
DESOTO SALARIED EMPLOYEES' PENSION TRUST
Pursuant to the Resolution of the Board of Directors of DeSoto, Inc.
adopted on October 1, 1992, the DeSoto Salaried Employees' Pension Trust is
hereby amended effective November 4th, 1992 as follows:
The following subsection (j) is added at the end of section 5.2:
(j) The Trustees may invest all, or any part, of the
assets of the Trust in interests in a trust fund that has been or
shall be created and maintained for the collective investments of
funds of trusts for employee benefit plans (qualified under sections
401 and 501 of the Internal Revenue Code).
IN WITNESS WHEREOF, DeSoto, Inc. has caused this amendment to be duly
executed by the proper officers thereof this 4th day of November __, 1992.
DeSOTO, INC.
By: [ILLEGIBLE]
-----------------------------------
ATTEST:
/s/ ANNE E. EISELE
- ------------------------------
<PAGE> 103
PROPOSED RESOLUTION
BOARD OF DIRECTORS
DeSOTO, INC.
WHEREAS, the Corporation is the plan sponsor of the DeSoto Salaried
Employees' Pension Plan and Trust, the DeSoto Hourly Employees' Pension Plan
and Trust and the DeSoto Stock Ownership Plus Plan and Trust ("Plans" and
"Trusts", respectively); and
WHEREAS, the Trustees of the above plans desire to retain certain
investment management and custodial services in connection with the operation
of the Plans and Trusts; and
WHEREAS, it is advisable to adopt certain amendments to each of the
Trusts to govern the investment of those assets of each Trust which are being
invested by the parties retained for this purpose;
NOW, THEREFORE, BE IT RESOLVED, that Section 5.3 of the DeSoto
Stock Ownership Plus Trust ("DSOP Trust") and Section 5.2 of each of the DeSoto
Salaried Employees' Pension Trust ("Pension Trust") and the DeSoto Hourly
Employees' Pension Trust ("Hourly Trust") be and are each hereby amended to add
a new subsection (i) to the DSOP Trust immediately following subsection (h)
thereof, and a new subsection (j) to the Salaried Trust and the Hourly Trust
immediately following subsection (i) of each of them, with each new subsection
to read as follows:
Notwithstanding any other provision hereof, all or any part of
the assets of the Trust may be transferred to and invested in any
collective investment trust then qualified for tax-exemption under
Section 401(a) of the Internal Revenue Code of 1986, as amended, which
is then maintained by the bank or trust company then acting as a
trustee, agent for the Trustees hereunder, or as an investment
manager. The provisions of the document governing such collective
investment trust, as amended from time to time, shall govern any
investment therein and are hereby made a part of this Trust Agreement.
FURTHER RESOLVED, that Section 9 of each of the Trusts be and is
hereby amended to read as follows:
9.1 The Trustees may in their discretion appoint an
investment committee composed of such individuals as they shall
designate, who shall hold office during the pleasure of the Trustees.
The Committee shall have all of the powers, authorities and
discretions vested in the Trustees
<PAGE> 104
under the provisions of Section 5, subject to such restrictions,
limitations, and conditions as may be prescribed from time to time by
the Trustees. The members of the Committee may adopt such resolutions
as they deem appropriate for the purpose of governing themselves in
the conduct of the business of the Committee, subject, however, to
such rules and regulations, if any, prescribed in that regard by the
Trustees. The Committee shall periodically and whenever required by
the Trustees to submit to the Trustees reports of the Committee's
actions.
9.2 Notwithstanding any other provision hereof, the
Trustees (a named fiduciary with respect to the control and management
of the assets of the Trust) may direct the segregation of all or any
portion of the assets of the Trust into one or more accounts to be
known as Investment Manager Accounts, and if they do so, shall also
appoint one or more investment managers to manage the portion or
portions of the assets of the Trust so segregated. Any investment
manager so appointed shall be an "investment manager" as that term is
defined in Section 3(38) of the Employee Retirement Security Act of
1974, as amended ("ERISA"). Concurrently with its acceptance of its
appointment hereunder, an investment manager shall acknowledge in
writing to the Trustees that it is a "fiduciary" as that term is
defined in Section 3(21)(A) of ERISA and that it has received a copy
of this Trust Agreement.
With respect to any assets held in an Investment Manager
Account, and subject to the terms of this Trust Agreement, the
investment manager shall have the power, without prior consultation
with the Trustees, to manage, acquire or dispose of any asset held in
such Account, and to direct the Trustees with respect to the
acquisition, retention, disposition or management of such assets. The
investment manager may be authorized to retain the physical custody or
indicia of ownership of any assets held in an Investment Manager
Account. The Trustees shall follow all directions of the investment
manager regarding the Account, and shall not be liable to the Company
or to any participant in or beneficiary of the Trust for so doing or
for failing to take any action in the absence of directions from the
investment manager. The Trustees shall not be liable for any act or
omission of an investment manager, or be under any obligation to
invest, review or otherwise manage
<PAGE> 105
any asset of the Trust Fund which is held in an Investment Manager
Account. Notwithstanding the foregoing, the Trustees shall not be
relieved of any liability imposed upon them by ERISA.
Directions of an investment manager to the Trustees shall be
in writing or may be made orally and confirmed in writing as soon as
practicable thereafter.
Pending receipt of directions from an investment manager for
any Account, any cash received by the Trustees from time to time for
such Account may be retained by the Trustees in cash.
The Trustees are authorized and directed to pay from the Trust
all fees, charges and expenses incurred in the operation and
administration of any Investment Manager Account to the extent
they are not paid by the Company.
<PAGE> 106
[DESOTO, INC. LETTERHEAD]
February 4, 1992
Ian Kopelman
Shefsky & Froelich Ltd.
444 K. Michigan Ave., Suite 2300
Chicago, IL 60611
Dear Ian:
At the September 1991 Board Meeting the Board passed a resolution
regarding investment managers and use of bank pooled investment funds.
As I recall, you provided the language. I wanted to officially notify
you of the change, so that any actions required at your end could be
taken care of. I have attached a copy of the change for your
information.
In addition, at the December 10, 1991 meeting the Board changed the
membership of the Salaried and Hourly Employees Pension Trust
Retirement Committee to two people. The plan document had called for
three people. Unfortunately I don't have any specific verbiage which
was adopted.
Please let me know if any additional information or any other action
on our part is required.
Regards,
/s/ ANNE E. EISELE
Anne E. Eisele
AEE/ds
Attach.
cc: Mark Renfro
<PAGE> 107
9.2 The Trustees (a named fiduciary with respect to the
control and management of the assets of the Trust) may, in their
complete discretion appoint one or more "Investment Managers" to hold
and manage any portion of the assets of the Trust. Upon appointment,
the Trustees shall transfer to each such Investment Manager such
portion of the assets of the Trust as the Trustees shall determine.
With respect to that portion of the assets of the Trust to be held by
an Investment Manager, the Trustees shall delegate to the Investment
Manager, pursuant to a written agreement with the Investment Manager,
such of its powers and duties as set forth in Section 5 as the
Trustees shall determine. Such written agreement, by which the
Investment Manager shall acknowledge that it is a fiduciary with
respect to the Plan, shall set forth the duties and responsibilities
of the Investment Manager and shall form a part of this Trust for as
long as any portion of the assets of the Trust is held and managed by
the Investment Manager.
For purposes of this Section 9.2, each Investment Manager must
be either (i) an investment adviser registered as such under the
Investment Adviser Act of 1940, or (ii) a bank as defined in said Act,
or (iii) an insurance company qualified to perform services in
connection with the management, acquisition, or disposition of any
assets of an employee benefit plan under the laws of more than one
state.
<PAGE> 108
DESOTO SALARIED EMPLOYEES' PENSION TRUST
(As amended and restated effective January 1, 1976)
THIS TRUST AGREEMENT made January 14, 1972 by and between DeSOTO,
INC., a Delaware corporation ("Company"), and the then acting Trustees under
this agreement ("Trustees"), as amended and restated, effective January 1,
1976, in order to comply with the Employee Retirement Income Security Act of
1974 ("ERISA"),
WITNESSETH:
WHEREAS, the Company has established a pension plan, known as the
"DeSOTO SALARIED EMPLOYEES' PENSION PLAN" (hereinafter referred to as the
"Plan"), for certain of its employees, a copy of said Plan, as it may be
amended from time to time, shall be identified by the Secretary of the Company
and filed with the Trustees; and
WHEREAS, the Company desires to continue the trust established to
implement and carry out the provisions of the Plan, and this trust has been
designated by the Company as a part of the Plan intended to meet the
requirements of Section 401(a) of the Internal Revenue Code of 1954, as amended
("Code"), and ERISA; and
WHEREAS, the contribution of the Company and any other Employers under
the Plan will be placed in this trust for the exclusive benefit of the
Employees and their beneficiaries;
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NOW, THEREFORE, the Company and the Trustees do hereby mutually
declare and agree, as follows:
SECTION 1. GENERAL
1.1 The Company hereby continues the previously created and
established trust known as the "DeSOTO SALARIED EMPLOYEES' PENSION TRUST"
(hereinafter called "Trust").
1.2 The Trust shall constitute a single trust fund to carry out
the purpose of the Plan. All property, monies and assets transferred,
delivered, or contributed to the Trust, together with the earnings, profits and
increments thereon, without distinction between principal and income, shall
constitute the Trust.
1.3 The Plan shall be administered as therein provided, and the
Trustees shall have no duties in respect of the administration of the Plan
except as specifically provided therein.
SECTION 2. THE TRUSTEES
2.1 The Trust shall be under the management of the Trustees, to be
determined and appointed by the Board of Directors of the Company. A majority
of the Trustees shall be officers, directors or employees of the Company. Any
Trustee may be removed by the Board at any time, with or without cause. Any
Trustee may resign at any time by giving written notice of such resignation to
the other Trustees of the Trust and the Secretary of the Company. The Board may
at any time increase or reduce the number of Trustees. Only the Board shall
have the right to fill
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vacancies occurring among the Trustees. The Board shall determine the amount of
compensation, if any, to be paid to the Trustees, or any of them.
2.2 The Trustees may adopt such resolutions as they desire for the
purpose of regulating themselves in the performance and discharge of their
powers and duties as such Trustees.
Any resolution or other action to which all the Trustees then in
office shall assent in writing or which shall be approved by the affirmative
vote of a majority of the Trustees then in office at any meeting of Trustees
shall be deemed to have been duly authorized on behalf of the Trustees.
2.3 The Trustees shall appoint a Chairman from their number, and
shall appoint a Secretary and a Treasurer, who may but need not be Trustees.
The Trustees may also appoint such other officers and assistant officers as
they may deem desirable. The Chairman, Secretary, and Treasurer, and any other
officers or assistants, appointed by the Trustees, shall hold office during the
pleasure of the Trustees and shall have and perform such powers and duties as
shall be prescribed from time to time by the Trustees. The Trustees shall have
the right, from time to time, to delegate in writing to any individual Trustee
or to any other person or persons, subject to such terms, conditions and
restrictions as they may prescribe, such of their rights, powers, authorities,
discretions and duties hereunder, except those dealing with interpretation of
the provisions of the Trust, as they shall determine; and all actions taken by
any such person
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or persons pursuant to and in accordance with any such delegations shall be
effective and binding upon all parties to the same extent as though taken by
the Trustees. The Trustees may likewise from time to time employ such clerical
help, accountants, investment consultants attorneys (who may be counsel to the
Company) and other individuals, all as the Trustees deem advisable. The
compensation to be paid to individuals appointed or employed by the Trustees as
aforesaid shall be fixed by the Trustees, except that any such individual who
is a Trustee shall receive no compensation other than that determined for him
as such Trustee by the Board.
SECTION 3. CONTRIBUTIONS TO THE TRUST
3.1 The Company and any other Employer will, from time to time,
make contributions to the Trust. The Trustees hereunder shall be accountable to
the Company and any other Employer under the Plan for all contributions made as
aforesaid, but the Trustees shall have no duty to see that the contributions
comply with the provisions of the Plan, nor shall the Trustees be obliged to
collect any contributions from the Company or any other Employer, or otherwise
see that monies or property are paid according to the provisions of the Plan.
SECTION 4. PAYMENTS FROM THE TRUST
4.1 The Trust shall be held only for the benefit of those
Employees, retired Employees, terminated Employees, or beneficiaries who have
rights and interests therein according to the terms of the Plan. Payments of
benefits under the Plan to such
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persons shall be made solely from the Trust, in such manner, at such times, and
in such amounts as the Company may in writing direct the Trustees. The Trustees
shall be fully protected in making payments out of the Trust in accordance with
such written directions and shall have no responsibility to see to the
application of such payments, or to ascertain whether such directions comply
with the terms of the Plan and shall not be liable for any payment made by them
in good faith.
4.2 If any payment or distribution directed to be paid from the
Trust is returned unclaimed, the Trustees shall notify the Company of that fact
and shall dispose of such payments as the Company shall direct. The Trustees
shall have no obligation to search for or ascertain the whereabouts of any
payee or distributee of benefits from the Trust.
SECTION 5. THE TRUST
5.1 The Trust shall be held by the Trustees in trust and dealt
with in accordance with the provisions of this Agreement.
5.2 With respect to the Trust, the Trustees shall have the
following powers, authorities and rights in addition to those vested in them
elsewhere in this Agreement or by law:
(a) The Trustees shall from time to time by resolution designate
one or more banks in which monies of the Trust shall be
deposited, and likewise the individuals authorized to sign,
for and in the name of the Trust, checks and other orders for
the
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payment of money drawn against the Trust's accounts with such
banks.
(b) The Trustees are authorized and empowered in their discretion
to invest and reinvest any part of the assets of the Trust in,
and to buy and sell, shares of stock, debentures, bonds,
mortgages, promissory notes, real estate, real estate
improvements, group annuity (and other forms of insurance
company) contracts, leaseholds or any income producing
properties or securities, real or personal, within or without
the State of Illinois, including such securities issued by or
property owned by the Company. The Trustees are to have as
wide a latitude in the selection and making of such
investments as if they, as individuals, were the absolute
owners thereof, and are not to be restricted to the
investments for trustees as prescribed by the statutes or law
of the State of Illinois or of any other jurisdiction. The
Trustees shall not maintain the indicia of ownership of any
asset of the Trust outside the jurisdiction of the district
courts of the United States.
(c) The Trustees are also authorized and empowered in their
discretion, but not by way of limitation, to lease, sell,
exchange, convey, transfer or dispose
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of, and also to grant options with respect to, any property,
whether real or personals, at any time held by them, for cash
or upon credit or partly for cash and partly upon credit, as
the Trustees may deem best, and no person dealing with the
Trustees shall be bound to see to the application of the
purchase money or to inquire into the validity, expediency or
propriety of any such sale or other disposition; to make such
warranties, representations and indemnifications in connection
with the sale or other disposition of any securities owned by
the Trust, for the benefit of the issuer of such securities,
the purchasers thereof, and any underwriters and securities
dealers involved in such sale or other disposition, all to the
extent and under such terms and conditions as the Trustees
with advice of counsel shall deem to be appropriate under the
circumstances; to compromise, compound and settle any debt or
obligation due to or from them as Trustees, and to reduce the
rate of interest on, to extend or otherwise modify, or to
foreclose upon default or otherwise enforce any such
obligation; to vote in person or by proxy on any stocks, bonds
or other securities held by them; to exercise any options
appurtenant to any stocks, bonds or other securities for the
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conversion thereof into other stocks, bonds, or securities, or
to exercise any rights to subscribe for additional stocks,
bonds or other securities, and to make any and all necessary
payments therefor; to join in, or to dissent from and to
oppose, the reorganization, recapitalization, consolidation,
liquidation, sale or merger of corporations or properties in
which they may be interested as Trustees upon such terms and
conditions as they may deem wise; and to maker execute,
acknowledge and deliver or to cause to be made, executed,
acknowledged and delivered on their behalf, any and all deeds,
leases, assignments, proxies, powers of attorney and
instruments whatsoever.
(d) The Trustees may borrow money for the purpose of the Trust,
upon such terms and conditions as the Trustees shall from time
to time determine, and pledge or mortgage securities or other
assets owned by the Trust as security for the payment thereof.
(e) Certificates of stock or other assets held or owned by the
Trust may be issued in the name of the Trustees, or in the
name of such nominee or nominees as the Trustees may from time
to time designate. Upon the death, resignation, removal or
disability of any such nominee, the certifi-
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cates of stock or other assets may be transferred to the
Trustees, or to any other nominee or nominees as the Trustees
designate. The Trustees shall from time to time by resolution
designate the individuals who shall be authorized to sign, on
behalf of the Trustees, instruments of assignment or transfer
for the purpose of assigning and transferring certificates of
stock or other assets held in the name of the Trustees.
(f) The Trustees shall from time to time by resolution designate
the individuals who shall be authorized to sign, on their
behalf, written orders to the nominee or nominees in whose
name or names certificates of stock or other assets owned by
the Trust are issued, instructing such nominee or nominees to
execute instruments of assignment or transfer for the purpose
of assigning or transferring such stock certificates or other
assets. No stock certificates or other assets issued in the
name of the Trustees shall be assigned or transferred unless
the instrument of assignment or transfer is signed on behalf
of the Trustees in accordance with the provisions of
resolutions adopted by the Trustees, as aforesaid. No stock
certificates or other assets owned by the Trust and held in
the name of any nominee or nominees,
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shall be assigned or transferred except pursuant to written
orders signed on behalf of the Trustees in accordance with
resolutions adopted by the Trustees, as aforesaid; but such
nominee or nominees shall in each case promptly comply with
all such written orders when so signed.
(g) The Trustees may begin, maintain or defend any litigation
necessary in connection with the administration of the Plan or
this Trust, except that the Trustees shall not be obligated or
required to do so unless they have been indemnified to their
satisfaction against all expenses and liabilities sustained or
anticipated by them by reason thereof.
(h) If payment of any distribution hereunder shall give rise to
any liability for estate, inheritance, income or other tax,
charge or assessment, which, in the Trustees' opinion, they
shall or may be required to pay, the Trustees shall have full
power and authority to pay such tax, charge or assessment out
of any monies or other property in their hands for the account
of the person whose interest hereunder is liable for such tax,
but the Trustees shall give the Company notice of their
intention to make such payments as far in advance as may be
practicable. If the Company requests
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the Trustees to defer making payment of such tax, charge or
assessment, the Trustees shall be indemnified to their
satisfaction in the premises. The Company or the Trustees or
either, before making payment of any distribution, may
require such release or other documents from any lawful taxing
authority and may require such indemnity from the intended
payee as they respectively consider necessary for their
protection.
(i) The Trustees may retain any funds or property subject to any
dispute without liability for payment of interest, or decline
to make payment or delivery thereof until final adjudication
is made by a court of competent jurisdiction.
SECTION 6. PAYMENT OF EXPENSES
6.1 All reasonable costs, charges, and expenses incurred by the
Trustees in connection with the administration of this Trust, including such
reasonable compensation to the Trustees as may be agreed upon in writing from
time to time between the Company and the Trustees, shall be paid from the
Trust, unless paid by the Company. The Trustees shall pay such expenses
relative to the administration of the Plan as may be directed in writing by the
Company and shall be fully protected in making any such payments. All taxes of
any and all kinds whatsoever that may be levied or assessed under existing or
future laws upon the Trust or the income thereof shall be paid from the Trust.
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SECTION 7. ACCOUNTS
7.1 The Trustees shall maintain accurate and detailed records and
accounts of all investments, receipts disbursements, and other transactions
hereunder, and all accounts, books and records relating thereto shall be open
at all reasonable times to inspection and audit by such person or persons as
the Company may designate.
7.2 The Trustees shall submit to the auditors for the Company and
to the actuaries for the Plan such valuations, reports or other information as
they may reasonably require under the terms of the Plan.
7.3 The Trustees shall establish and maintain for operational and
accounting purposes such other accounts or records as the Company may, from
time to time, consider necessary.
7.4 In no event shall the maintenance of an account or record by
the Trustees designated as the account of an Employee, retired Employee,
terminated Employee, or beneficiary mean that such person shall have any
interest in any specific asset of the Trust from which he may be entitled to
receive benefits.
SECTION 8. PROTECTION OF THE TRUSTEES
8.1 The Trustees shall not be obligated to inquire as to whether
or not any payee of funds or any distributee of benefits designated by the
Company is entitled thereto or as to whether any payment, allocation or
distribution directed or authorized by the Company is proper, or within the
terms of the
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Plan, or has been computed properly as to the amount or manner of making the
same, and shall be accountable only to the Company for any payment, allocation
or distribution made by the Trustees in good faith on the order or direction of
the Company. The Trustees shall not be liable or responsible for any payment
made by them in good faith.
8.2 Any action which may be taken by the Company under this
Agreement shall be by resolution of its Board of Directors or by the Retirement
Committee under the Plan as such Committee is constituted or by any other
representative authorized to act by resolution of the Board of Directors. The
Trustees shall not recognize or take notice of the appointment of any
representative of the Company unless and until the Company notifies the
Trustees in writing of such appointment and the extent of such representative's
authority. The Trustees may assume that such appointment and authority continue
in effect until they receive written notice to the contrary from the Company.
Any action taken or omitted to be taken by the Trustees by authority of any
representative of the Company within the scope of his authority shall be as
effective for all purposes hereof as if such action or nonaction had been
authorized by the Company. The Company, the Retirement Committee, any
representative of the Company, and the Trustees shall each be fully protected
in acting and relying upon notices described in this paragraph.
8.3 The Trustees shall have no power, authority or duty in respect
of the determination of rights and interests of
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any persons in and to the Trust or under the Plan or to question or examine
into the determination of any right or interest.
8.4 The Trustees and the members of the Investment Committee shall
not be personally liable to any person for any obligation or liability incurred
on behalf of the Trust, but each such person shall look solely to the assets of
the Trust for satisfaction of such obligations or liability. Moreover, the
Trustees and the members of the Investment Committee shall not be personally
liable for any loss which may result by reason of any investment or loan made
by them in good faith on behalf of the Trust, or for any act or failure on
their part to act, made or omitted to be done in good faith.
8.5 Each Trustee, each officer, or member of the Investment
Committee and each person who shall serve at the request of the Trustees as a
director or officer of a corporation in which the Trust owns shares of capital
stock or of which it is a creditor, including, in each instance, a former
Trustee, director, committee member, or officer and the heirs, legatees,
devisees and personal representatives of a deceased Trustee, committee member,
director or officer, shall be indemnified by the Company against expenses
(including attorneys' fees and any amounts paid in settlement) actually or
necessarily incurred by them in connection with the defense of any action, suit
or proceeding (including any appeal therein) in which they or any of them are
made parties or a party by reason of being or having been Trustees, officers or
members of the Investment Committee or
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a director or officer of any such corporation, except in relation to matters as
to which any such Trustee, director, officers, committee member, or former
Trustee, director committee member, or officer shall be adjudged in such
action, suit or proceeding to be liable for dereliction or misconduct in the
performance of his duties as such Trustee, director, committee member or
officer.
8.6 No Employer shall have any responsibility or liability
whatsoever with reference to the management or conduct of the business of the
Trust for any act or failure to act on the part of any Trustee. The Employers,
however, shall hold the Trustees harmless from good faith reliance on personnel
and compensation information received from the Employers, or any of them.
8.7 The Company intends that the Trust, the terms of which are
herein restated, shall continue to qualify under Section 401(a) of the Code and
also meet the requirements of ERISA, and until advised to the contrary, the
Trustees may assume that the Trust is so qualified.
SECTION 9. INVESTMENT COMMITTEE
9.1 The Trustees may in their discretion appoint an investment
committee composed of such individuals as they shall designate, all of whom
may, but need not be, either Trustees or "investment managers" as defined by
Section 3(38) of ERISA, who shall hold office during the pleasure of the
Trustees. The Committee shall have all of the powers, authorities and discre-
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tions vested in the Trustees under the provisions of Section 5, subject to such
restrictions, limitations and conditions as may be prescribed from time to time
by the Trustees. The members of the Committee may adopt such resolutions as
they deem appropriate for the purpose of governing themselves in the conduct of
the business of the Committee, subject, however, to such rules and regulations,
if any, prescribed in that regard by the Trustees. The Committee shall
periodically and whenever required by the Trustees submit to the Trustees
reports of the Committee's actions.
SECTION 10. TRANSFERS, MERGERS AND CONSOLIDATIONS
10.1 The Trust may not merge with, consolidate with or transfer
assets or liabilities to any other plan unless each Participant would receive a
benefit immediately after the merger, consolidation or transfer (if the other
plan then terminated) which is equal to or greater than the benefit he would
have been entitled to receive immediately before the merger, consolidation or
transfer (if the Plan had then terminated).
SECTION 11. TERMINATION
11.1 Upon termination of the Plan, the Trustees shall first reserve
such reasonable amounts as they may deem necessary to provide for the payment
of any expenses then or thereafter chargeable to the Trust. The balance of the
Trust, together with any amounts reserved by the Trustees in accordance with
the preceding sentence which prove to be excessive, shall be liquidated and
distributed by the Trustees as directed by the Company
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in writing. The Trustees shall have no responsibility to see that such
distribution is proper and within the terms of the Plan. Such liquidation and
distribution may be implemented through the continuance of this Trust, the
execution of a new trust agreement, by the purchase of annuity contracts for
persons entitled to distributions, or in any other appropriate manner, as the
Company may direct in writing. The Company or any other Employer shall have no
beneficial interest in the Fund during its continuance or upon termination of
the Trust, except that any balance remaining in the Trust, after satisfaction
of all fixed and contingent liabilities, may revert to the Company or any other
Employer entitled thereto.
11.2 Upon termination of the Trust, the Trustees shall continue to
have all of the powers provided in this Agreement as are necessary or desirable
for the orderly liquidation and distribution of the Trust.
SECTION 12. AMENDMENT
12.1 This Agreement may be amended by action of the Board of
Directors of the Company at any time and from time to time. The Directors shall
promptly notify the Trustees of any such amendment; provided, however, that no
such amendment shall vest in the Company or any other Employer any right, title
or interest in or to the assets of the Trust Fund or allow any part of the
Trust Fund to be used for, or diverted to, purposes other than for the
exclusive benefit of Participants and their beneficiaries, within the meaning
of Section 401 of the Code and ERISA,
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provided, further, that the rights, duties or responsibilities of the Trustees
shall not be substantially changed without their written consent.
SECTION 13. NONASSIGNABILITY
13.1 It is a condition of the Plan to which all rights of any
person shall be subject, that payments hereunder shall be made only to those
persons entitled thereto under the terms of this Plan, and no right or interest
in the Plan or Trust shall be transferable or assignable; such right or
interest may not be anticipated, charged or encumbered, and shall not be
subject to or reached by any legal or equitable process (including execution,
garnishment, attachment, pledge or bankruptcy) in satisfaction of any debt,
liability or obligation, prior to its receipt, including any liability or
obligation for alimony, separate maintenance or child support payments.
SECTION 14. APPLICABLE LAW
14.1 Since the Company's principal office and the Trustees'
domicile are in the State of Illinois, and since it is contemplated that the
situs of administration of the Plan and Trust will continue in such State, all
rights under the Plan and Trust shall be governed, construed and administered
in accordance with the laws of the State of Illinois to the extent such law is
not superseded pursuant to the provisions of Section 514 of ERISA.
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SECTION 15. COUNTERPARTS
15.1 This Agreement may be executed in any number of counterparts,
each of which shall be considered as an original, and no other counterparts
need be produced.
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EXHIBIT 10.13
3174m/8472L
PLAN AND AGREEMENT OF MERGER
PLAN AND AGREEMENT OF MERGER, dated as of August 21, 1992
(this "Agreement"), by and among DeSoto, Inc., a Delaware corporation
("DeSoto"), DeSoto Subsidiary One Corp., a New Jersey corporation and a direct
wholly-owned subsidiary of DeSoto ("Newco"), and J.L. Prescott Company, a New
Jersey corporation (the "Company").
W I T N E S S E T H
WHEREAS, the respective Boards of Directors of the Company,
DeSoto and Newco have each adopted resolutions approving this Agreement and the
Merger (as defined in Section 1.01) and providing that Newco merge with the
Company pursuant to this Agreement and the applicable provisions of the New
Jersey Business Corporation Act, as amended (the "BCA").
NOW, THEREFORE, in consideration of the premises and of the
mutual agreements hereinafter contained, the parties hereto do hereby agree as
follows:
ARTICLE I
THE MERGER
1.01 Merger. Upon the terms and subject to the conditions
set forth in this Agreement, at the Effective Time (as defined in Section
1.03), the Company will be merged with and into Newco (the "Merger") in
accordance with the BCA. Following the Merger, Newco shall continue as the
surviving corporation under the laws of the State of New Jersey, except that
Newco shall change its name to "J.L. Prescott Company" as described in Section
1.05 (Newco, following the Merger, shall sometimes be referred to herein as the
"Surviving Corporation"), and the separate corporate existence of the Company
shall cease. The Company shall, upon Newco's request, execute an amendment or
supplement to this Agreement to provide for a merger, on terms otherwise
consistent with this Agreement, of the Company with and into any other direct
or indirect wholly-owned subsidiary of DeSoto, with such other
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subsidiary of DeSoto as the Surviving Corporation, or of Newco or such other
subsidiary of DeSoto with and into the Company, with the Company as the
Surviving Corporation.
1.02 Closing. Upon the terms and subject to the conditions
set forth in this Agreement, the closing of the Merger (the "Closing") shall
take place as soon as practicable after all the conditions set forth in Article
V hereof have been satisfied or, to the extent permitted hereunder, waived,
provided that such satisfaction or waiver shall have occurred within the period
specified in Section 6.01(b). The Closing will take place at 10:00 a.m. local
time at the offices of Fried, Frank, Harris, Shriver & Jacobson, One New York
Plaza, New York, New York 10004, or at such other time and/or place as the
parties hereto may agree. The date on which the Closing occurs is herein
referred to as the "Closing Date."
1.03 Effective Time. The Merger shall be effected as soon
as practicable on or after the Closing Date by filing a Certificate of Merger
with the Office of the Secretary of State of the State of New Jersey, which
shall be filed promptly on or after the Closing Date (but in no event later
than one business day after the Closing Date), and the Merger shall, in
accordance with Section 14A:10-4.1 of the BCA, become effective immediately at
the time of such filing (the "Effective Time").
1.04 Effect of Merger. The Merger shall have the effects
set forth in Section 14A:10-6 of the BCA and, from and after the Effective
Time, the Surviving Corporation shall possess all the assets, rights,
privileges, powers, immunities, purposes and franchises and be liable for all
the obligations and liabilities of the Company and Newco, all as provided under
the BCA.
1.05 Certificate of Incorporation and By-Laws. The
Certificate of Incorporation (as amended as described in the next sentence) and
the By-laws of Newco in effect immediately prior to the Effective Time shall be
the Certificate of Incorporation and By-laws of the Surviving Corporation at
the Effective Time. Article FIRST of the Certificate of Incorporation of Newco
shall be amended at the Effective Time to read in its entirety as follows:
"FIRST: The name of the Corporation is J.L. Prescott Company."
1.06 Directors and Officers. The directors of Newco and
the officers of the Company, each as of immediately prior to the Effective
Time, shall be the initial directors and officers of the Surviving Corporation
at the Effective Time, respectively, in each case until the earlier of their
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resignation or removal or until their respective successors are duly elected
and qualified.
1.07 Conversion of Shares. At the Effective Time, by
virtue of the Merger and without any action on the part of DeSoto, Newco, the
Company or any holder of shares of common stock, par value $.01 per share
(collectively, the "Shareholders"), of the Company (the "Shares"):
(a) each Share issued and outstanding immediately
prior to the Effective Time (other than Shares cancelled and retired pursuant
to Section 1.07(b)) shall be converted into the right to receive certificates
representing (i) that number (the "Conversion Number") of validly issued, fully
paid and nonassessable shares of common stock, par value $1 per share, of
DeSoto ("DeSoto Common Stock") obtained by dividing (x) 522,775 (as adjusted
pursuant to Section 1.08) by (y) the number of Shares issued and outstanding
immediately prior to the Effective Time (other than Shares cancelled and
retired pursuant to Section 1.07(b)), (ii) if DeSoto's Preferred Share Purchase
Rights have not terminated, expired or been redeemed prior to the Effective
Time, a distribution of a number of Preferred Share Purchase Rights in
accordance with the terms thereof equal to the Conversion Number and (iii) that
number of contingent value rights in the form set forth on Exhibit A (the
"CVRs") equal to the Conversion Number; provided, however, that until
surrendered in accordance with the provisions of Section 1.10, each stock
certificate which immediately prior to the Effective Time represented Shares
(each, a "Certificate") (other than Certificates representing Shares cancelled
and retired pursuant to Section 1.07(b)), shall represent for all purposes only
the right to receive the consideration set forth in this Section 1.07(a),
without interest thereon or other rights in respect thereof; and in further
consideration of the Merger, DeSoto agrees to assume at the Effective Time the
obligation of Parent (as defined in Section 2.03) with respect to the payment
to Parent's minority stockholder following redemption and cancellation of
Parent's stock held by such minority stockholder as set forth in the redemption
agreement dated as of the date hereof among Parent, such minority stockholder
and DeSoto;
(b) each Share held in the treasury of the
Company immediately prior to the Effective Time shall be cancelled and retired
and cease to exist and no payment shall be made with respect thereto; and
(c) each share of common stock of Newco issued
and outstanding immediately prior to the Effective Time shall be converted into
and exchangeable for one validly issued,
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fully paid and nonassessable share of the common stock of the Surviving
Corporation.
1.08 Adjustments. If at any time during the period between
the date of this Agreement and the Effective Time any change in the outstanding
shares of DeSoto Common Stock shall occur, including by reason of any
reclassification, recapitalization, stock split or combination, exchange or
readjustment of or any other like change in such shares, or any stock dividend
thereon with a record date during such period, the Conversion Number shall be
appropriately adjusted as if the Effective Time had occurred immediately prior
to such change.
1.09 Payment for Shares. (a) From and after the Effective
Time, upon surrender to the Surviving Corporation of a Certificate, duly
executed, and any other documents reasonably requested by DeSoto to evidence
properly the surrender of the Certificate in exchange for the consideration set
forth in Section 1.07 (including without limitation the documents referred to
in Section 1.09(c)), the holder of such Certificate shall be entitled to
receive in exchange therefor the consideration set forth in Section 1.07, and
such Certificate shall forthwith be cancelled. If payment is to be made to a
person other than the person in whose name the Certificate surrendered is
registered, it shall be a condition of payment that the Certificate so
surrendered shall be properly endorsed or otherwise in proper form for transfer
and that the person requesting such payment shall pay any transfer or other
taxes required by reason of the payment to a person other than the registered
holder of the Certificate surrendered or establish to the satisfaction of the
Surviving Corporation that such tax has been paid or is not applicable. Without
limiting the generality of the foregoing, subsequent to the Effective Time,
unless and until an outstanding Certificate is surrendered in accordance with
this Section 1.09, (i) no dividends or distributions of any kind payable to the
holders of record of DeSoto Common Stock after the Effective Time shall be paid
by DeSoto to the holder of such an outstanding Certificate and (ii) no such
holder shall have a right to receive such dividends or distributions. Upon the
surrender and exchange of such an outstanding Certificate, the holder shall be
paid, without interest, the amount of any dividends or distributions which
theretofore would have become payable between the Effective Time and the date
of such surrender or exchange with respect to the shares of DeSoto Common Stock
evidenced by such Certificate as if the surrender or exchange had occurred at
the Effective Time.
(b) After the Effective Time, there shall be no
transfers of the Shares which were outstanding immediately
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prior to the Effective Time on the stock transfer books of the Surviving
Corporation. If, after the Effective Time, Certificates are presented to the
Surviving Corporation, they shall be cancelled and exchanged for the
consideration provided in Section 1.07 in accordance with the procedures set
forth in this Section 1.09.
(c) As a condition to payment to a Shareholder of
the consideration set forth in Section 1.07, such Shareholder (i) shall have
delivered to DeSoto an affidavit pursuant to Section 1.1445-2(b)(2) of the
United States Treasury Regulations which (A) states that such Shareholder is
not a nonresident alien (or in the case of an entity, is not a "foreign
person") for purposes of United States income taxation, (B) sets forth such
Shareholder's taxpayer identification number and home address (or in the case
of an entity, its office address), and (C) is duly signed under penalties of
perjury, and (ii) shall have delivered to DeSoto an accurate and complete
signed original of Internal Revenue Service Form W-9 (or successor form)
indicating that such Shareholder is entitled to receive payments under this
Agreement without any deduction or withholding of any federal income Taxes (as
defined in Section 2.15). If a Shareholder does not deliver such form, DeSoto
is entitled to withhold from any payments any amounts required by applicable
law to be withheld.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to each of DeSoto and
Newco as follows:
2.01 Organization. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
New Jersey and has all requisite corporate power and authority to carry on its
business as it is now being conducted and to own, use and lease its assets and
properties. The Company is duly qualified and licensed as a foreign corporation
to do business, and is in good standing (and has paid all relevant franchise or
analogous taxes due prior to the date hereof), in each jurisdiction where the
character of its properties owned or held under lease or the nature of its
activities makes such qualification necessary, except where the failure to be
so qualified or in good standing, individually or in the aggregate, would not
have (and would not reasonably be expected to have) a material adverse effect
on the business, financial condition, assets, liabilities, properties or
results
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of operations of the Company (a "Company Material Adverse Effect"). True and
complete copies of the Certificate of Incorporation and By-laws of the Company
have previously been delivered to DeSoto.
2.02 Authority Relative to This Agreement; Required Vote.
The Company has all requisite corporate power to enter into this Agreement and
to carry out its obligations hereunder. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have
been duly approved and authorized by the Board of Directors of Company and by
the Shareholders, and no other corporate proceeding is necessary to approve or
authorize this Agreement or any of the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by the Company and
constitutes a valid and binding obligation of the Company, enforceable against
it in accordance with its terms, except that such enforceability (i) may be
limited by applicable bankruptcy, insolvency, moratorium or other similar laws
affecting or relating to creditors' rights generally and (ii) is subject to
general principles of equity.
2.03 Capitalization. The authorized capital stock of the
Company consists of 1,250,000 Shares, of which 815,278 Shares are issued and
outstanding. Narrangansett/Prescott, Inc., a Delaware corporation ("Parent"),
is the registered owner of all the issued and outstanding Shares. No Shares are
held in the Company's treasury. All the issued and outstanding Shares are
validly issued, fully paid and nonassessable and free of preemptive rights.
Except (x) as set forth above in this Section 2.03 or (y) for such interests as
are set forth on Schedule 2.03 and are "out of the money" with respect to the
holder thereof or will be cancelled prior to the Effective Time at no cost to
the Company or the Surviving Corporation, there are no shares of capital stock
of the Company authorized, issued or outstanding or reserved for issuance, and
there are no outstanding subscriptions, options, warrants, rights, contingent
value rights, stock-based or stock-related awards or convertible or
exchangeable securities or other agreements or commitments to which the Company
is a party or by which the Company may be bound of any character relating to,
or obligating the Company to sell, issue, grant, award, transfer or otherwise
dispose of, or to redeem, repurchase or otherwise acquire, any shares of
capital stock or other securities of the Company (including, without
limitation, any agreement or commitment obligating the Company to make any
payment, issue any security or take other action with respect to any third
party or pursuant to any employee compensation arrangement based on any
valuation or transaction price of, or change of majority ownership in, the
Shares), other than this Agreement.
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Except as set forth on Schedule 2.03, there are no voting trusts, proxies or
other agreements or understandings to which the Company is a party with respect
to the voting of capital stock of the Company.
2.04 Subsidiaries and Portfolio Interests. Except as set
forth on Schedule 2.04, the Company does not directly or indirectly own any
voting or equity interest in any corporation, partnership, joint venture or
other business association or entity or other Person (as defined in Section
7.05). Except as set forth on Schedule 2.04, the interests of the Company in
such Persons are owned free and clear of all liens, options, claims, security
interests or other encumbrances (including, without limitation, rights of first
refusal or similar rights) (collectively, "Encumbrances"). The Company has no
subsidiary (as defined in Section 7.05).
2.05 Financial Statements; Projections. (a) Schedule 2.05
sets forth copies of the balance sheets of the Company at December 31, 1990,
1989 and 1988 (collectively, the "Audited Balance Sheets"), and the related
statements of income, retained earnings and cash flows for the years (or, in the
case of the December 31, 1988 Audited Balance Sheet, the nine-month period) then
ended, including the notes thereto, audited by Ernst & Young, together, in each
case, with a copy of the report of Ernst & Young (collectively, the "Audited
Financial Statements"). Also set forth on Schedule 2.05 is the unaudited balance
sheet of the Company at May 31, 1992 (the "May 31, 1992 Unaudited Balance
Sheet") and the related unaudited statements of income, retained earnings and
cash flows for the five-month period then ended (collectively, the "Unaudited
Financial Statements"). The Audited Financial Statements and the Unaudited
Financial Statements (i) are in accordance with books and records of the Company
and (ii) fairly present in all material respects the net assets, financial
position and results of operations of the Company as at the respective dates and
for the respective periods referred to therein in conformity with generally
accepted accounting principles ("GAAP"), uniformly applied on a basis consistent
with that of prior years or periods, except that the Unaudited Financial
Statements do not contain a complete set of notes and are subject to normal
year-end adjustments of a type and in amounts consistent with adjustments in
prior years. The books of account and other financial and corporate records of
the Company are complete and correct in all material respects.
(b) The Company has provided to DeSoto its
forecasts and projections of the Company's operations, financial condition and
financial performance dated as of June 16, 1992. All forecasts and projections
of the Company's
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operations, financial condition and financial performance provided by the
Company to DeSoto were at the time prepared believed by the Company's senior
management to be reasonable and are the same forecasts and projections as were
then being used in the Company's internal business plans and budgets at the
time provided to DeSoto.
2.06 Undisclosed Liabilities; Absence of Certain Charges.
(a) Except as disclosed on Schedule 2.06(a), other schedules to this Agreement
or elsewhere in this Agreement, the Company is not subject to any debts,
liabilities or obligations, whether known or unknown, asserted or unasserted,
accrued, absolute, contingent or otherwise and whether due or to become due
("Liabilities") which, singly or in the aggregate, have (or would reasonably be
expected to have) a Company Material Adverse Effect, other than (i) to the
extent reflected, reserved against or otherwise disclosed in the May 31, 1992
Unaudited Balance Sheet, (ii) Liabilities incurred by the Company in connection
with this Agreement or any of the transactions contemplated hereby or any other
transaction with DeSoto and (iii) Liabilities arising since May 31, 1992 in the
ordinary course of the Company's business consistent (in amount and kind) with
past practice (but, in any event, excluding liabilities relating to violations
of law, Litigation (as defined in Section 2.13), or environmental matters).
(b) Except as set forth on the Schedules to this
Agreement, since May 31, 1992, the Company has not:
(i)(A) suffered any loss or casualty which
has (or would reasonably be expected to have) a Company
Material Adverse Effect, whether or not covered by insurance or
(B) suffered any material adverse change in its financial
condition or operating results other than on account of its
continuing cash flow difficulties;
(ii) incurred or discharged any Liability
or entered into any transaction except in the ordinary course
of the Company's business and except for Liabilities and
transactions that, individually or in the aggregate, do not
have (and would not reasonably be expected to have) a Company
Material Adverse Effect;
(iii) applied its cash and cash
equivalents other than in the day-to-day operations of its
business or in the ordinary course of business;
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(iv) modified, amended, terminated,
transferred or waived any material right under any material
contract or other agreement of the type required to be set
forth on any Schedule hereto, except in the ordinary course of
the Company's business consistent with past practice;
(v) made any changes in its accounting
methods or practices or made any changes in depreciation or
amortization policies or rates adopted by it other than as may
be required by GAAP;
(vi) made any loan or advance to any of
its affiliates (as defined in Section 7.05) or any of its or
their respective directors, officers, employees or other
representatives, or, otherwise than in the ordinary course of
business consistent with past practice, made any other loan or
advance;
(vii) except for inventory or equipment
disposed of or acquired in the ordinary course of business,
sold, abandoned, transferred, leased, licensed or made any
other disposition of any of its material properties or assets
or acquired any capital stock or business of any other Person;
(viii) with respect to any Employee whose
annual base compensation exceeds $50,000, or any group or unit
of Employees as a whole (irrespective of wage rate), entered
into, amended or terminated any employment, consulting,
collective bargaining, severance, termination, retirement or
indemnification agreement, contract, policy, plan, practice or
arrangement (other than the hiring or dismissal of at-will
employees in the ordinary course of business consistent with
past practice), or granted any increase in the compensation
payable or to become payable by the Company to any current or
former director, officer, employee or consultant of the
Company (or a former subsidiary or division of the Company)
(an "Employee"), or paid any bonus, fee or other compensation
to any Employee other than in the ordinary course of business
consistent (in amount and kind) with past practice, or entered
into, or increased the amounts payable or to become payable by
the Company with respect to any Employee pursuant to, any
agreement or employee benefit plan or arrangement;
(ix) terminated or failed to renew, or
received any written notice of dispute or threat to
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terminate or fail to renew (that, in any case, was not
subsequently withdrawn), any material commitment or other
agreement to which it is or was a party;
(x) made any declaration of, or set
aside or paid, any dividend or other distribution (whether in
cash, stock or property) with respect to the capital stock of
the Company; or
(xi) entered into any agreement,
arrangement or other understanding to do any of the foregoing.
2.07 Compliance with Laws; Permits. Except as set forth on
Schedule 2.07 and except for such matters as are represented or warranted in
Section 2.19 or as otherwise disclosed on Schedule 2.19 ("Environmental
Matters"), the Company is in compliance in all material respects with all
federal, state, local and foreign orders, judgments, injunctions, writs,
decrees, laws, statutes, ordinances, rules and regulations by any Governmental
Entity (as defined below) (collectively, "Laws") applicable to its business as
currently conducted or properties, except where noncompliance, individually or
in the aggregate, does not have (and would not reasonably be expected to have)
a Company Material Adverse Effect. Except as set forth on Schedule 2.07 and
except with respect to Environmental Matters, the Company has not received any
written notice of any alleged violation of Law applicable to the Company since
January 1, 1990. Except as set forth on Schedule 2.07, the Company has all
governmental permits, licenses, orders and authorizations from, and has made
all required governmental registrations with (collectively, "Permits"),
federal, state and local courts, governmental agencies and regulatory or
administrative authorities and instrumentalities, foreign and domestic (each, a
"Governmental Entity"), required for the conduct of its business as presently
conducted and the ownership, lease or operation of its properties, except where
the absence thereof, individually or in the aggregate, does not have (and would
not reasonably be expected to have) a Company Material Adverse Effect. All
material Permits held by the Company are valid and in full force and effect,
and the Company has duly performed and is in compliance with all such Permits
in all material respects. No event has occurred with respect to the Company's
Permits which allows, or after notice or lapse of time or both would allow, the
suspension, limitation, revocation or termination thereof, and no terminations
thereof or proceedings to suspend, limit, revoke or terminate any Permit have
been to the Company's knowledge threatened, except for any such impairments,
terminations and (if adversely determined) proceedings as, singly or in the
aggregate, do not have (and would not
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reasonably be expected to have) a Company Material Adverse Effect.
2.08 Consents; No Violations. Assuming the accuracy of the
representations and warranties contained in Section 3.10, except as set forth
on Schedule 2.08, neither the execution, delivery or performance of the
Agreement by the Company nor the consummation of any of the transactions
contemplated hereby will (a) conflict with, or result in a breach or a
violation of, any provision of the Certificate of Incorporation or By-laws of
the Company; (b) assuming compliance with the matters set forth in clause (c)
of this Section 2.08, constitute, with or without the passage of time or the
giving of notice or both, a breach, violation or default, create a lien, or
give rise to any right of termination, modification, cancellation, prepayment,
suspension, limitation, revocation or acceleration, under (i) any Law or
Permit, or (ii) any note, bond, mortgage, indenture, lease, agreement or other
instrument of the Company, or to which it or any of its properties is subject,
except, with respect to the matters set forth in clause (ii), for breaches,
violations, defaults, liens, or rights of termination, modification,
cancellation, prepayment, suspension, limitation, revocation or acceleration,
singly or in the aggregate, which would not have (and would not reasonably be
expected to have) a Company Material Adverse Effect or materially adversely
affect the ability of the Company to consummate any of the transactions
contemplated hereby; or (c) require any consent, approval or authorization of,
notification to, filing with, or exemption or waiver by, any Governmental
Entity on the part of the Company other than (i) the filing of a Certificate of
Merger in accordance with the BCA, (ii) the receipt of an amended
administrative consent order or clean-up plan approval letter for the Company's
former New Jersey sites currently subject to an administrative consent order
and, if necessary, an administrative consent order or letter of
non-applicability (or de minimis exemption) with respect to the Company's New
Jersey warehouse (collectively, the "ECRA ACO's") from the New Jersey
Department of Environmental Protection under the New Jersey Environmental
Cleanup Responsibility Act, N.J.S.A. Section 13:lK-6 et seq. ("ECRA"), and (iii)
consents, approvals, authorizations, notifications, filings, exemptions or
waivers which, if not obtained or made would not, singly or in the aggregate,
have a Company Material Adverse Effect or materially adversely affect the
ability of the Company to consummate any of the transactions contemplated
hereby.
2.09 Commitments. (a) Schedule 2.09(a) sets forth a list
of each contract, agreement or other binding arrangement
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to which the Company is a party or by or to which it or any of its properties
may be bound or subject (collectively, the "Commitments") (i) which provides
for future payments thereunder of more than $100,000 per year, including,
without limitation, all such (A) Commitments for capital expenditures, (B)
manufacturing, marketing, distribution, dealer, override, commission, rebating,
fee-sharing, minimum requirements or sales agency Commitments, (C) guarantees
of third party obligations, and (D) Commitments for the sale or purchase of any
assets other than in the ordinary course of business, but excluding purchase
orders or other Commitments for the purchase of raw materials, components or
supplies and sales orders or other Commitments for the sale of finished goods;
(ii) which restricts the kinds of businesses in which the Company may engage or
the geographical area in which it may conduct its business, or the type of
information which it may disclose (other than non-disclosure agreements with
customers relating to the sale, marketing or manufacture of goods); (iii) which
is an indenture, mortgage, loan agreement, promissory note, or similar
obligation to repay money borrowed in excess of $50,000 on an individual basis;
(iv) which is a Commitment to provide funds or a line of credit for or to make
any investment (in the form of a loan, advance, capital contribution or
otherwise) to or in any Person (other than advances to Employees for their
expenses in the ordinary course of business); (v) which provides for employment
(other than oral agreements for employment at-will at annual salary less than
$50,000), consulting, compensation (including, without limitation, benefits),
loan, severance or indemnification agreements with any Employee or any labor
union or other association representing any Employee; (vi) which provides for
indemnification by the Company of any party (other than an Employee); (vii)
which contain product warranties which are still by their terms effective in
respect of products manufactured, sold, distributed or marketed at any time by
the Company; (viii) with any Governmental Entity, including without limitation,
the United States Department of Defense and any United States military service;
(ix) which require the Company to purchase its powdered detergent requirements
which Commitments are not cancellable within 90 days' or less notice without
penalty; (x) which relate to or affect any of the business, assets or
properties of the Company or by which any purchaser thereof may be bound
(unless of the type not required to be disclosed pursuant to any of clauses (i)
through (ix) of this sentence), except for Commitments of a type described in
clauses (i) through (ix) of this sentence (A) which are cancellable by the
Company on 90 days' or less notice without any penalty or other financial
obligation to the Company involving payments in the aggregate of less than
$100,000 in respect of any such cancellation or (B) which involve annual
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aggregate payments of $100,000 or less, and, in either case, are not material
to the business or financial condition of the Company; and (xi) which are
currently in negotiation and which if entered into would be required to be
listed on Schedule 2.09(a) or to be written on any other Schedule hereto.
(b) Except as disclosed on Schedule 2.09(b), all
of the Commitments referred to in the preceding paragraph 2.09(a) are valid,
binding, in full force and effect and enforceable against the Company in
accordance with their terms except that enforceability (i) may be limited by
applicable bankruptcy, insolvency, moratorium or other similar laws affecting
or relating to creditors' rights generally and (ii) is subject to general
principles of equity. Except as set forth on Schedule 2.09(b), (i) there is no
breach, violation or default by the Company and no event (including the
execution or delivery of this Agreement, the consummation of the transactions
contemplated hereby or the performance of the covenants and agreements provided
herein) which, with notice or lapse of time or both, would constitute a breach,
violation or default by the Company, or give rise to any contingencies,
liquidated damages, penalties or rights of termination, modification,
cancellation, prepayment, suspension, limitation, revocation or acceleration
under, any Commitment listed on Schedule 2.09(a), except for breaches,
violations and defaults, or contingencies, liquidated damages, penalties or
rights of termination, modification, cancellation, prepayment, suspension,
limitation, revocation or acceleration which, singly or in the aggregate, do
not and will not have a Company Material Adverse Effect, (ii) to the Company's
knowledge, no other party to any of the Commitments listed on Schedule 2.09(a)
is in material arrears in respect of the performance or satisfaction of the
terms and conditions on its part to be performed or satisfied under any of such
Commitments and (iii) no material waiver or material indulgence has been
granted by any of the parties to any of the Commitments listed on Schedule
2.09(a).
2.10 Real Estate. The Company does not directly or
beneficially own or operate any real property other than the land owned of
record by the Company and the improvements located thereon (the "Owned Real
Property") and the premises subject of leaseholds held by the Company (the
"Leased Real Property"), in each case, described on Schedule 2.10 (the annual
rental, termination date and renewal term given in the case of each lease) (the
Owned Real Property and the Leased Real Property being, collectively, the "Real
Property"). The Company does not use, operate, lease, sublease, license or
otherwise have the right to use or operate any real property (except for (i)
public warehouse space the annual aggregate
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rental of which does not exceed $60,000 and (ii) the Real Property) and, except
as set forth on Schedule 2.10, is not the lessor (or sublessor) of any real
property.
2.11 Title to Properties. (a) The Company has good,
marketable and, in the case of the Owned Real Property, insurable, title to all
of its properties and assets, tangible and intangible, including, without
limitation, (i) all of the assets reflected on the May 31, 1992 Unaudited
Balance Sheet (other than those subject to capital leases), (ii) the properties
described in Sections 2.10, 2.12 and 2.14 which the Company purports to own,
and (iii) all other properties or assets of any kind used or held for use by
the Company which the Company purports to own, in each case free and clear of
any and all Encumbrances or exceptions to title, except for (p) Encumbrances
set forth in the December 31, 1990 Audited Balance Sheet (including any notes
with respect thereto); (q) properties (other than Owned Real Property) sold,
consumed or otherwise disposed of, or subject to purchase or sales orders or
conditional sale arrangements, in the ordinary course of business consistent
with past practice; (r) Encumbrances set forth on Schedule 2.11(a); (s)
Encumbrances securing taxes not yet due or being contested in good faith by
appropriate proceedings for which adequate reserves or accruals have been
provided in the May 31, 1992 Unaudited Balance Sheet; and (t) Encumbrances
which do not, individually or in the aggregate, materially detract from the
value of such property, materially interfere with the present use, occupancy or
operation of such property or otherwise materially impair the business
operations of the Company or have a Company Material Adverse Effect.
(b) The leases pursuant to which the Company
leases any real or personal property are (i) valid and binding on the Company
and (ii), to the best knowledge of the Company, valid and binding on all
respective parties to such leases in accordance with their respective terms.
Except as disclosed in Schedule 2.11(b) with respect to past due payments of
rent aggregating not more than $138,548 (all of which rental payments have been
accrued on the May 31, 1992 Unaudited Balance Sheet or reflected in the
projections referred to in Section 2.05(b)), there are not under such leases
any existing breaches, defaults, events of default by the Company or events
which with notice or lapse of time or both would constitute a breach, default
or event of default by the Company, nor does the Company know, nor has the
Company received notice of, or a counterparty made a claim to the Company with
respect to, any breach or default, the consequences of which, individually or
in the aggregate, would have or would reasonably be expected to have a Company
Material Adverse Effect. Except as set forth in
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Schedule 2.11(b), none of the rights of the Company under any such leases is
subject to termination or modification as a result of the transactions
contemplated hereby, except where such modification or termination, singly or
in the aggregate, would not have (and would not reasonably be expected to have)
a Company Material Adverse Effect.
(c) Except as set forth on Schedule 2.11(c), the
assets, rights, and properties owned, licensed or leased by the Company
constitute all of the assets, rights, and properties used or held for use by
the Company or reasonably necessary to the operations of the Company as
currently conducted.
2.12 Tangible Property. Except as set forth on Schedule
2.12, the buildings, facilities, machinery, equipment, furniture, leasehold and
other improvements, fixtures, vehicles, structures, any related capitalized
items and other tangible property material to the business operations or
financial condition of the Company (the "Tangible Property") are in reasonable
operating condition and repair (normal wear and tear excepted), free (in the
case of buildings or structures located on the Owned Real Property) of any
material structural or engineering defects, are subject to continued repair and
replacement in accordance with past practice, and are suitable for their
current use. Except as set forth on Schedule 2.12, since March 31, 1988 there
has not been any significant interruption of the operations of the Company due
to inadequate maintenance of the Tangible Property.
2.13 Litigation and Orders. Except as set forth on
Schedule 2.13, (a) there are no actions, suits or legal, administrative or
arbitral proceedings, charges or investigations (collectively, "Litigation")
pending or, to the knowledge of the Company, threatened against, affecting or
involving the Company or any of its rights or properties which, if decided
adversely to the Company, would have (or would reasonably be expected to have)
a Company Material Adverse Effect, or which seek to enjoin or obtain damages in
respect of any of the transactions contemplated hereby; and (b) there is no
judgment, decree, injunction, rule or order of any Governmental Entity
(collectively, "Orders" and, Orders together with Litigation being referred to
herein as "Claims") outstanding against the Company. The Company does not have
any Liability under any Litigation brought or threatened by, or Order in
respect of, any Person who, prior to Parent's acquisition of the Company in
1988, had any equity or participating interest in the Company (other than
possible legal expenses in connection therewith).
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2.14 Patents, Trademarks and Copyrights. Schedule 2.14
sets forth a list of all patents, trademarks, trade names, service marks,
copyright registrations, and applications therefor now or heretofore used or
presently proposed to be used in and material to the business of the Company,
other than any such Intellectual Properties (as defined below) which have not
been used by the Company since March 31, 1988. Except as disclosed on Schedule
2.14, (a) the Company owns or possesses licenses or other valid rights to use
(without the making of any payment to others or the obligation to grant rights
to others in exchange) all patents, trademarks, trade names, service marks,
copyright registrations, know-how and other proprietary information
("Intellectual Properties") reasonably necessary to the conduct of its business
as presently being conducted, except when the failure to have such licenses or
rights, singly or in the aggregate, would not have (and would not reasonably be
expected to have) a Company Material Adverse Effect; (b) the conduct of the
business of the Company as now conducted does not and will not infringe or
conflict with any Intellectual Properties of others; (c) the Company is not
aware of any use of any Intellectual Properties owned by or licensed to the
Company that is now being made, except by the Company or by any Person duly
licensed to use the same; and (d) no infringement by others of any Intellectual
Properties owned by or licensed by or to the Company is known to the Company.
The consummation of the transactions contemplated hereby will not alter or
impair the rights and interests of the Surviving Corporation in any of the
items listed on Schedule 2.14, and the Surviving Corporation will have the same
rights and interests in such items at and after the Effective Time as the
Company will have immediately prior to the Effective Time.
2.15 Taxes. The Company has filed on or prior to the date
hereof, and will file on or prior to the Closing Date, all material federal,
state and local income and other tax returns required to be filed by Law at
such time. All such tax returns were true, complete and correct in all material
respects and filed on a timely basis. The Company has paid all taxes of any
nature whatsoever (including estimated taxes and withholding taxes), with any
related penalties, interest and liabilities (any of the foregoing being
referred to herein as a "Tax") that are shown as due on the aforementioned
filings and all other Taxes claimed or asserted by any taxing authority to be
due from the Company for the periods covered by such tax returns (except for
those being contested in good faith and set forth in Schedule 2.15 and for
which adequate reserves have been provided in the May 31, 1992 Unaudited
Balance Sheet). Except as set forth in Schedule 2.15, the Company is not a
party to any agreement providing for the transfer of Tax benefits to or from
any Person or any agreements or arrangements relating to
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allocating or sharing of Taxes. All Taxes for which the Company may be liable
for periods ending on or prior to May 31, 1992 have been paid, accrued or
reserved for on its books and records, and all Taxes for which the Company may
be liable for periods ending on or after June 1, 1992 and on or prior to the
Closing Date will be paid, accrued or reserved for on its books and records,
except those which, individually or in the aggregate, would not have (and would
not reasonably be expected to have) a Company Material Adverse Effect.
Notwithstanding the foregoing, the May 31, 1992 Unaudited Balance Sheet
includes as an asset a certain Purchase Money Note issued by 510 Ryerson Road,
Inc. in the amount of $2,320,000, the collection of which will give rise to a
section 1231 gain of approximately $1,700,000 for tax purposes, but such
Unaudited Balance Sheet does not contain any accrual or reserve for Taxes
related to such section 1231 gain since the Company's net operating loss
carryforwards at December 31, 1991 and its current year operating losses would
more than offset such gain should the Purchase Money Note be collected prior to
the Effective Time. The Company will not be subject to any income Tax or
similar Tax based upon the Company's operations or activities subsequent to May
31, 1992 up to and including the Closing Date which would exceed $25,000 in the
aggregate. Except as set forth on Schedule 2.15, there are no claims or
assessments pending against the Company for any alleged deficiency in Tax which
pending claims or assessments involve amounts singly or in the aggregate in
excess of $25,000. There is, and there will be, neither any material reduction
or impairment of Tax benefits (including the tax basis of assets), other than
the reduction or elimination of net operating loss carryforwards, available to
the Company and a reduction in the tax basis of the Company's assets by no more
than $1,400,000, nor any taxable income (after application of net operating
loss carryforwards) resulting from or in respect of any forgiveness,
cancellation or modification of any indebtedness of the Company on or before
the Effective Date, including in connection with the restructuring entered into
contemporaneously herewith (the "Bank Debt Restructuring") of the Company's
revolving line of credit arrangement, which arrangement is referred to in note
5 to the December 31, 1990 Audited Financial Statements (the "Prescott Credit
Agreement"), and the guaranty and pledge of Parent related thereto and in
connection with the capital contribution to the Company referred to in Section
5.02(f). The Company will not be subject to any transfer, gains, sales or
similar Taxes as a result of the Merger. Except as provided in Schedule 2.15,
since March 31, 1988 the Company has not been included in any group of
corporations filing a consolidated, combined or unitary return for federal,
state or local Tax purposes.
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2.16 Insurance. Schedule 2.16 sets forth a list of all
policies or binders of fire, casualty, liability, product liability, worker's
compensation, vehicular and other insurance held by or on behalf of the
Company, including the amounts of such insurance and annual premiums with
respect thereto. Such policies and binders are valid and binding in accordance
with their terms and are in full force and effect. Except as disclosed on
Schedule 2.16, the Company is not in material default with respect to any
provision contained in any such policy or binder nor has it failed to give any
notice or present to the insurer any material claim covered under any such
policy or binder in due and timely fashion. Except for claims set forth on
Schedule 2.16, there are no material outstanding unpaid or denied claims under
any such policy or binder, and the Company has not received any written notice
of cancellation or non-renewal of any such policy or binder. Except as set
forth on Schedule 2.16, the Company has not received any written notice from
any of its insurance carriers that any insurance premiums will be materially
increased in the future or that any insurance coverage listed on Schedule 2.16
will not be available in the future on substantially the same terms as now in
effect. Except as would not have a Company Material Adverse Effect, the
consummation of the Merger will not result in the cancellation of insurance
coverage disclosed on Schedule 2.16 following the Effective Time but prior to
the expiration of such policies.
2.17 Employee Matters Generally. (a) Schedule 2.17 lists
each Company Benefit Plan. Except as set forth in Schedule 2.17, each Qualified
Plan is and since its inception has been qualified under Section 401(a) of the
Code and is the subject of a favorable determination letter issued by the
Internal Revenue Service (which has not revoked or threatened to revoke such
letter) regarding the qualified status of the plan. The merger of the pension
plan covering unionized New Jersey Employees with the pension plan covering
salaried Employees has been completed and the merger was done in accordance
with all applicable Law and did not and will not adversely affect the qualified
status of either plan. The Company has made an application to the Internal
Revenue Service requesting a determination as to the qualification of the
combined plan resulting from said plan merger.
(b) The Company has complied in all material
respects with and performed all contractual obligations and all obligations
under Law required to be performed by it under or with respect to any of the
Company Benefit Plans or any related trust agreement or insurance contract. All
contributions and other payments required to be made by the Company to any
Company Benefit Plan prior to the date hereof have been made.
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No Defined Benefit Plan listed in Schedule 2.17 has any accumulated funding
deficiency whether or not waived. There is no bonus, commission, fee or other
incentive compensation payable to any Employee (including, without limitation,
any amounts actually or contingently payable under the bonus arrangements
described in Note 13 to the December 31, 1990 Audited Balance Sheet, all of
which arrangements are "out of the money" with respect to the beneficiary or
holder thereof or will be cancelled prior to the Effective Time at no cost to
the Company or the Surviving Corporation) other than for which adequate
accruals or reserves have been provided in the May 31, 1992 Unaudited Balance
Sheet. There is no Claim pending or, to the knowledge of the Company,
threatened or anticipated (other than routine claims for benefits) against or
relating to any Company Benefit Plan or against the assets of any Company
Benefit Plan. Except as set forth in Schedule 2.17, the Company has not
communicated generally to Employees regarding any material future increases of
benefit levels (or creations of material new benefits) with respect to any
Company Benefit Plan beyond those reflected in the Company Benefit Plans.
(c) No "reportable event" within the meaning of
Section 4043 of ERISA as to which the Pension Benefit Guaranty Corporation
("PBGC") has not by regulation waived the notice requirement of Section 4043(c)
of ERISA has occurred with respect to any Defined Benefit Plan, other than the
merger of the Company's pension plan for New Jersey union Employees with the
Company's pension plan for salaried Employees. Except as set forth in Schedule
2.17, the Company has not participated in or had an obligation to contribute to
any Multiemployer Plan, or incurred or been notified of any withdrawal
liability in respect of any Company Benefit Plan. In the event the Company were
to withdraw as of the Effective Time from any Multiemployer Plan to which it
contributes, it would not incur any withdrawal liability in excess of $25,000.
(d) No event or transaction (including, without
limitation, any "prohibited transaction" within the meaning of Section 4975 of
the Code or Section 406 of ERISA) has occurred with respect to which the
Company, directly or indirectly (through any indemnification agreement or
otherwise), is (or would reasonably be expected to be) subject to any Liability
or Tax under Section 409 of ERISA, Section 502(i) of ERISA, Title IV of ERISA
or Sections 4972, 4975, 4976, 4977, 4979 or 4980B of the Code.
(e) No transaction contemplated by this Agreement
will (either alone or upon the occurrence of any additional or subsequent
events) (i) constitute an event under any Company Benefit Plan, trust funding a
Company Benefit Plan
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or agreement with any Employee that will or may result in any payment (whether
of severance pay or otherwise), acceleration, forgiveness of indebtedness,
vesting, distribution, increase in compensation or benefits or obligation to
fund benefits with respect to any Person or obligation to employ any Person or
(ii) result in Liability to the PBGC under Title IV of ERISA. Each Company
Benefit Plan can be amended, terminated or otherwise discontinued after the
Closing in accordance with its terms, without Liability to the Company, DeSoto
or any of their respective affiliates, except for potential funding liability
arising under Section 412 of the Code and Title IV of ERISA, which as of April
24, 1992 did not exceed $600,000.
(f) No payment or benefit which will or may be
made by the Company or Parent, will be characterized as an "excess parachute
payment" within the meaning of Section 28OG of the Code.
(g) No employer securities, employer real
property or other employer property is included in the assets of any Company
Benefit Plan.
(h) The Company does not have and, absent the
Merger, will not have any Liability by reason of its being a member during the
five year period preceding the Closing and ending on the Closing Date of any
group of organizations described in Section 414(b), (c), (m) or (o) of the Code
and regulations promulgated thereunder of which any corporation, Person or
other member maintained, contributed to or has been liable to contribute to any
Defined Benefit Plan or Multiemployer Plan or failed to comply with the
requirements of Sections 4980B or 162(k) (prior to its repeal) of the Code.
(i) Except as set forth on Schedule 2.17, the
Company does not maintain or contribute to any Company Benefit Plan which
provides, and does not have any Liability to provide, severance or life
insurance, medical or other employee welfare benefits to any Employee (or his
beneficiary) upon such Employee's retirement or termination of employment,
except as may be required by Law, and the Company has never represented,
promised or contracted to any Employee of the Company that such Employee would
be provided with severance, life insurance, medical or other employee welfare
benefits upon his retirement or termination of employment, except to the extent
required by Law. The average annual potential liability of the Company under
Retiree Medical Plan A and Retiree Medical Plan B, in the aggregate, for the
years 1992, 1993, 1994, and 1995 will not exceed $265,000.
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(j) No work stoppage or labor strike against the
Company is pending or, to the knowledge of the Company, threatened. Except as
set forth on Schedule 2.17, the Company is not involved in or, to the knowledge
of the Company, threatened with, any labor dispute, grievance, or Claim
relating to labor, safety or discrimination matters involving any Employee,
including, without limitation, charges of unfair labor practices or
discrimination complaints, which, if adversely determined, individually or in
the aggregate, would have (or would reasonably be expected to have) a Company
Material Adverse Effect. The Company has not violated any state labor Law other
than violations which would not have a Company Material Adverse Effect, or
engaged in any unfair labor practices within the meaning of the National Labor
Relations Act.
For purposes of this Section 2.17, (i) "Code" means the
Internal Revenue Code of 1986, as amended, (ii) "ERISA" means the Employee
Retirement Income Security Act of 1974, as amended, (iii) "Plan" means any
bonus, incentive compensation, deferred compensation, pension, profit sharing,
retirement, stock purchase, stock option, stock ownership, stock appreciation
rights, phantom stock, leave of absence, layoff, vacation, day or dependent
care, legal services, cafeteria, life, health, accident, disability, workmen's
compensation or other insurance, severance, separation or other employee
benefit plan, practice, policy or arrangement of any kind, including, but not
limited to, any "employee benefit plan" within the meaning of Section 3(3) of
ERISA; (iv) "Company Benefit Plan" means any employee pension benefit plan and
any material Plan (other than a multiemployer plan within the meaning of
Section 3(37) of ERISA) established by the Company or to which Parent or the
Company contributes or has contributed (including Plans not now maintained by
the Company or to which the Company does not now contribute, but with respect
to which the Company has or may have any liability); (v) "Qualified Plan" means
each Company Benefit Plan intended to qualify under Section 401 of the Code;
(vi) "Defined Benefit Plan" means each Company Benefit Plan which is subject to
Part 3 of Title I of ERISA, Section 412 of the Code or Title IV of ERISA; and
(vii) "Multiemployer Plan" means any multiemployer plan within the meaning of
Section 4001(a)(3) of ERISA.
2.18 Customers. To the Company's knowledge, except as
disclosed on Schedule 2.18, since May 31, 1992, there has not been any
termination, cancellation or limitation of, or any material modification or
change in, the business relationships of the Company with any material customer
of the Company. Subject to obtaining the consents set forth on Schedule 2.18,
none of the transactions contemplated hereby will give rise to
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the right of any customer of the Company to terminate, modify, cancel, prepay,
suspend, limit, revoke or accelerate any arrangement it has with the Company.
The Company has no knowledge of any threatened adverse change by a material
customer in respect of its relationship with the Company as a result of the
transactions contemplated hereby.
2.19 Environmental Matters. (a) Except as set forth on
Schedule 2.19(a), (i) the Company is and has conducted its business in
substantial compliance with all Laws and Permits relating to pollution,
contamination, protection of the environment, human and occupational safety or
health or sanitation, including matters relating to emissions, discharges,
disseminations, releases or threatened releases of hazardous or toxic
materials, substances or wastes into the air, surface water, groundwater, soil,
land surface or subsurface, buildings or facilities or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of hazardous or toxic materials, substances or wastes
("Environmental Laws" and Environmental Permits") except where the failure to
so comply, individually or in the aggregate, would not have (and would not
reasonably be expected to have) a Company Material Adverse Effect and (ii) the
Company has not received any notice of any failure of the Company to comply in
any material respect with any Environmental Law or the requirements of any
Environmental Permit or that it is or may be a potentially responsible party at
any waste disposal site. The Company does not, and the Surviving Corporation
will not, have actual or potential clean-up, compliance or remediation costs,
Claims, damages or expenses arising out of the Company's non-compliance with
the Environmental Laws or the Environmental Permits prior to the Closing Date,
and the Company has no Liability in respect of waste site remediation or
relating to toxic or hazardous materials, substances or wastes, except for such
costs, Claims, damages, expenses and Liabilities which can in the aggregate be
fully satisfied from amounts reasonably available to the Company or the
Surviving Corporation after the date hereof under (I) the Environmental
Provisions (as defined below), (II) additional monies which may be paid by the
former owners of the Company upon any settlement of existing disputes described
in Schedule 2.19(b) or, if settlement is not reached, which are paid pursuant
to the Environmental Provisions, (III) after tax net proceeds of the $2,320,000
Purchase Money Note issued by 510 Ryerson Road, Inc., to the order of the
Company in connection with the sale of the Company's former Lincoln Park
facility or the fair market value (based on a sale in the short term) of any
collateral securing such note and as to ownership of which is acquired by the
Surviving Corporation or DeSoto, (IV) after tax net proceeds of the $1 million
Mortgage Note
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issued by Noah Realty Corp. to the Company in connection with the sale of the
Company's former 27 Eighth Street facility or the fair market value (based on a
sale in the short term) of any collateral securing such note and as to
ownership of which is acquired by the Surviving Corporation or DeSoto, (V) any
amounts recovered from the Company's insurance carriers under policies in
effect prior to the Effective Time on account of costs incurred by the Company,
DeSoto or the Surviving Corporation in respect of liabilities under Cleanup
Plans, Environmental Laws or Environmental Permits, and (VI) any amounts
recovered from the Company's former landlord at the warehouse facility at 100
Eighth Street on account of costs incurred by the Company, DeSoto or the
Surviving Corporation in respect of environmental clean-up or remediation
obligations, Environmental Laws or Environmental Permits (it being agreed that
the amounts referred to in Items II through VI shall be measured after
deducting any reasonable costs of collection, including reasonable legal costs
incurred by the Company, DeSoto or the Surviving Corporation after May 31,
1992, and that, for purposes of determining amounts at the Maturity Date of the
CVR (as defined therein), the value of the notes referred to in III and IV (if
then outstanding) shall be determined in good faith by a majority of the Board
of Directors of DeSoto at the Maturity Date) (DeSoto agrees to take reasonable
action in light of its business judgment to collect amounts pursuant to the
arrangements described in (I) through (VI); however, it is further agreed that
DeSoto shall have no obligation to take action to recover amounts due under any
of the foregoing if in good faith DeSoto concludes that its reasonable business
judgment (after taking into account the expected benefits and costs of such
action, without regard to the existence of the CVR and DeSoto's rights
thereunder) does not justify such action, which judgment shall be conclusive).
(b) Each of the arrangements for an environmental
escrow fund provided by, and the Agreement to be Bound entered into by, the
former owners of the Company and the letters of credit and surety bonds, all of
which are referred to in Note 12 to the December 31, 1990 Audited Financial
Statements, together with Article XV of that certain merger agreement pursuant
to which Parent acquired the Company in 1988 (collectively, the "Environmental
Provisions"), contains a valid and binding obligation of the parties thereto
enforceable against them in accordance with its terms, except to the extent
that such enforceability (i) may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to creditor's rights
generally and (ii) is subject to general principles of equity. The Company has
taken all steps reasonably necessary to be taken to date to perfect and
maintain its rights under the Environmental Provisions and
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neither the execution, delivery nor performance of any of this Agreement nor
the consummation of any of the transactions contemplated hereby will vitiate
the Company's rights thereunder, and immediately following the Effective Time
such rights will continue in full force and effect. Upon consummation of the
Merger, the Surviving Corporation will be entitled to all benefits and rights
of the Company under the Environmental Provisions. The Company has, pursuant to
Schedule 2.19(b), disclosed certain disputes regarding the foregoing and, after
the Effective Time, DeSoto agrees to be responsible for the reasonable legal
expenses in connection therewith.
2.20 Affiliate Transactions. Except as set forth in
Schedule 2.20 and except for employment relationships between the Company and
Employees, (i) there are no Liabilities or Commitments or other arrangements
between the Company and any affiliate of the Company, (ii) no affiliate of the
Company provides or causes to be provided any assets, services or facilities to
the Company, (iii) the Company does not provide or cause to be provided any
assets, services or facilities to any affiliate of the Company except in the
ordinary course of business on an arms-length basis and (iv) to the Company's
knowledge, no affiliate of the Company will, on or after the Closing, have any
cause of action or other claim whatsoever against, or owe any amount to, the
Company, except for claims in the ordinary course of business such as for
accrued salary, bonus, commissions, and vacation pay, accrued benefits under
employee benefit plans, and similar matters and agreements existing on the date
hereof which have been disclosed to DeSoto in the other Schedules hereto.
Except as set forth on Schedule 2.20, there are no consulting, employment, fee
or other compensation arrangements with any directors or affiliates of the
Company who are not current full-time employees of the Company.
2.21 Expenses; Brokers and Finders. Except as set forth in
the first sentence of Section 7.10, all expenses incurred by Parent or the
Company in connection with this Agreement and the Merger are to be the
responsibility of and borne by Parent. The Company has not employed any broker
or finder or incurred any Liability for any brokerage fees, commissions or
finders' fees in connection with the transactions contemplated hereby or any
other transaction relating to a sale or recapitalization of the Company for
which adequate reserves are not reflected on the May 31, 1992 Unaudited Balance
Sheet.
2.22 Illinois Responsible Property Transfer Act. Either
the Illinois Responsible Property Transfer Act, S.H.A.
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ch. 30, Sections 901-07 (the "Illinois Act") does not apply to this Agreement
or any of the transactions contemplated hereby or, to the extent the Illinois
Act does or may be deemed to so apply, the Company has executed and delivered
to DeSoto such disclosure documents as may be required by the Illinois Act.
2.23 Accuracy of Information: Full Disclosure. All
documents delivered to DeSoto by or on behalf of the Company in connection with
this agreement are complete and authentic in all material respects. No
representation or warranty of the Company contained in this Agreement or in any
Schedule hereto or in any certificate or related document delivered to DeSoto
or any of its affiliates pursuant hereto or in connection herewith contains an
untrue statement of a material fact or omits to state a material fact required
to be stated therein or necessary to make the statements made, in the context
in which made, not materially false or misleading. The senior management of the
Company has no knowledge of any fact that has not been disclosed to DeSoto that
has (or would reasonably be expected to have) a Company Material Adverse
Effect, or that would reasonably be expected to impair the ability of the
Company to perform this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF DESOTO AND NEWCO
Each of DeSoto and Newco represents and warrants to the
Company as follows:
3.01 Organization. Each of DeSoto and Newco is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation and has all requisite corporate
power and authority to carry on its business as it is now being conducted and
to own, use and lease its assets and properties. Each of DeSoto and Newco is
duly qualified and licensed as a foreign corporation to do business, and is in
good standing (and has paid all relevant franchise or analogous taxes due prior
to the date hereof), in each jurisdiction where the character of its properties
owned or held under lease or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified or in good
standing, individually or in the aggregate, would not have (and would not
reasonably be expected to have) a material adverse effect on the business,
financial condition, assets, liabilities, properties or results of operations
of DeSoto and its subsidiaries taken as a whole (a "DeSoto material Adverse
Effect"). True and complete copies of the Certificate of Incorporation and
By-laws of each of DeSoto and Newco have previously been delivered to Parent.
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3.02 Authority Relative to This Agreement; Required Vote.
Each of DeSoto and Newco has all requisite corporate power to enter into this
Agreement and to issue the CVRs and to carry out its obligations hereunder and
thereunder. The execution and delivery of this Agreement and the CVRs and the
consummation of the transactions contemplated hereby have been duly approved
and authorized by the respective Boards of Directors of DeSoto and Newco and by
DeSoto as the sole shareholder of Newco, and no other corporate proceedings on
the part of DeSoto or Newco are necessary to approve or authorize this
Agreement, the issuance of the consideration provided in Section 1.07(a) or any
of the transactions contemplated hereby. This Agreement has been duly and
validly executed and delivered by each of DeSoto and Newco and constitutes a
valid and binding obligation of each of DeSoto and Newco, enforceable against
each of them in accordance with its terms, and the CVRS, when issued, will have
been duly and validly executed and delivered by DeSoto and will constitute a
valid and binding obligation of it, enforceable against DeSoto in accordance
with their terms, except that such enforceability, in each case, (i) may be
limited by applicable bankruptcy, insolvency, moratorium or other similar laws
affecting or relating to enforcement of creditors' rights generally and (ii) is
subject to general principles of equity.
3.03 Capitalization. The authorized capital stock of
DeSoto consists of 20,000,000 shares of DeSoto Common Stock and 5,000,000
shares of preferred stock, par value $1 per share ("Preferred Stock"). As of
the date hereof, 4,070,932 shares of DeSoto Common Stock are issued and
outstanding, all of which are validly issued, fully paid and nonassessable and
free of preemptive rights. DeSoto has entered into an agreement providing for
the issuance of up to 583,333 shares of Series B Senior Preferred Stock and
warrants ("Warrants") to purchase an aggregate of 1,350,000 shares of DeSoto
Common Stock at a price of $7.00 per share (or, under certain circumstances,
shares of Senior C Junior Participating Preferred Stock at a price of $6.50 per
share), of which a portion of such securities have been issued in accordance
with such agreement. A stock option and restricted stock plan was approved by
DeSoto stockholders at the annual meeting of stockholders held on May 27, 1992
authorizing the issuance of up to 400,000 shares of DeSoto Common Stock in
respect of options and stock awards granted by DeSoto pursuant to the plan and
options to purchase 18,000 shares of DeSoto Common Stock have been issued to
non-employee directors in accordance with the terms of the plan and, pursuant
to the employment agreements referred to in Section 5.01(b) hereof, DeSoto has
committed to grant options. All of the outstanding shares of
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capital stock of Newco are owned by DeSoto, are validly issued, fully paid and
nonassessable, and are owned free and clear of any Encumbrance or any
preemptive rights. Except as set forth above in this Section 3.03 or in Section
3.04, there are no shares of capital stock of DeSoto authorized, issued or
outstanding or reserved for issuance, and there are no outstanding
subscriptions, options, warrants, rights, contingent value rights, stock-based
or stock-related awards or convertible or exchangeable securities or other
agreements or commitments to which DeSoto or Newco is a party or by which
DeSoto or Newco may be bound of any character relating to, or obligating DeSoto
or Newco to sell, issue, grant, award, transfer or otherwise dispose of, or to
redeem, repurchase or otherwise acquire, any shares of capital stock or other
securities of DeSoto (including, without limitation, any agreement or
commitment obligating DeSoto to enter into any employee compensation
arrangement based on any valuation or transaction price of, or change of
majority ownership in, shares of DeSoto Common Stock), other than (i) this
Agreement, (ii) the employment agreements referred to in Section 5.01(b) and
(iii) Preferred Share Purchase Rights associated with the DeSoto Common Stock.
There are no voting trusts, proxies or other agreements or understandings to
which DeSoto or Newco is a party with respect to the voting of capital stock of
Desoto.
3.04 DeSoto Common Stock. The shares of DeSoto Common
Stock to be issued at the Effective Time in payment of the consideration
provided in Section 1.07, and any shares of DeSoto Common Stock issued pursuant
to the CVRs, will, in each case upon their issuance, be duly and validly
issued, fully paid and nonassessable, will vest in the recipients thereof valid
title to such DeSoto Common Stock free and clear of all Encumbrances (other
than those Encumbrances created by any such recipients) and will not be issued
in violation of any preemptive rights. A sufficient number of shares of DeSoto
Common Stock have been reserved for the issuance contemplated by clause (a)(i)
of Section 1.07.
3.05 SEC Filings. DeSoto has delivered to Parent (i)
DeSoto's annual reports on Form 10-K for each of the fiscal years ended
December 31, 1988, 1989, 1990 and 1991 (the "10-K's"), (ii) its quarterly
reports on Form 10-Q for each of its fiscal quarters ended on or after December
31, 1988 (the "10-Q's"), (iii) its proxy or information statements relating to
meetings of DeSoto's stockholders since December 31, 1988, and (iv) all of its
other reports, statements, schedules and registration statements and other
filings required under the Securities Act or the Exchange Act (as such terms
are defined below), to be filed with the Securities and Exchange Commission
("SEC") since December 31, 1990 (the filings referred to in
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clauses (i) through (iv) above, which have been delivered to Parent on or prior
to the date hereof, being hereinafter referred to as the "SEC Filings"). DeSoto
has filed with the SEC all reports, statements and other filings required of it
under the Securities Act and the Exchange Act since December 31, 1990, except
where the failure to do so does not have (and would not reasonably be expected
to have) a DeSoto Material Adverse Effect. As of its filing date, each SEC
Filing complied as to form in all material respects with the requirements of
the Securities Act of 1933, as amended, and the rules and regulations
thereunder (the "Securities Act"), or the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder (the "Exchange Act"), as
applicable, and did not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.
3.06 Financial Statements. (a) The audited financial
statements of DeSoto included in each of the 10-K's, and the unaudited
financial statements of DeSoto included in each of the 10-Q's, fairly present,
in each case, in all material respects, in conformity with GAAP applied on a
consistent basis (except as may be indicated in the notes thereto), the
financial position of DeSoto as of the dates thereof and its results of
operations and cash flows for the periods then ended, except that each such
unaudited financial statement is or was subject to normal year-end adjustments
which would not have a DeSoto Material Adverse Effect.
(b) DeSoto has provided to the Company its most
recent forecasts and projections of DeSoto's operations, financial condition
and financial performance. All forecasts and projections of DeSoto's
operations, financial condition and financial performance provided by DeSoto to
the Company were at the time prepared believed by DeSoto senior management to
be reasonable and are the same forecasts and projections as were then being
used in DeSoto's internal business plans and budgets at the time provided to
the Company.
3.07 Absence of Certain Changes. Except as permitted or
contemplated by this Agreement, since December 31, 1991, neither DeSoto nor
Newco has (i) suffered any change, event or series of changes or events which
has or would reasonably be expected to have a DeSoto Material Adverse Effect,
whether or not covered by insurance or (ii) incurred or discharged any
Liability or entered into any transaction except in the ordinary course of
business and except for Liabilities and transactions that, individually or in
the aggregate, do not have (and would not reasonably be expected to have) a
DeSoto Material Adverse Effect.
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3.08 Compliance with Laws; Permits. Each of DeSoto and
Newco is in compliance with all Laws applicable to its business or properties
and all Permits from all Governmental Entities required for the conduct Of its
business presently conducted and the ownership, lease or operation of its
properties, except where noncompliance, individually or in the aggregate, does
not have (and would not reasonably be expected to have) a DeSoto Material
Adverse Effect. DeSoto has all such Permits, and all such Permits are in full
force and effect, except where the absence thereof, individually or in the
aggregate, does not result (and would not reasonably be expected to result) in
a DeSoto Material Adverse Effect. Except as set forth in the SEC Filings,
DeSoto has not received any notice of any alleged violations of Law applicable
to DeSoto which if determined adversely, individually or in the aggregate,
would have (or would reasonably be expected to have) a DeSoto Material Adverse
Effect.
3.09 Title to Assets. Each of DeSoto and Newco has good,
marketable (and, in the case of owned real property, insurable) title to all of
the assets and properties which it purports to own (including those reflected
on the balance sheet as of December 31, 1991 included in the 10-K for the year
then ended (the "1991 10-K"), except for assets and properties sold, consumed
or otherwise disposed of in the ordinary course of business consistent with
past practice since December 31, 1991) and which are material to the business,
financial condition, assets or results of operations of DeSoto and its
subsidiaries taken as a whole, free and clear of Encumbrances, except (a)
Encumbrances reflected in the balance sheet as of December 31, 1991 included in
the 1991 10-K; (b) properties subject to purchase or sales orders or
conditional sale arrangements entered into in the ordinary course of business
consistent with past practice; (c) Encumbrances securing taxes not yet due or
being contested in good faith by appropriate proceedings; and (d) Encumbrances
which do not, individually or in the aggregate, materially detract from the
value of such property, materially interfere with the use, occupancy or
operation of such property as currently used or otherwise materially impair the
business operations of DeSoto or Newco or have a DeSoto Material Adverse
Effect.
3.10 Consents; No Violation. (a) Assuming the accuracy of
the representations and warranties contained in Section 2.08, no consent,
approval or authorization of, notification to, filing with, or exemption or
waiver by, any Governmental Entity, is required on the part of DeSoto or Newco
in connection with the execution, delivery and performance by DeSoto or Newco
of this Agreement or the CVR, other than (i) pursuant to the Exchange Act, (ii)
in connection with the
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Company's application for the ECRA ACO, (iii) the filing of a Certificate of
Merger in accordance with the BCA, (iv) as required by self regulatory
organizations relating to the securities of DeSoto and (v) consents, approvals,
authorizations, notifications, filings, exemptions or waivers which, if not
obtained or made would not, singly or in the aggregate, have a DeSoto Material
Adverse Effect or materially adversely affect the ability of DeSoto or Newco to
consummate any of the transactions contemplated hereby.
(b) Neither the execution, delivery or
performance of this Agreement or the CVR by DeSoto or Newco nor the
consummation of any of the transactions contemplated hereby will at the
Effective Time (x) conflict with, or result in any breach or violation of, any
provision of the Certificate of Incorporation or the by-laws of DeSoto or
Newco; (y) assuming compliance with the matters referred to in Section 3.10(a),
constitute, with or without the passage of time or the giving of notice, or
both, a breach, violation or default, create a lien, or give rise to any
contingencies, liquidated damages, penalties or rights of termination,
modification, cancellation, prepayment, suspension, limitation, revocation or
acceleration, under (i) any Law or Permit, or (ii) any note, bond, mortgage,
indenture, lease, agreement or other instrument of DeSoto or Newco, or to which
they or any of them or any of their properties is subject, except, with respect
to the matters set forth in clause (ii), for breaches, violations, defaults,
liens, or contingencies, liquidated damages, penalties or rights of
termination, modification, cancellation, prepayment, suspension, limitation,
revocation or acceleration which would not, singly or in the aggregate, have a
DeSoto Material Adverse Effect or materially adversely affect the ability of
DeSoto or Newco to consummate any of the transactions contemplated hereby,
except that performance by DeSoto of this Agreement and the CVR and the
arrangements providing for the Bank Debt Restructuring is not currently
permitted by the Credit Agreement, dated as of February 6, 1991 (the "DeSoto
Credit Agreement"), among DeSoto, Harris Trust and Savings Bank, Continental
Bank N.A. and Old Kent Bank -- Chicago and, in any event, DeSoto will seek to
refinance or amend the DeSoto Credit Agreement in connection with the Financing
(as defined in Section 5.02(b)).
3.11 Brokers and Finders. DeSoto and Newco have not
employed any broker or finder or incurred any liability for any brokerage fees,
commissions or finders' fees in connection with the transactions contemplated
hereby.
3.12 Newco. Newco is a newly-formed Delaware corporation
and has nominal assets. Newco has had no business
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operations since it was organized other than in connection with the
transactions contemplated hereby.
3.13 Material Customers. To DeSoto's knowledge, the 1991
10-K accurately reflects the status of DeSoto's business relationships with its
material customers and there have been no material adverse changes in such
business relationships since the date of the 1991 10-K.
3.14 Environmental. Except as set forth in the 1991 10-K,
as of the date hereof DeSoto is not subject to any Liabilities (including
clean-up, compliance or remediation costs, Claims, damages or expenses) in
respect of Environmental Laws or Environmental Permits other than such
Liabilities which, singly or in the aggregate do not have (and would not
reasonably be expected to have) a DeSoto Material Adverse Effect. Except as set
forth in the 1991 10-K, DeSoto is and has conducted its business in substantial
compliance with all Environmental Laws and Environmental Permits except where
the failure to so comply, individually or in the aggregate, would not have (and
would not reasonably be expected to have) a DeSoto Material Adverse Effect.
3.15 Litigation. Except as set forth in the 1991 10-K
(including the settlement described in Item 3(i) thereof), the recently filed
product warranty action previously described to the Company, and for matters
which are covered by insurance, there is no Litigation pending or, to DeSoto's
knowledge, threatened against, affecting or involving DeSoto or any of its
rights or properties which would reasonably be expected to have a DeSoto
Material Adverse Effect.
3.16 Pension Plans. As of December 31, 1991, the
approximate fair market value of the combined assets of the DeSoto Hourly
Employees' Pension Plan and the DeSoto Salaried Employees' Pension Plan (the
"DeSoto Plans") exceeded combined projected benefit obligations by $66,977,000,
the projected benefit obligations having been calculated in accordance with
FASB Statement 87 using an 8.5% weighted average discount rate. The material
terms of the settlement described in Item 3, paragraph (i) to the 1991 10-K
have been accurately disclosed therein and the consequences of which have been
previously described to the Company. Since December 31, 1991 there has not been
a material decrease in the amount by which the approximate fair market value of
the combined assets of the DeSoto Plans exceeds combined projected benefit
obligations (after taking into account the effect of such settlement). There is
no provision in the DeSoto Plans or in any legally binding documents (other
than the DeSoto Credit Agreement, which requires DeSoto to apply all or a
portion of
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distributable excess assets in the repayment of indebtedness thereunder) to
which DeSoto is a party which, under existing facts or circumstances, would
prevent DeSoto from terminating the DeSoto Plans and recovering any excess
assets after reserves necessary to satisfy benefit liabilities after
termination and payment of required taxes. Except for the Litigation disclosed
in the 1991 10-K and the settlement described therein, there is no Order which
has, or Litigation pending (or, to DeSoto's knowledge, threatened) which would
reasonably be expected to have, a material adverse effect on the DeSoto Plans
or their assets.
ARTICLE IV
COVENANTS
4.01 Filings, Consents and Arrangements. DeSoto, Newco and
the Company shall (a) use their best efforts to make promptly any submissions,
notifications or filings under the HSR Act which the Company or DeSoto
determines should be made, in each case, with respect to this Agreement and the
transactions contemplated hereby and (b) cooperate with each other and use (i)
their best efforts in promptly determining whether any other submissions,
notifications or filings are required to be or should be made or whether any
consents, approvals, permits, authorizations, exemptions or waivers are
required to be or should be obtained under any other Law (including ECRA) or
from other parties to Commitments material to the Company's business in
connection with the consummation of any of the transactions contemplated hereby
and (ii) their reasonable efforts in promptly making any such submissions,
notifications or filings, furnishing information required in connection
therewith and seeking timely to obtain any such consents, approvals, permits,
authorizations, exemptions or waivers.
4.02 Best Efforts; Further Assurances. Subject to the
terms and conditions in this Agreement, each of the parties hereto shall use
its best efforts to take promptly, or cause to be taken, all actions and to do
promptly, or cause to be done, all things necessary, proper or advisable under
applicable Laws to consummate and make effective the transactions contemplated
hereby (it being agreed that from and after the Closing, in the event the
Secretary of State of the State of New Jersey shall not have accepted and
declared effective the Certificate of Merger filed pursuant to Section 1.03,
each of DeSoto and Newco shall have full power and authority to execute, in the
name and on behalf of the Company, any and all amendments to such Certificate
of Merger that are consistent with the terms of the
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Merger and this Agreement and necessary for it to be so accepted and declared
effective). Each of the parties hereto shall provide all reasonable assistance
to, and shall cooperate with, each other to bring about the consummation of the
Merger in accordance with the terms and conditions of this Agreement.
Notwithstanding the foregoing, nothing herein shall impose upon DeSoto any
obligation to accept terms of the Financing which are not acceptable to it in
its sole discretion. At any time or from time to time after the Effective Time,
the parties hereto, at the request of any other and at such other party's
expense, shall execute and deliver any further instruments or documents and
take all such further action as such other may reasonably request in order to
evidence the consummation of the transactions contemplated hereby.
4.03 Notice. (a) Each party shall give prompt written
notice to each of the other parties hereto of (i) the occurrence, or failure to
occur, of any event which occurrence or failure would be likely to cause any
representation or warranty of such party 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 that will or would be likely to result in the failure
to satisfy any of the conditions specified in Article V, and (ii) any failure
of such party to comply with or satisfy in any material respect any covenant,
condition or agreement to be complied with or satisfied by it hereunder.
(b) From time to time after the date hereof and
prior to the Effective Time, DeSoto shall provide all information reasonably
requested by the Company, relating to the Financing and the negotiations with
respect thereto.
4.04 No Solicitation of Transactions. The Company will
not, and each will cause its employees, representatives, investment bankers,
consultants, advisors, agents or affiliates not to, directly or indirectly, (a)
initiate contact with, solicit or encourage submission of any inquiries,
proposals or offers by, or (b) participate in any discussions or negotiations
with, or disclose any information concerning the Company to, or afford any
access to the properties, books or records of the Company to, or otherwise
assist, facilitate or encourage, any Person (other than DeSoto, Newco, their
respective employees, consultants, affiliates, agents and representatives and
those of DeSoto's and the Company's lenders in connection with the transactions
contemplated hereby) in connection with any possible proposal (an "Acquisition
Proposal") regarding a sale or acquisition of any of the capital stock or any
other equity interest in the Company, or a merger, consolidation or business
combination involving the
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Company, or the liquidation or reorganization of the Company, or a sale of all
or (other than in the ordinary course of business consistent with past
practice) any portion of the assets of the Company or any similar transaction.
The Company hereby represents that as of the date hereof it has ceased any and
all existing activities, discussions or negotiations with any parties (other
than DeSoto and Newco and the Company's lenders in connection with the
transactions contemplated hereby) conducted heretofore with respect to any of
the foregoing. The Company will (i) notify DeSoto immediately if any inquiry or
proposal is made or any such information or access is requested in connection
with an Acquisition Proposal or potential Acquisition Proposal and (ii)
immediately communicate to DeSoto the terms and conditions of any such
Acquisition Proposal or potential Acquisition Proposal or inquiry and the
identity of the offeror or potential offeror.
4.05 Conduct of Business. (a) Except as may be otherwise
contemplated by this Agreement or required by any preexisting Commitment or
except as DeSoto may otherwise consent to in writing (and subject to the
provisions of paragraph (b) of this Section 4.05 which if inconsistent with
this paragraph (a) shall supersede this paragraph (a)), from the date hereof
and prior to the Closing, the Company shall, with no less diligence and effort
than would be applied in the absence of this Agreement, (i) in all material
respects, operate its business only in the ordinary course of business; (ii)
use its reasonable efforts to preserve intact its business organization; (iii)
maintain its properties, machinery and equipment in sufficient operating
condition and repair to enable it to operate its business in all material
respects in the manner in which its business is currently operated, except for
maintenance required by reason of fire, flood, earthquake or other acts of God
and except that the Company shall have no obligation to make capital
expenditures other than as described on Schedule 4.05(a); (iv) continue all its
material existing insurance policies (or comparable insurance) in full force
and effect; (v) use its reasonable efforts to keep available until the Closing
the services of its present Employees and agents (as a group) and notify DeSoto
promptly of all terminations known to the Company whether pending, threatened
or effective, of any such officers or key employees; and (vi) use its
reasonable efforts to preserve its relationship with its material suppliers,
customers, licensors and licensees and others having material business dealings
with the Company such that its business will not be materially impaired.
(b) Without limiting the generality of the
foregoing, and except as may be otherwise contemplated by this Agreement or
required by any pre-existing Commitment or except
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as DeSoto may otherwise consent to in writing, from the date hereof and prior
to the Closing, the Company shall not (i) issue, deliver, sell, dispose of,
pledge or otherwise encumber, or authorize the issuance, sale, disposition or
pledge or other Encumbrance of, any additional shares of capital stock of any
class, (ii) redeem, purchase or otherwise acquire any of its outstanding
securities, (iii) split, combine, subdivide or reclassify any shares of its
capital stock or declare, set aside for payment or pay any dividend, or make
any other actual, constructive or deemed distribution in respect of any shares
of its capital stock, (iv) grant any increases in the compensation of any of
its Employees, except in the ordinary course of business in accordance with its
customary practices, (v) pay any pension, retirement allowance or other
employee benefit in excess of $10,000 which is not required or contemplated by
any of the existing Company Benefit Plans, (vi) enter into any new or amend any
existing employment or severance agreement with any officer or director of the
Company or any Employee whose base annual compensation from the Company is
$50,000 or greater (other than in accordance with a letter from the Company
dated July 17, 1992 delivered to DeSoto prior to the date hereof), (vii) become
obligated under a new pension plan, welfare plan, multiemployer plan, severance
plan, material benefit arrangement, or similar material plan or arrangement
which was not in existence on the date hereof or materially amend any such
existing plan or arrangement, (viii) except as set forth on Schedule 4.05(b),
adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization of the
Company, (ix) except as set forth on Schedule 4.05(b), make any acquisition or
disposition of assets or securities outside the ordinary course of business,
(x) adopt any amendments to its certificate of incorporation or by-laws or
alter its corporate structure, (xi) incur any new indebtedness for borrowed
money or newly guarantee any such indebtedness except for the endorsement of
checks in the ordinary course of business, and not amend, breach or circumvent
the Company's agreement as of the date hereof with the banks (being Fleet
National Bank, Barclays Bank PLC and The Bank of Nova Scotia) under the
Prescott Credit Agreement providing for the Bank Debt Restructuring or to make
any payments (other than payments in respect of reasonable fees and expenses of
counsel to the banks required to be paid by the Company and extension fees, if
any, payable by the Company pursuant to such agreement providing for the Bank
Debt Restructuring) to such banks except to the extent such payments reduce on
a dollar-for-dollar basis any obligation to repay bank debt upon consummation
of the Merger as contemplated by the Bank Debt Restructuring, (xii) make any
change in any method of accounting or accounting practice other than as
required by Law or GAAP, including the method of determining reserves, increase
or decrease reserves or write off or write
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down any asset or properties of the Company, (xiii) fail to maintain normal
current assets consistent with operating the business of the Company in the
ordinary course of business, (xiv) defer the payment of accounts payable,
accelerate the collection of accounts receivable or fail to replenish
inventory, except, in each case, in the ordinary course of business (it being
acknowledged and agreed that DeSoto shall not unreasonably withhold its consent
with respect to matters subject of this clause), (xv) except as set forth on
Schedule 4.05(b), make any capital expenditures or commitments for additions to
plant, property or equipment constituting capital assets in an aggregate amount
exceeding $25,000 (it being acknowledged and agreed that DeSoto shall not
unreasonably withhold its consent with respect to matters subject of this
clause), (xvi) except as set forth on Schedule 4.05(b), make any tax election
or settle or compromise any liability for Taxes either not in accordance with
prior practice or which would have or would reasonably be expected to have a
Company Material Adverse Effect, (xvii) take or permit any action which would
make any representation or warranty of the Company herein untrue or incorrect
in any material respect, (xviii) authorize by corporate action, or publicly
announce an intention to do, any of the foregoing, or enter into any legally
binding Commitment to do any of the foregoing.
(c) In connection with the continuing operation
of the business of the Company between the date of this Agreement and the
Effective Time, the Company shall use all reasonable best efforts to consult in
good faith on a regular and frequent basis with representatives of DeSoto to
report material operational developments and the general status of ongoing
operations. The Company acknowledges that any such consultation shall not
constitute a waiver by DeSoto of any rights it may have under this Agreement
and that DeSoto shall have no liability or responsibility for any actions of
the Company or any of its respective Employees with respect to matters which
are the subject of such consultations.
(d) From the date hereof until the Effective
Time, DeSoto (i) shall not declare, set aside for payment or pay any dividend
or distribution, or make any other actual, constructive or deemed distribution,
with respect to DeSoto Common Stock nor shall it redeem, repurchase or
otherwise acquire any shares of DeSoto Common Stock (it being acknowledged and
agreed, however, that DeSoto may redeem the Preferred Share Purchase Rights
associated with the DeSoto Common Stock if the Board of Directors of DeSoto in
the exercise of its fiduciary duties determines it is necessary or an Order
require it or the DeSoto Board of Directors to do so) and (ii) shall not
acquire any new businesses or operations
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(whether by the purchase of assets or stock), other than in connection with one
possible transaction previously discussed with representatives of Parent.
4.06 Access and Information. (a) From the date hereof
until the Effective Time, the Company shall, and shall cause its officers,
directors, employees and agents to, afford to DeSoto and its officers,
directors, employees, counsel, accountants, advisors, representatives,
consultants and agents and those of DeSoto's lenders full access to the
officers, employees, agents, properties, offices and other facilities, and to
the books, records (including, without limitation, tax returns and work papers
of the Company's independent auditors) and Commitments of the Company, and
shall furnish DeSoto and such others all financial, operating, technical and
other data and information which DeSoto or its lenders, through their
respective officers, employees or agents, may from time to time reasonably
request. The Company shall permit DeSoto's consultants to engage in such
activities, including drilling or other sampling techniques, at DeSoto's sole
expense, on its properties as are reasonably necessary in connection with an
"environmental audit" so long as they do not unreasonably interfere with the
normal business operations of the Company and such properties are restored to
the reasonable satisfaction of the Company. The Company will use its reasonable
efforts to obtain access to three New Jersey properties which the Company no
longer owns in order for DeSoto and its representatives to conduct a "walk
through" or "Phase 1" environmental review of such properties. DeSoto and Newco
will treat, and will cause their sources of financing and their respective
accountants, counsel and other representatives and Persons described in the
first sentence of this paragraph to treat, confidentially all non-public
information, whether written or oral, concerning the Company furnished to
DeSoto or Newco in connection with the transactions contemplated by this
Agreement and not disclose such information to any other Person without the
Company's prior written consent, subject to the requirements of Law and the
provisions of this Agreement, and upon termination of this Agreement and the
Company's written request, DeSoto shall deliver to the Company or destroy all
such information in written or tangible form without retaining any copies,
summaries, analyses or extracts thereof.
(b) From the date hereof until the Effective
Time, DeSoto shall, and shall cause its officers, directors, employees and
agents to, afford to the Company and its officers, directors, employees,
counsel, accountants, advisors, representatives, consultants and agents full
access to the officers, employees, agents, properties, offices and other
facilities, and to the books, records (including, without
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limitation, tax returns and work papers of DeSoto's independent auditors) and
Commitments of DeSoto, and shall furnish the Company and such others all
financial, operating, technical and other data and information which the
Company, through its officers, employees or agents, may from time to time
reasonably request. The Company will treat, and will cause its accountants,
counsel and other representatives and Persons described in the foregoing
sentence to treat, confidentially all non-public information, whether written
or oral, concerning DeSoto furnished to the Company in connection with the
transactions contemplated by this Agreement and not disclose such information
to any other Person without DeSoto's prior written consent, subject to the
requirements of Law and the provisions of this Agreement, and upon termination
of this Agreement and DeSoto's written request, the Company shall deliver to
DeSoto or destroy all such information in written or tangible form without
retaining any copies, summaries, analyses or extracts thereof.
4.07 Termination of Affiliate Relationships. At the
Closing, the Company will terminate any existing agreement with any affiliate
thereof (other than (i) those entered into as part of or arising out of an
employment or former employment relationship with the Company on an
arms'-length basis, (ii) agreements with DeSoto or any affiliate of DeSoto and
(iii) as otherwise set forth in Schedule 4.07), without liability of either
party to the other.
ARTICLE V
CONDITIONS
5.01 Conditions to the Obligations of all Parties. The
obligations of the parties hereto to consummate the Merger shall be subject to
the satisfaction (or waiver by each of the parties hereto) at or prior to the
Effective Time of each of the following conditions:
(a) No statute, rule or regulation, order or
injunction of any Governmental Entity shall be in effect which prohibits any
party hereto from consummating the transactions contemplated hereby, or which
makes the consummation of the transactions contemplated hereby illegal or
otherwise materially restricts or prohibits consummation of the Merger.
(b) The employment agreements between DeSoto and
each of the individuals listed on Schedule 5.01(b) (as they may be amended by
the parties thereto through the Closing Date) shall be in full force and
effect.
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(c) The Company shall have received the ECRA
ACO's in form and substance reasonably satisfactory to DeSoto and the Company.
(d) The Bank Debt Restructuring shall have been
consummated in accordance with the terms thereof and in connection therewith
the Company's outstanding indebtedness under the Prescott Credit Agreement
shall have been reduced to an aggregate amount not exceeding $10,000,000, which
amount shall be payable immediately following effectiveness of the merger (and
the $250,000 letter of credit from one of Prescott's banks in favor of a surety
in connection with ECRA shall have been cancelled and returned to such bank).
(e) The Company shall have obtained the consent
to the Merger from the surety bonding the Company's undertakings to the New
Jersey Department of Environmental Protection and Energy ("NJDEPE"), the
material terms of which surety bond are set forth on Schedule 5.01(e), and
DeSoto shall have replaced such surety bond with a bond, letter of credit or
similar instrument acceptable to NJDEPE (or, alternatively, DeSoto shall have
delivered a back-up bond, letter of credit similar investment acceptable to
such surety).
(f) The Company shall have obtained the consent
of the third party specified in Schedule 5.01(f) to the assignment to, and the
assumption by, the Surviving Corporation of the contract referred to in such
Schedule, if such consent is necessary to effect such assignment and
assumption.
5.02 Conditions to the Obligations of DeSoto and Newco.
The obligations of DeSoto and Newco to consummate the Merger shall be subject
to the satisfaction (or waiver by DeSoto and Newco) at or prior to the
Effective Time of each of the following conditions:
(a) The Company shall have complied in all
material respects with each of its agreements and covenants contained herein to
be performed at or prior to the Effective Time, and each of the representations
and warranties of the Company contained herein shall be true in all material
respects on the date hereof, and as of the Effective Time shall be true in all
material respects with the same effect as though made on and as of the
Effective Time, except to the extent that such representations and warranties
were made as of a specified date and as to such representations and warranties
the same shall continue on the Effective Time to have been true in all material
respects as of the specified date. DeSoto shall have received a certificate of
the Company, dated as of the Closing Date and signed by an officer of the
Company certifying as to the fulfillment of the condition set forth in this
Section 5.02(a).
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(b) The proceeds of financing, on terms
satisfactory to DeSoto in its sole discretion and in an aggregate amount which,
when added to the cash and cash equivalents held by DeSoto and the Company at
the Effective Time, will be in an aggregate principal amount sufficient to
satisfy the approximate sum of (x) the repayment of the Company's indebtedness
to banks, other financial institutions, lenders and factors (as such
indebtedness may be then reduced by the Bank Debt Restructuring), (y) the
working capital needs of DeSoto and the Surviving Corporation on a combined
basis (including the refinancing of the DeSoto Credit Agreement) and (z) all
fees and expenses incurred in connection with, and the refinancing of any
indebtedness which may be accelerated by, the transactions contemplated hereby
and by the Bank Debt Restructuring (the "Financing"), shall have been received
by DeSoto or the Surviving Corporation in cash or immediately available funds
or all conditions to the drawdown of funds under definitive arrangements
providing for the Financing shall have been satisfied or waived.
(c) Certificates representing all Shares issued
and outstanding immediately prior to the Effective Time shall have been
delivered to DeSoto, duly endorsed in blank for transfer or accompanied by duly
executed stock powers assigning all such Shares in blank (it being agreed that
the holders of such Shares immediately prior to the Effective Time shall bear
the cost of any documentary or stamp taxes payable in respect of the
transactions contemplated hereby).
(d) Except as set forth on Schedule 5.02(d), each
current or former employee of Parent and each Employee shall have repaid all
promissory notes payable by or on behalf of him to the Company, and he shall
have repaid any additional amounts owed to the Company in respect of advances
or draws taken by him to the extent they exceed the amount of his accrued
salary and bonuses and reasonable travel and entertainment expenses incurred in
the ordinary course of business, calculated as of the Closing Date.
(e) There shall not have been any action
threatened or taken, or any statute, rule, regulation, order, decree or
judgment promulgated, enacted, entered, enforced or deemed applicable, by any
Governmental Entity that seeks (i) to require the divestiture by DeSoto or the
Company or any of their respective affiliates of any business, assets or
property of the Company or to impose any material limitation on the ability of
any of them to conduct their respective businesses and own such business,
assets or properties or (ii) to impose any material limitations on the ability
of DeSoto or any of its affiliates effectively to control in any respect the
business or operations of the Company or DeSoto or any of its affiliates.
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(f) DeSoto shall have received evidence
reasonably satisfactory to it to the effect that (1) the subordinated note of
the Company referred to in note 5 to the December 31, 1990 Audited Financial
Statements shall have been contributed to the capital of the Company and (2)
there shall not exist any indebtedness of the Company to any beneficial owner
of stock of the Company.
(g) The Company shall have obtained, and
evidenced reasonably satisfactorily to DeSoto, each of the consents set forth
on Schedule 2.18.
5.03 Conditions to the Obligations of the Company. The
obligations of the Company to consummate the Merger shall be subject to the
satisfaction (or waiver by the Company) at or prior to the Effective Time of
each of the following conditions:
(a) Each of DeSoto and Newco shall have complied
in all material respects with each of its agreements and covenants contained
herein to be performed at or prior to the Effective Time, and each of the
representations and warranties of each of DeSoto and Newco contained herein
shall be true in all material respects on the date hereof, and as of the
Effective Time shall be true in all material respects with the same effect as
though made on and as of the Effective Time, except to the extent that such
representations and warranties were made as of a specified date and as to such
representations and warranties the same shall continue on the Effective Time to
have been true in all material respects as of the specified date. The Company
shall have received a certificate of each DeSoto and Newco, dated as of the
Closing Date and signed by an officer of DeSoto or Newco, as applicable,
certifying as to the fulfillment of the condition set forth in this Section
5.03(a).
(b) Certificates representing the consideration
provided in Section 1.07(a) (other than Preferred Share Purchase Rights, unless
they are generally held in certificated form by the holders of DeSoto Common
Stock on the Closing Date) shall have been delivered.
ARTICLE VI
TERMINATION PRIOR TO THE EFFECTIVE TIME
6.01 Termination. This Agreement may be terminated and the
Merger contemplated hereby may be abandoned at any time prior to the Effective
Time:
41
<PAGE> 42
(a) By mutual written consent duly authorized by
the respective Boards of Directors of the parties hereto;
(b) By either DeSoto or the Company, in writing,
without liability to the terminating party on account of such termination
(provided the terminating party is not otherwise in default or in breach of
this Agreement), if the Merger shall not have been consummated within 60 days
after the. date of this Agreement (the "Initial Termination Date"), provided
that the Initial Termination Date shall automatically be extended to 90 days
after the date of this Agreement if on the Initial Termination Date the
condition set forth in Sections 5.01(c), 5.01(e) or 5.02(b) has not been
satisfied or waived and DeSoto is not in default or breach of this Agreement
and is otherwise pursuing the Merger in good faith;
(c) By either DeSoto or the Company, if the
consummation of the Merger shall be prohibited by any order, decree or
injunction of any Governmental Entity;
(d) By DeSoto within 30 days after the date
hereof, if DeSoto is not satisfied in its sole discretion with the results of
its due diligence investigation of Parent and the Company, including meetings
with officers of Parent and the Company (it being understood that such due
diligence investigation shall not affect the condition set forth in Section
5.02(a) nor shall it or any prior due diligence investigation lessen any
reduction in any amount payable under the CVRs for breach of any
representations, warranties, covenants or agreements of the Company in this
Agreement);
(e) By the Company (provided it is not otherwise
in default or breach of this Agreement), if any of the conditions specified in
Sections 5.01 and 5.03 has not been met or waived by the Company at such time
as such condition can no longer be satisfied;
(f) By DeSoto or Newco (provided it is not
otherwise in default or breach of this Agreement), if any of the conditions
specified in Sections 5.01 and 5.02 has not been met or waived by DeSoto or
Newco at such time as such condition can no longer be satisfied;
(g) By the Company, if the average of the daily
closing sale price per share of DeSoto Common Stock as reported in The Wall
Street Journal for any ten consecutive trading days after the date hereof shall
be less than $4.00; provided that the termination of this Agreement pursuant to
this Section 6.01(g) shall only be available for the three business days
immediately following any such ten consecutive trading days;
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(h) By the Company, if DeSoto shall not have
delivered to the Company within 30 days of the date hereof a written
non-binding proposal with respect to the Financing from such sources of credit
as DeSoto may in its sole discretion solicit accompanied by a letter from
DeSoto stating that DeSoto believes such proposal provides the basis for a
reasonable expectation that the Financing will be available on terms acceptable
to DeSoto; or
(i) By DeSoto or the Company if the banks under
the Prescott Credit Agreement shall have repudiated, withdrawn or terminated or
breached in a material respect the agreement as of the date hereof providing
for the Bank Debt Restructuring or such agreement shall otherwise have
terminated prior to consummation of the Bank Debt Restructuring, or any of such
banks shall have commenced any Litigation or other action or steps to pursue
contractual or other remedies in respect of any default under the Prescott
Credit Agreement.
6.02 Effect on Obligations. Termination of this Agreement
pursuant to this Article VI shall terminate all obligations of the parties
hereunder, except for the obligations under the last sentence of Section
4.06(a) and the last sentence of Section 4.06(b); Provided, however, that
termination pursuant to Section 6.01 (b), (e) or (f) shall not relieve the
defaulting or breaching party from any liability to any other party hereto.
ARTICLE VII
MISCELLANEOUS
7.01 Survival. The representations and warranties made by
the Company herein and in any certificate or other writing delivered pursuant
hereto and the covenants and agreements made by the Company in Section 4.05
shall survive until the Maturity Date (as defined in the CVRs); Provided,
however, that the representations and warranties made by the Company in Section
2.15 shall survive until the expiration of the applicable statutes of
limitation. The other representations and warranties and the covenants and
agreements contained herein shall not survive the Effective Time, except for
those covenants and agreements contained in Article I, the covenants contained
in the last parenthetical in Section 2.19(a), the last sentence of Section
2.19(b), and the last sentence of Section 4.02 and, as provided in the
preceding sentence, those covenants and agreements made by the Company in
Section 4.05. If the Effective Time shall occur, the sole and exclusive remedy
of DeSoto for any breach of a representation,
43
<PAGE> 44
warranty, covenant or agreement made by the Company herein (absent bad faith or
fraud) shall be pursuant to the CVR Value Reduction (as defined in the CVR).
7.02 Entire Agreement. This Agreement (including all
Schedules and Exhibits hereto) constitute the sole understanding of the parties
with respect to the subject matter hereof and thereof and supersede all prior
agreements among the parties with respect to the subject matter hereof and
thereof.
7.03 Assignment. This Agreement shall inure to the benefit
of and be binding upon solely the parties hereto and their respective
successors and permitted assigns. Newco shall have the right to assign to one
or more direct or indirect wholly-owned subsidiaries of DeSoto any and all
rights and obligations of Newco under this Agreement, including, without
limitation, the right to substitute in its place such affiliate as one of the
constituent corporations in the Merger (and, if Newco elects to make such an
assignment, the parties agree to execute an appropriate amendment to this
Agreement to reflect such substitution). Newco may not otherwise assign this
Agreement or any of its rights hereunder without the prior written consent of
the Company. Neither DeSoto nor the Company shall have the right to assign any
or all of its rights and obligations under this Agreement and any such
purported assignment shall be null and void and of no force and effect, except
that Parent has the right to direct DeSoto to issue up to 50% of the shares of
DeSoto Common Stock and CVRs issuable pursuant to Section 1.07(a) directly to
the banks party to the Prescott Credit Agreement if such banks simultaneously
with such issuance execute, as if an original party thereto, the "Stockholders
Agreement" between DeSoto and Parent dated as of the date hereof and shall be
bound thereby in all respects in the same manner as Parent.
7.04 Counterparts. This Agreement may be executed in
counterparts, each of which shall for all purposes be deemed to be an original
and all of which shall constitute the same instrument.
7.05 Construction. The headings of the Articles, Sections
and paragraphs of this Agreement are inserted for convenience only and shall
not be deemed to constitute part of this Agreement or to affect the
construction hereof. All section and article references are to this Agreement,
unless otherwise expressly provided. As used in this Agreement, (a) "hereof",
"hereunder', "herein" and words of like import shall be deemed to refer to this
Agreement in its entirety and not just a particular section of this Agreement,
(b) unless the context otherwise requires, words in the singular number or in
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<PAGE> 45
the plural number shall each include the singular number or the plural number,
words of the masculine gender shall include the feminine and neuter, and, when
the sense so indicates, words of the neuter gender shall refer to any gender,
(c) "Person" shall mean and include an individual, a partnership, a joint
venture, a corporation or trust, an unincorporated organization, a group or a
government or a Governmental Entity, (d) "affiliate" shall mean any Person
directly or indirectly controlling, controlled by or under common control with
the Person of which it is an affiliate, (e) "subsidiary" means any affiliate of
a Person who under GAAP would be required to consolidate such affiliate's
financial statements in its own financial statements and (f) "the ordinary
course of business" with respect to the Company and "the ordinary course of the
Company's business" and words of like import in each case shall take into
account the current financial (including cash flow) condition and difficulties
of the Company and the impact of such condition and difficulties on its
business relationships and practices, including its need from time to time to
manage its cash flow and levels of inventory pursuant to its reasonable
business judgment employed in a manner to maintain its existence as a going
business concern in the lines and markets of business currently pursued.
7.06 Modification and Waiver. No amendment, modification
or alteration of the terms or provisions of this Agreement shall be binding
unless the same shall be in writing and duly executed by DeSoto and the
Company; provided, however, that any of the terms or provisions of this
Agreement may be waived in writing at any time by the party which is entitled
to the benefits of such waived terms or provisions. No waiver of any of the
provisions of this Agreement shall be deemed to or shall constitute a waiver of
any other provision hereof (whether or not similar). No delay on the part of
any party in exercising any right, power or privilege hereunder shall operate
as a waiver thereof.
7.07 Severability. Any term or provision of this Agreement
which is invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms or provisions of this Agreement in any other jurisdiction. If
any provision of this Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
7.08 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in
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<PAGE> 46
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which they
are entitled at Law or in equity.
7.09 Public Announcements. Prior to the Closing, none of
the parties hereto (or any of their respective officers, directors or
employees) shall make any public statements, including, without limitation, any
press releases, with respect to this Agreement, the Financing or the Bank Debt
Restructuring or any of the transactions contemplated hereby or thereby, except
as may be required by Law (in which case, the nature of the statement shall be
described to the other party prior to dissemination to the public) or as agreed
to by the parties hereto.
7.10 Expenses. If the Effective Time shall occur, the
reasonable legal, accounting and tax advice expenses of Parent and the Company
incurred in connection with this Agreement, the Merger, and the redemption of
Parent's minority stockholder shall, be borne by DeSoto in accordance with
DeSoto's existing policies and practices regarding the fees and expenses of its
own legal counsel and other outside advisors and subject to receipt of
documentary evidence reasonably satisfactory to DeSoto of such legal and other
expenses, and all reasonable costs and expenses of Parent and the Company in
connection with the Financing and the Bank Debt Restructuring shall be borne by
the Company and assumed by the Surviving Corporation subject to the same
requirements as to documentation and DeSoto's existing polices and practices.
Nothing herein is intended to create liability of Parent for any expenses it is
not otherwise liable for. Except as otherwise explicitly set forth herein, if
the Closing does not occur each of parties hereto shall pay all costs and
expenses incurred prior to the Closing by it or on its behalf in connection
with this Agreement, the Financing and the Bank Debt Restructuring and the
transactions contemplated hereby and thereby, including, without limiting the
generality of the foregoing, fees and expenses of its own financial
consultants, accountants and counsel.
7.11 Notices. Any notice, request, instruction or other
document to be given hereunder (a "Notice") by any party hereto to any other
party shall be dated and in writing and delivered personally, sent by a
recognized overnight delivery service with charges prepaid, sent by registered
or certified mail with postage prepaid, or sent by facsimile transmission:
46
<PAGE> 47
if to DeSoto to:
DeSoto, Inc.
1471 Business Center Drive
Suite 800
Mt. Prospect, Illinois 60056
Facsimile: (708) 391-9043
Confirmation: (708) 391-9000
Attention: William Spier
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Facsimile: (212) 741-1526
Confirmation: (212) 820-8000
Attention: Peter Golden
if to Newco, to it c/o DeSoto at the address and with a copy
as set forth for DeSoto above
if to the Company to:
J.L. Prescott Company
c/o Narragansett Capital, Inc. Manufacturing Group
One Turks Head Place
Suite 1550
Providence, Rhode Island 02903
Facsimile: (401) 751-455-0076
Confirmation: (401) 751-8110
Attention: Arthur D. Little
with a copy to:
Edwards & Angell
2700 Hospital Trust Tower
Providence, Rhode Island 02903
Facsimile: (401) 276-6611
Confirmation: (401) 274-9200
Attention: Christopher D. Graham
or at such other address for a party as shall be specified by like Notice.
Any Notice which is delivered in the manner provided herein shall be deemed to
have been duly given to the party to whom it is directed upon actual receipt by
such party, except that any Notice delivered by facsimile transmission shall be
deemed to have been given upon confirmation of transmission; provided that
Notice so delivered is promptly followed by duplicate
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<PAGE> 48
Notice to that same party sent by recognized overnight delivery service with
charges prepaid, or by registered or certified mail, postage prepaid.
7.12 Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of New Jersey applicable
to agreements made and to be performed wholly within such jurisdiction.
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<PAGE> 49
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed on its behalf as of the date first above written.
DESOTO, INC.
By:/s/ WILLIAM SPIER
--------------------------------
Name: William Spier
Title: Chairman and Chief
Executive Officer
Attest:
/s/ DAMIAN GRECO
- ------------------------------
Name: Damian Greco
Title: Assistant Secretary
DESOTO SUBSIDIARY ONE CORP.
By:/s/ WILLIAM SPIER
--------------------------------
Name: William Spier
Title: President
Attest:
/s/ DAMIAN GRECO
- ------------------------------
Name: Damian Greco
Title: Secretary
J.L. PRESCOTT COMPANY
By:/s/ ARTHUR D. LITTLE
--------------------------------
Name: Arthur D. Little
Title: Chief Executive Officer
Attest:
/s/ CHRISTOPHER D. GRAHAM
- ------------------------------
Name: Christopher D. Graham
Title: Secretary
49
<PAGE> 50
3175m/8473L
Exhibit A
THE RIGHTS REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN LIMITATIONS
ON TRANSFER. ANY ATTEMPTED TRANSFER, SALE, PLEDGE, HYPOTHECATION, CREATION OF
AN ENCUMBRANCE OR ANY OTHER MANNER OF DISPOSITION OF THE RIGHTS OR ANY INTEREST
OR PARTICIPATION THEREIN IN VIOLATION OF THE TERMS SET FORTH HEREIN SHALL BE
WITHOUT FORCE AND EFFECT.
THE RIGHTS EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED.
* * * *
CONTINGENT VALUE RIGHT
DESOTO, INC.
No. ________ Certificate for ______ Contingent Value Rights
This certifies that _____________________ , or registered
permitted assigns, is the registered holder of the number of Contingent Value
Rights ("CVRs") set forth above. Each CVR entitles the CVR Holder (as defined
below), subject to the provisions contained herein, to a contingent payment
from DeSoto, Inc., a corporation organized under the laws of the State of
Delaware ("DeSoto"), in an amount, if any, determined pursuant to the
provisions set forth herein.
The CVRs represented hereby are being issued on the terms and
pursuant to the conditions set forth herein as well as in the Merger Agreement,
to all of which terms and conditions the holder of this CVR Certificate
consents by acceptance hereof. Copies of the Merger Agreement can be obtained
by contacting DeSoto. Capitalized terms used and not otherwise defined herein
shall have the meanings ascribed to them in the Merger Agreement. Certain
capitalized terms are defined below in paragraph (k).
(a) Contingent Value Right Payment. DeSoto shall
determine, as of the Maturity Date, the amount by which the Target Price
exceeds the Highest Price, which excess amount (if any) shall be subject to
reduction as provided in paragraph
<PAGE> 51
(f) (the "CVR Value"); provided, however, that in no event shall the CVR Value
exceed $6.00 (as it may be adjusted pursuant to paragraph (e)(i)) (the "Maximum
CVR Value"). If the applicable Highest Price is equal to, or greater than, the
Target Price, then the CVR Value shall be zero and DeSoto shall have no payment
obligation in respect of any CVR. Upon compliance by a CVR Holder with the
exercise procedures set forth herein, a CVR Holder shall be entitled to a
payment of an amount equal to that portion of the CVR Value multiplied by the
number of CVRs held by such CVR Holder on the Maturity Date (the "CVR
Payment"). DeSoto shall make any CVR Payment in cash if and to the maximum
extent not prohibited by a Prohibition. If the CVR Payment cannot be fully made
in cash because of a Prohibition, to the extent the CVR Payment has not been
made in cash, DeSoto shall make that portion of the CVR Payment which cannot be
made in cash by means of the issuance of DeSoto Securities, if and to the
maximum extent not prohibited by a Prohibition, in an aggregate principal
amount equal to that portion of the CVR Payment which cannot be made in cash,
and if the CVR Payment cannot be fully made in cash or DeSoto Securities
because of a Prohibition, to the extent the CVR Payment has not been made in
cash or DeSoto Securities, DeSoto shall make that portion of the CVR Payment
which cannot be made in cash or DeSoto Securities by means of the delivery of
shares of DeSoto Common Stock, which shall be deemed to have a per share value
equal to the Moving Average Price for the thirtieth Trading Day immediately
preceding the date such payment is made; provided, however, that if the CVR
Payment cannot be fully made in cash, then the CVR Representative shall, on
behalf and for the account of each CVR Holder, have the right to elect whether
all CVR Holders receive either DeSoto Securities or DeSoto Common Stock to the
extent the CVR Payment has not been made in cash; and further provided that, in
any event, regardless of the value of shares of DeSoto Common Stock, upon the
delivery of an aggregate number of shares of DeSoto Common Stock to all CVR
Holders in connection with the making of CVR Payments which equals the number
of shares by which 22.0% of the total number of shares of DeSoto Common Stock
issued and outstanding immediately following the Effective Time exceeds the
total number of DeSoto Merger Shares (in each case appropriately adjusted to
reflect any subdivisions, combinations, recapitalizations or reclassifications
of, or dividends paid in, shares of DeSoto Common Stock subsequent to the
Effective Time), the CVR Payment shall be deemed to have been fully paid and
satisfied and DeSoto shall have no further payment or other obligation in
respect of any CVR. Cash, DeSoto Securities and DeSoto Common Stock shall be
paid pro rata to CVR Holders based on the number of CVRs registered in the name
of each CVR Holder, except where cash payment is necessary to avoid the
issuance of fractional
2
<PAGE> 52
shares of DeSoto Common Stock. If DeSoto cannot make all or part of a CVR
Payment because of a Prohibition or the inability to issue shares of DeSoto
Common Stock, CVR Payments shall be made pro rata to the extent permitted. Upon
the lapse of a Prohibition or the ability to issue shares of DeSoto Common
Stock, additional payments shall be made pro rata to the extent permitted until
the CVR Payments have been fully paid and satisfied in the manner and with the
priority contemplated by the foregoing payment methods. Any CVR Payment shall
be paid by DeSoto as promptly as possible after the Maturity Date and
compliance by a CVR Holder with the exercise procedures set forth herein.
(b) Nontransferability. No transfer of CVRs
(other than by descent or devise) may be made without the prior written consent
of DeSoto except (x) to any of the Initial Holders if DeSoto is first provided
(i) an unqualified opinion of counsel reasonably satisfactory to it that such
transfer is in compliance with the registration provisions of the Securities
Act or the exemptions thereto and (ii) a representation from such recipient
that it is holding the CVRs for investment without a view toward distribution
and that it will comply with the restrictions set forth herein or (y) to
DeSoto. By accepting a CVR, each CVR Holder agrees not to pledge, hypothecate,
or otherwise encumber the CVR or to attempt to sell, transfer or dispose of the
CVR or any interest therein except as permitted hereunder or, in the case of
any Bank, pursuant to the purchase option granted to Narragansett First Fund in
connection with the Bank Debt Restructuring. Any transfer of CVRs (and all
rights thereunder) in violation of the restrictions set forth herein shall be
null and void. DeSoto may require presentment of the CVR Certificate(s)
evidencing the CVR(s) purportedly transferred and such contemporaneous evidence
of the nature of any such transfer as it shall deem appropriate in order to
update the registry of CVR Holders. DeSoto will maintain a registry of the CVR
Holders; such registry shall be revised upon written request of any CVR Holder
(or its legal representative, heir or successor) to reflect any permitted
transfers of CVRs. Prior to the time of due presentment of a CVR Certificate
and other evidence for registration of transfer, DeSoto may treat the Person in
whose name such CVR Certificate is registered as the owner thereof for all
purposes, and DeSoto shall not be affected by notice to the contrary.
(c) Exercise of Contingent Value Rights. To
obtain a CVR Payment, a CVR Holder must deliver to DeSoto its CVR Certificate
duly endorsed in blank. DeSoto may require that each CVR Holder execute and
deliver a transmittal letter, in a form acceptable to DeSoto, specifying such
CVR Holder's
3
<PAGE> 53
number of CVRs, permitted and non-permitted transfers of CVRs, and such other
information as may be necessary or desirable to determine the number of CVRs
which such CVR Holder is entitled to exercise. It any such exercise is
reasonably determined by DeSoto to be defective, DeSoto shall promptly so
notify the CVR Holder, together with an explanation of such defect. No later
than one week prior to the Maturity Date, DeSoto shall mail or otherwise
deliver written instructions to the CVR Holders concerning the place and means
of delivering CVRs for the CVR Payment. If DeSoto cannot make all or part of a
CVR Payment because of a Prohibition or the inability to issue shares of DeSoto
Common Stock, DeSoto shall so state in the instructions and shall on a
semiannual basis thereafter notify the CVR Holders of the continued existence
of such Prohibition or inability until the lapse thereof. No CVR shall be
exercisable and no CVR Payment shall be made in respect of any CVR unless the
CVR Certificate with respect to such CVR shall have been received by DeSoto
within 270 days immediately after the Maturity Date (or, if later, after
DeSoto's notice of the lapse of any Prohibition applicable to DeSoto's ability
to make the CVR Payment or the inability to issue shares of DeSoto Common
Stock).
(d) Termination Notice. In the event that DeSoto
determines that no amount is payable with respect to the CVRs on the Maturity
Date, DeSoto shall mail or otherwise deliver to each CVR Holder written notice
of such determination (the "Termination Notice"). In the event no amount is
payable, all CVRs shall terminate and become null and void as of such date, and
the CVR Holders shall have no further rights with respect thereto. The failure
to give a Termination Notice or any defect therein shall not affect the
operation of the preceding sentence.
(e) Antidilution. (i) In the event DeSoto shall
at any time after the Effective Time and prior to the Maturity Date (A) declare
a dividend on the outstanding shares of DeSoto Common Stock payable in shares
of DeSoto Common Stock, (B) subdivide the outstanding DeSoto Common Stock or
(C) combine the outstanding DeSoto Common Stock into a smaller number of
shares, (x) the number of CVRs associated with each CVR Certificate then
outstanding, or issued or delivered thereafter, shall be proportionately
adjusted by multiplying each CVR previously outstanding by a fraction (the
"Applicable Fraction"), the numerator of which shall be the total number of
shares of DeSoto Common Stock outstanding immediately following the occurrence
of the event and the denominator of which shall be the total number of shares
of DeSoto Common Stock outstanding immediately prior to the occurrence of such
event, and (y) the Target Price and the Maximum CVR Value shall be
4
<PAGE> 54
proportionately adjusted by multiplying it by the inverse of the Applicable
Fraction. Appropriate adjustments in the calculation of the number of CVRs
associated with outstanding CVR Certificates and the Target Price shall be made
to reflect other changes in the capital stock of DeSoto (i.e., recapitalizations
and reclassifications) made after the Effective Time. All adjustments
contemplated by this subparagraph (i) shall be subject to the approval of
DeSoto's Board of Directors. Whenever any event of the type described above
occurs, DeSoto shall: (i) promptly prepare a certificate setting forth such
adjustments and a brief statement of the facts accounting for such adjustments;
(ii) promptly file with the CVR Representative a copy of such certificate; and
(iii) mail a brief summary thereof to each CVR Holder. Such adjustments, absent
manifest error, shall be final and binding on DeSoto, the CVR Representative
and the CVR Holders. All references herein to DeSoto Common Stock shall, after
the occurrence of such an event, be deemed to be references to any common
equity security of DeSoto (or its successor) which may thereupon be acquired by
exercise of the CVRs.
(ii) In the event DeSoto agrees to merge
or consolidate with any other Person or sell or convey all or substantially all
of its assets to any Person pursuant to a transaction or series of transactions
in which the holders of DeSoto Common Stock shall receive equity securities of
the continuing or successor corporation or the acquiring Person (or a
combination of equity securities and other property) in exchange for shares of
DeSoto Common Stock, DeSoto shall cause the continuing or successor corporation
or the Person which acquires by sale or conveyance all or substantially all the
assets of DeSoto to assume expressly the due and punctual payment of the CVRs,
according to their tenor (except that for these purposes all references to
DeSoto Common Stock herein shall, with respect to any time from or after the
date of such exchange, be deemed to mean the equity security issued in such
exchange for DeSoto Common Stock and the Moving Average Price shall be
proportionately adjusted by multiplying it by the exchange ratio per share of
DeSoto Common Stock employed in such exchange), and the due and punctual
performance and observance of all of the covenants and conditions to be
performed or observed by DeSoto with respect to the CVRs. In case of any such
consolidation, merger, sale or conveyance, and following such an assumption by
the continuing or successor corporation or acquiring Person, such continuing or
successor corporation or acquiring Person shall succeed to and be substituted
for DeSoto, with the same effect as if it had been named herein. Moreover, in
such event, such changes in phraseology and form (but not in substance) may be
made in the CVRs thereafter to be issued as may be appropriate. In the
5
<PAGE> 55
event of any such sale or conveyance (other than a conveyance by way of lease)
DeSoto or any successor corporation which shall theretofore have become such in
the manner described in this subparagraph (ii) shall be discharged from all
obligations and covenants under the CVRs and may be liquidated and dissolved.
(iii) In the event DeSoto agrees to merge
or consolidate with any other Person or sell or convey all or substantially all
of its assets to any Person pursuant to a transaction or a series of
transactions in which the holders of DeSoto Common Stock shall receive solely
cash or non-equity securities in exchange for shares of DeSoto Common Stock,
DeSoto shall cause the continuing or successor corporation or the Person which
acquires by sale or conveyance all or substantially all the assets of DeSoto to
redeem concurrently with such merger, consolidation or sale all of the
outstanding CVRs for cash at a redemption price equal to the amount, if any, by
which (i) the Discounted Target Price in effect at the time such merger,
consolidation or sale is consummated exceeds (ii) the sum of the consideration
payable in such transaction for each share of DeSoto Common Stock then
outstanding and the CVR Value Reduction; provided, however, that in no event
shall the redemption price exceed the Maximum CVR Value. In the event of any
such sale or conveyance (other than a conveyance by way of lease) DeSoto or any
successor corporation which shall theretofore have become such in the manner
described in this subparagraph (iii) shall be discharged from all obligations
and covenants under the CVRs and may be liquidated and dissolved.
(f) CVR Value Reduction. The CVR Value shall be
reduced (but not below zero) by an amount (the "CVR Value Reduction") equal to
the sum of (i) all Distributions on Common Stock plus (ii) the quotient
obtained by dividing (A) the sum of any and all "Prospective Losses" (as
defined below), losses, damages, judgments, fines, Taxes, penalties, amounts
paid in settlement, costs and expenses (including interest which may be imposed
in connection therewith and court costs and reasonable fees and disbursements
of counsel, consultants and other experts) (collectively, "Losses") which are
sustained or incurred by DeSoto (or the Surviving Corporation), its directors
and officers or any successor or assign of any of the foregoing Persons (each,
an "Injured Party") on or before the Maturity Date and arising out of or
resulting from (x) the breach of any of the representations or warranties made
by the Company in the Merger Agreement or in any certificate or other writing
delivered pursuant thereto, (y) the failure of the
6
<PAGE> 56
Company to comply with any of the covenants or agreements of the Company
contained in the Merger Agreement or in any certificate or other writing
delivered pursuant thereto or (z) any Liability of the Company arising out of
facts existing or events occurring prior to the Effective Time (whether or not
disclosed by the Company or Parent) to the extent not reflected or reserved for
in the May 31, 1992 Unaudited Balance Sheet or in the projected financial
statements dated as of June 16, 1992 provided to DeSoto by the Company or, if a
greater amount, to the extent exceeding any specific dollar amount included in
a representation of the Company in the text of the Merger Agreement (but not a
disclosure schedule thereto) as to such Liability or any other Liability of
similar type or character (except, as to any of the foregoing, to the extent
that (1) DeSoto or the Surviving Corporation has not suffered a Loss in respect
thereof by reason of the availability of insurance policies purchased by the
Company prior to the date hereof or the arrangements intended to provide funds
to satisfy environmental liabilities described in Section 2.19(a)(I) through
(VI) of the Merger Agreement, (2) DeSoto or the Surviving Corporation suffered
a Loss in connection with any Commitment or any lease of Leased Real Property
with respect to which the Company is past due on payments due thereunder, if
and so long as such past due payments and any penalties relating thereto are
fully accrued on the May 31, 1992 Unaudited Balance Sheet or otherwise
reflected in said financial projections and are disclosed in the disclosure
schedules to the Merger Agreement and such Loss arose out of the Surviving
Corporation's failure to pay such past due amounts within 75 days after the
Effective Time (but not excepting Losses resulting from the assertion of
remedies by the other parties to such Commitments or leases which are available
prior to, and are not eliminated by, such payment), (3) a Liability is incurred
by the Company which is not reflected or accrued on the May 31, 1992 Unaudited
Balance Sheet or otherwise reflected in said financial projections on account
of severance arrangements or any other actions of the Company approved in
writing by DeSoto prior to the Effective Time, (4) DeSoto or the Surviving
Corporation has suffered a Loss solely by reason of legal expenses incurred in
connection with the matters referred to in the last sentence of Section 2.13,
by reason of the covenant contained in the last parenthetical in Section
2.19(a) or costs of collection deducted from the amounts collected from the
arrangements referred to in Section 2.19(a) pursuant to such Section, solely by
reason of the cancellation of a possible supply arrangement regarding powdered
detergent with a third party (to the extent such Losses do not exceed
$140,000), or solely by reason of capital expenditures or commitments not in
excess of the amounts as set forth in the written plan dated July 28, 1992
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<PAGE> 57
and previously delivered to DeSoto, (5) DeSoto or the Surviving Corporation has
suffered a Loss or has achieved results inconsistent with the Company's
projected financial statements as a result of the failure to obtain any consent
from Lever Bros. to the transactions contemplated by the Merger Agreement, (6)
DeSoto or the Surviving Corporation has suffered a Loss in connection with any
obligation to remove tanks from the former Passaic facility of the Company at a
cost of no more than $50,000 and which, to the extent it reduces amounts
available pursuant to the arrangements described in Section 2.19(a) is deducted
from such amounts for all purposes, and only to the extent no out-of-pocket
expenditure is required, (7) a Liability is incurred by the Company for
extension fees payable pursuant to the agreement among the Banks, the Company
and Parent providing for the Bank Debt Restructuring, or (8) any tax is payable
in respect of amounts received pursuant to the notes referred to in Section
2.19(a), Items (III) and (IV), and which is taken into account in calculating
under such Section net after tax proceeds from such notes), but excluding
Liabilities incurred in the ordinary course of business since May 31, 1992
excepted from the representation contained in Section 2.06(a) of the Merger
Agreement by (B) 550,000. (As used herein, the term "Prospective Losses" means
amounts with respect to which DeSoto may, consistent with generally accepted
accounting practice, accrue, establish reserves or disclose in its financial
statements or the notes thereto or the minimum amounts which the Board of
Directors of DeSoto has determined in good faith, based on the advice of
counsel, are highly likely to be paid in respect of Liabilities or claims.) In
computing the CVR Value Reduction, the CVR Value shall not be reduced by any
amount in respect of Losses unless the aggregate amount of Losses exceeds
$175,000 (the "Deductible"), in which event the Deductible shall be subtracted
from the aggregate amount of Losses in the calculation of the quotient referred
to in clause (ii) of the preceding sentence. In the event that any Injured
Party shall sustain or incur any Losses in respect of which a CVR Value
Reduction may be sought pursuant to this paragraph (f), DeSoto shall provide
written notice (a "Claim Notice") to the CVR Representative stating the nature
and basis of such Losses reasonably promptly following the awareness of DeSoto
senior management of the sustaining or incurrence of such Losses. In the case
of Losses arising by reason of any third party Claims, the Claim Notice shall
be given within 45 days of the filing or other written assertion of any Claim
against the Injured Party, but the failure of DeSoto so to notify the CVR
Representative shall not affect the determination of any CVR Value Reduction in
respect of Losses arising out of or resulting from such third party Claims.
DeSoto shall provide to the CVR Representative on request all information and
documentation reasonably necessary to support and verify any Losses which
DeSoto believes will give rise to a CVR Value Reduction hereunder and shall
give the CVR Representative reasonable access to all books, records and
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<PAGE> 58
personnel in the possession or under the control of DeSoto which would have
bearing on such CVR Value Reduction. Within 90 days of the Maturity Date (or,
if applicable, on the date of any earlier redemption of any CVRs), DeSoto shall
mail or otherwise deliver notice to the CVR Representative setting forth in
reasonable detail all matters giving rise to a CVR Value Reduction. Any
proposed CVR Value Reduction shall be conclusive and binding upon DeSoto and
all CVR Holders unless, within 30 days after delivery to the CVR Representative
of the written notice pursuant to the foregoing sentence, the CVR
Representative shall deliver to DeSoto a written statement of specific
objections thereto (which objections may be made only as to the matters
described in clause (ii)(A)). If any differences with respect to the matters
described in clause (ii)(A) are resolved by agreement of DeSoto and the CVR
representative within 45 days after delivery of the statement of objections to
DeSoto (the "Resolution Period"), then such agreement shall be conclusive and
binding upon DeSoto, the CVR Representative and all CVR Holders. If any
differences with respect to the matters described in clause (ii)(A) are not
resolved by agreement of DeSoto and the CVR Representative within the
Resolution Period, such differences shall be submitted by DeSoto or the CVR
Representative to the American Arbitration Association for the appointment of
an arbitrator to resolve the dispute. The decision of the arbitrator shall be
set forth in a written report delivered to DeSoto and the CVR Representative,
and shall be conclusive and binding upon DeSoto, the CVR Representative and all
CVR Holders. Any such dispute shall be settled by arbitration in the state of
Illinois in accordance with the rules of the American Arbitration Association
then in effect, and judgment upon any award rendered by the arbitrator may be
entered in any court having jurisdiction thereover. DeSoto and the CVR
Representative shall each be responsible for one-half of the fees and expenses
of the arbitrator and each such party shall be responsible for its own fees and
expenses relating to the arbitration; provided, however, that if the arbitrator
shall determine that DeSoto or the CVR Representative shall have acted in bad
faith in such dispute, the fees and expenses of the arbitrator and the
reasonable fees and expenses of both parties to the arbitration shall be borne
by the party so determined to have acted in bad faith; and provided, further
that, if the CVR Value is determined in accordance with the provisions hereof
to be a positive number, (I) the CVR Value shall then be reduced to the extent
the amount obtained by dividing the total foregoing fees and expenses for which
the CVR Representative is responsible but which it has not paid (the
"Representative's Share") by the total number of DeSoto Merger Shares does not
exceed the CVR Value and (II) the CVR Representative shall remain responsible
for the Representative's Share to the extent it is not reflected in such
reduction of the CVR Value.
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<PAGE> 59
(g) Optional Redemption By DeSoto. Prior to the
Maturity Date, DeSoto may, at its option, at any time and from time to time,
redeem all or a portion of the outstanding CVRs for cash at a redemption price
equal to the amount, if any, by which (i) the Discounted Target Price as of the
date of redemption exceeds (ii) the sum of the Highest Price and the CVR Value
Reduction; provided, however, that (x) in the event the date of redemption is
prior to the first anniversary of the Effective Time, the redemption price
shall equal the sum of (1) the then present value of $6.00 as of the Maturity
Date (discounted in the same manner as the Target Price is discounted in the
definition of "Discounted Target Price") and (2) the CVR Value Reduction, and
(y) in no event shall the redemption price exceed the Maximum CVR Value. If
less than all outstanding CVRs are redeemed, CVRs shall be redeemed pro rata
based on the number of CVRs registered in the name of each CVR Holder.
Immediately upon public announcement by DeSoto or notice to the CVR
Representative of the redemption, the redeemed CVRs shall represent only the
right to receive the redemption price. As promptly as practicable after so
announcing or noticing a redemption and in any event not later than 30 days
thereafter, DeSoto shall mail or otherwise deliver to each CVR Holder written
notice of redemption stating the redemption date (which shall be no later than
30 days after such announcement unless a Prohibition commences after the
announcement, in which event such redemption shall be rescinded automatically
and shall be of no effect), the redemption price and, if less than all
outstanding CVRs are to be redeemed, the identification of the particular CVRs
to be redeemed, and instructions as to the place and means of surrendering CVRs
in exchange for the redemption price. CVR Holders shall have no right to
require the redemption of any CVR, subject to paragraphs (e)(iii) and (j).
(h) No Interest. No interest shall accrue on any
amounts payable on the CVRs to any CVR Holder.
(i) Determinations by DeSoto. All determinations
to be made by DeSoto with respect to the CVRs (other than those to which the
CVR Representative may object as provided in paragraph (f), which shall be
conclusively determined in accordance with paragraph (f)) shall be determined
by the DeSoto Board of Directors in good faith and its sole business judgment,
and all Board Determinations shall, in each case (absent manifest error), be
final and binding upon DeSoto, Parent and the CVR Holders.
(j) Preferred Stock Repurchases. DeSoto shall not
redeem, repurchase or otherwise acquire any shares of its Series B Senior
Preferred Stock at any time prior to the first
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<PAGE> 60
anniversary of the Effective Time or at any time that any payment obligation
under DeSoto Securities issued in respect of a CVR Payment has not been paid
(whether or not prohibited by a Prohibition); provided, however, that the
foregoing restrictions shall not apply if the Board of Directors of DeSoto in
the exercise of its fiduciary duties determines it is necessary to facilitate
or is otherwise required in connection with a merger or consolidation of
DeSoto, a sale of all or substantially all of DeSoto's assets or an issuance of
voting securities of DeSoto to a Person who, after such issuance, shall control
in excess of 50% of all DeSoto voting securities, in which acquisition
transaction the CVRs or the DeSoto Securities will be fully paid in cash in
connection with such transaction in accordance with their terms.
(k) Certain Definitions. As used herein:
"Authorized Newspaper" means The Wall Street Journal
(Eastern Edition), or if The Wall Street Journal (Eastern Edition) shall cease
to be published or if the publication or general circulation of The Wall Street
Journal (Eastern Edition) shall be suspended for whatever reason, such other
English language newspaper as is selected by DeSoto of general circulation in
The City of New York, New York.
"Bank" means any of the banks under the Prescott
Credit Agreement, being Fleet National Bank, Barclays Bank PLC and The Bank of
Nova Scotia.
"Board Determination" means a determination which
shall be made by DeSoto's Board of Directors in good faith (which in so doing
may rely on advice from DeSoto's independent accountants, financial advisors
and/or legal counsel) that the payment of the CVR Payment in cash and/or DeSoto
Securities would materially threaten DeSoto's financial viability or have a
DeSoto Material Adverse Effect.
"CVR Certificate" means this certificate or any other
certificate delivered to a CVR Holder following the Effective Time which
evidences the number of CVRs issued to such CVR Holder pursuant to the
provisions hereof and, if such CVR Holder is the initial holder of such CVRs,
pursuant to the Merger Agreement or in connection with the Bank Debt
Restructuring.
"CVR Holder" means any registered holder of any CVRs
on the Maturity Date who obtained such CVRs in connection with the Merger or in
connection with the Bank Debt Restructuring or pursuant to a registered
transfer of such CVRs permitted hereby.
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<PAGE> 61
"CVR Representative" shall be the "Stockholder
Representative" under the Stockholder Agreement dated the date hereof between
DeSoto and Narragansett/Prescott, Inc.
"Daily Closing Price" means, on a per share basis for
DeSoto Common Stock for each Trading Day on which shares of DeSoto Common Stock
are registered under the Exchange Act: (A) if shares of DeSoto Common Stock are
listed or admitted to trading on any securities exchange, the closing price,
regular way, on such day on the principal securities exchange on which such
shares are traded; (B) if shares of DeSoto Common Stock are not then listed or
admitted to trading on any securities exchange, the last reported sale price on
such day, or if no sale takes place on such day, the average of the closing bid
and asked prices on such day, as reported by a reputable quotation source
designated by DeSoto; and (C) if the shares of DeSoto Common Stock are not then
listed or admitted to trading on any securities exchange and no such reported
sale price or bid and asked prices are available, the average of the reported
high bid and low asked prices on such day, as reported in the Authorized
Newspaper or, if not so reported, then the last price as of such date at which
a transaction in shares of DeSoto Common Stock occurred between a willing buyer
and a willing seller which DeSoto determines in good faith is based on reliable
sources and is indicative of a market price. The Daily Closing Price for each
date during the period beginning with the first Trading Day following the
announcement by DeSoto of (x) a dividend or distribution on DeSoto Common Stock
payable in shares of DeSoto Common Stock or securities convertible into shares
of DeSoto Common Stock or any cash dividend (other than a regular quarterly
dividend) or (y) any subdivision, combination or reclassification of DeSoto
Common Stock, and ending with the last Trading Day before DeSoto Common Stock
trades ex-dividend with respect to such dividend or distribution, or ending
with the record date for such subdivision, combination or reclassification, as
the case may be, shall be properly adjusted to take into account ex-dividend
trading (therefore, for purposes of the calculation of Highest Price in the
case of such a cash dividend actually paid prior to the end of the measurement
period herein specified for such calculation of Highest Price, the amount of
such dividend shall be subtracted from the Daily Closing Price for each Trading
Day from the first Trading Day after announcement of the dividend until the
first Trading Day when DeSoto Common Stock trades ex-dividend). In addition,
with respect to repurchases of DeSoto Common Stock, the Daily Closing Price
during a specified measurement period beginning with the first Trading Day
following the announcement by DeSoto of its intention to repurchase DeSoto
Common Stock and ending with the last Trading Day on which any such repurchases
are made shall be decreased
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<PAGE> 62
by the Per Share Deemed Distribution in respect of such repurchases.
"DeSoto Merger Shares" means shares of DeSoto Common
Stock issued (i) in the Merger or (ii) to the Banks in connection with the Bank
Debt Restructuring.
"DeSoto Securities" means any general unsecured debt
security issued by DeSoto pursuant to the CVRs that shall (i) bear interest at
an annual rate of 3% over the prime rate announced by Citibank, N.A. from time
to time until the second anniversary of its issuance, which annual rate shall
increase prospectively by one percentage point on the day immediately following
such second anniversary and on each such day immediately following subsequent
anniversaries so long as any DeSoto Securities are outstanding, (ii) require
that the foregoing interest shall be payable quarterly in arrears to the extent
not prohibited by any Prohibition and otherwise payable at such time as first
permitted by Prohibitions, (iii) mature upon the later to occur of the
anniversary of its issuance and the shortest maturity date allowable for
indebtedness that DeSoto is permitted to incur under Prohibitions in effect at
the time of issuance, and (iii) possess such other features as are mutually
acceptable to DeSoto and the CVR Representative.
"Discounted Target Price" means, with respect to any
redemption of the CVRS, the present value of the Target Price as of the date
specified herein, which shall be determined by discounting the Target Price by
a yield computed from linear interpolation from the yields as of such specified
date of those United States Treasury constant maturities series having a period
as close as practicable to the period from such date to the Maturity Date, as
published in the Federal Reserve Statistical Release H.15 (519) first issued
following the announcement of such redemption that contains information with
respect to such specified date; Provided, however, that if the period between
such specified date and the Maturity Date is less than 90 days, the Discounted
Target Price shall equal the Target Price.
"Distributions on Common Stock" means all cash
dividends declared after the Effective Time and paid on a share of DeSoto
Common Stock (other than regular quarterly cash dividends) and the Fair Market
Value of all distributions of securities (other than CVRS, DeSoto Securities or
DeSoto Common Stock), cash or property made in respect of a share of DeSoto
Common Stock on or after the Effective Time and on or before the Maturity Date
(the Fair Market Value of any such securities or property shall be determined,
as of the time of the distribution by an Independent Financial Expert if one
shall
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<PAGE> 63
have been retained by DeSoto or DeSoto's Board of Directors in connection with
such distribution for purposes other than solely the determination contemplated
hereby and otherwise by DeSoto's Board of Directors, and shall include the
value of subsequent distributions, dividends and interest payments in respect
of such distributed security or property). Distributions on Common Stock shall
also include the quotient obtained by dividing (A) the aggregate cash amounts
and the aggregate Fair Market Value of any non-cash consideration paid by
DeSoto in connection with the purchase or other acquisition of shares of DeSoto
Common Stock at any time after the Effective Time and on or before the Maturity
Date pursuant to any privately negotiated transactions, open market purchases
or tender or exchange offer in which CVR Holders have had an opportunity to
participate (with any necessary consent from DeSoto to waive provisions of the
Stockholders Agreement which would otherwise prevent such participation) on a
basis equivalent (including the same price and percent of stock to be acquired)
to that offered to all other holders of DeSoto Common Shares who are presented
with such opportunity by (B) the total number of shares of DeSoto Common Stock
outstanding at the time of such purchase or acquisition (such quotient being
referred to as the "Per Share Deemed Distribution"). Appropriate adjustments in
the calculation of Distributions on Common Stock hereunder shall be made to
reflect stock dividends, stock splits, recapitalizations and other changes in
the DeSoto Common Stock made after the Effective Time.
"Fair Market Value" means, with respect to any
property, the value as determined by the Independent Financial Expert or DeSoto
(as applicable) reasonably and in good faith to be the probable price that
would be paid by a willing buyer to an unrelated willing seller on an arm's
length basis, and with respect to any security, the value of such security as
determined by the Independent Financial Expert or DeSoto (as applicable)
reasonably and in good faith to be the probable market trading price of such
security on a fully distributed basis and subject to normal trading activity.
"Highest Price" means:
(I) as used in paragraph (a), the greater of
(x) the highest of the Moving Average
Prices calculated for each day from the date which is
60 Trading Days immediately after the first
anniversary of the Closing Date until the Maturity
Date, and
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<PAGE> 64
(y) the price per share of DeSoto Common
Stock determined by an Independent Financial Expert
as of any date from or after the first anniversary of
the Closing Date but not later than the Maturity Date
on which date the shares of DeSoto Common Stock are
not registered under the Exchange Act, using one or
more valuation methods that the Independent Financial
Expert, in its best professional judgment, determines
to be most appropriate;
and
(II) as used in paragraph (g) with respect to an optional
redemption by DeSoto permitted by such paragraph, the greater of
(x) the highest of the Moving Average
Prices calculated for each day from the date which is
60 Trading Days immediately after the first
anniversary of the Closing Date until the date of
announcement of such redemption, and
(y) the price per share of DeSoto Common
Stock determined by an Independent Financial Expert
as of any date from or after the first anniversary of
the Closing Date but not later than the date of
announcement of such redemption on which date the
shares of DeSoto Common Stock are not registered
under the Exchange Act, using one or more valuation
methods that the Independent Financial Expert, in its
best professional judgment, determines to be most
appropriate.
"Independent Financial Expert" means an independent
investment banking firm or financial consultant chosen by DeSoto that does not
(and whose directors, officers and affiliates do not) have a direct or indirect
financial interest in DeSoto or any of its affiliates and that, at the time it
is called upon to give independent financial advice to DeSoto, is not (and none
of whose directors, officers or affiliates is) a director or officer of DeSoto
or any of its affiliates, and which is reasonably acceptable to the CVR
Representative.
"Initial Holder" means a CVR Holder who is Parent,
Narragansett First Fund, a liquidating trust of Narragansett First Fund (the
sole trustee of which, who shall have sole voting and dispositive power with
respect to the property of such trust, shall be Narragansett Management
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<PAGE> 65
Partners or a bank or other institutional trustee which in the regular course
of business provides trust services to its customers) or any of the Banks.
"Maturity Date" means the third anniversary of the
Effective Time.
"Merger Agreement" means the Plan and Agreement of
Merger, dated as of July 20, 1992, by and among DeSoto, Inc., DeSoto Subsidiary
One Corp. and J.L. Prescott, Co.
"Moving Average Price" as of a date means the average
Daily Closing Price for the 60 consecutive Trading Days immediately preceding
and including that date.
"Prohibition" means, with respect to any contemplated
or proposed action or statement, (i) any relevant Board Determination or (ii)
any relevant limitation, prohibition, Encumbrance or penalty imposed by or
under (x) any agreement, instrument, note, indenture or similar arrangement
with an unaffiliated third party by which DeSoto or any of its subsidiaries is
a party or by which any of their properties may be subject as of the date of
such contemplated or proposed action or statement and the breach of which would
have or would reasonably be expected to have a DeSoto Material Adverse Effect
(after taking into account cross-default or cross-acceleration provisions of
other such agreements, instruments, notes, indentures and similar arrangements)
and for which a waiver cannot reasonably be obtained or (y) any Law.
"Target Price" shall be $12.00 as adjusted pursuant
to the Antidilution provisions set forth in paragraph (e).
"Trading Day" means any day on which the New York
Stock Exchange is open for trading.
(l) Governing Law. This Contingent Value Right
shall be governed by and construed in accordance with the laws of the State of
Delaware applicable to instruments made and entirely to be performed in such
State.
(m) Amendments; Waivers. Any or all of the
provisions of the CVRs may be amended or cancelled only by a written instrument
signed by (i) DeSoto and (ii) the CVR Holders who shall own in the aggregate
not less than 66% of all CVRs outstanding at the time such instrument is
signed. Each CVR Holder shall be bound by any amendment authorized by this
paragraph (m) (including, without limitation, any amendment (i) to the
definition of CVR Payment, CVR Value, CVR Value
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<PAGE> 66
Reduction, Daily Closing Price, DeSoto Securities, Discounted Target Price,
Distributions on Common Stock, Fair Market Value, Highest Price, Maturity Date,
Moving Average Price or Target Price, (ii) to paragraph (e), (iii) to this
paragraph (m), or (iv) which adversely affects the rights of the CVR Holders
hereunder), whether or not such CVR Holder shall have consented thereto. Any of
the terms or provisions of the CVRs may be waived (either generally or in a
particular instance and either retroactively or prospectively) only in writing
at any time by each of the parties which is entitled to the benefits of such
waived terms or provisions. No waiver of any of the provisions of the CVRs
shall be deemed to or shall constitute a waiver of any other provision thereof
(whether or not similar). No delay on the part of any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof.
IN WITNESS WHEREOF, DeSoto has caused this instrument to be duly
executed.
Dated:
DESOTO, INC.
By:
-------------------------------
Authorized Signature
Attest:
-------------------------
Authorized Signature
17
<PAGE> 1
EXHIBIT 10.14
STOCK REDEMPTION AGREEMENT
STOCK REDEMPTION AGREEMENT dated as of August 21, 1992 by and among
NARRAGANSETT/PRESCOTT, INC., a Delaware corporation ("Narragansett"), DESOTO,
INC., a Delaware corporation ("DeSoto"), and MATTHEW T. CARROLL
("Stockholder").
WITNESSETH:
WHEREAS, Stockholder is the owner of $34,722 shares of the Common
Stock, $.01 par value per share, of Narragansett (the "Redemption Stock");
WHEREAS, Narragansett is the owner of all of the issued and
outstanding capital stock of J. L. Prescott Company, a New Jersey corporation
("Prescott");
WHEREAS, Prescott, DeSoto and DeSoto Subsidiary One Corp. ("Newco"), a
New Jersey corporation and wholly-owned subsidiary of DeSoto, have entered into
a Plan and Agreement of Merger (the "Merger Agreement") dated the date hereof
whereby Prescott shall merge with Newco (the "Merger"); and
WHEREAS, (i) Narragansett desires to redeem, and Stockholder desires
to sell to Narragansett, the Redemption Stock and (ii) DeSoto desires to assume
any and all of Narragansett's obligations hereunder, all as hereinafter set
forth and in both instances, assuming and immediately following the
consummation of the Merger.
NOW THEREFORE, in consideration of the mutual promises contained in
this Agreement and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree
as follows:
1. Subject to (i) the consummation of the Merger pursuant to the
terms and conditions of the Merger Agreement and (ii) the terms and conditions
set forth herein, Stockholder shall sell, assign, convey and deliver the
Redemption Stock to Narragansett and Narragansett shall redeem the Redemption
Stock, on the Closing Date (as defined herein). Simultaneously with
Stockholder's execution hereof, Stockholder has delivered to Narragansett stock
certificate(s) representing the Redemption Stock, accompanied by a stock power
duly endorsed in blank (the "Escrow Documents"), to be held by Narragansett in
escrow and to be distributed as follows: (i) if the Closing (as defined herein)
occurs, the Escrow Documents shall immediately be released and delivered to
Narragansett for its sole and exclusive benefit; and (ii) if this Agreement is
terminated due to a Termination Event (as defined herein), the Escrow Documents
shall immediately be released and delivered to Stockholder for his sole and
exclusive benefit.
<PAGE> 2
2. The aggregate redemption price for the Redemption Stock shall be
an amount equal to $265,000 and shall be payable as follows: $100,000 on the
Closing Date and $55,000 on each of the first three (3) anniversaries of the
Closing Date. Each payment set forth in this Section 2 shall be considered to
include the payment of interest, compounded annually, at a rate equal to the
"applicable Federal short term rate" as determined under Section 1274(d) of the
Internal Revenue Code of 1986, as amended, on unpaid amounts.
3. The closing of the redemption of the Redemption Stock provided for
herein (the "Closing") shall take place immediately following the Effective
Time (as defined in the Merger Agreement) or at such other time and date as may
hereafter be mutually agreed upon in writing by the parties (such time and date
of Closing being hereinafter called the "Closing Date"). This Agreement shall
terminate and no party hereto shall have any obligations hereunder (other than
the obligation of Narragansett to return the Escrow Documents to Stockholder as
contemplated by Section 1 hereof) if (i) the Merger Agreement is terminated
pursuant to the terms thereof or (ii) the Merger is not consummated for any
reason whatsoever on or prior to March 31, 1993 (any of the events described in
clauses (i) or (ii) shall be referred to herein as a "Termination Event").
4. Subject to the terms and conditions herein contained, at the
Closing, the Stockholder shall deliver to Narragansett stock certificate(s)
representing the Redemption Stock, accompanied by a properly executed stock
power(s) duly endorsed in blank and the release described below. It is
understood that such delivery of certificates and stock powers is intended to
be made by the delivery of the Escrow Documents to Narragansett from the escrow
described herein, and that immediately following the Effective Time,
Narragansett shall deliver, and is hereby irrevocably authorized to deliver,
the Escrow Documents as provided in Section 1 hereof.
5. Immediately following the Effective Time, without any further
action required by the parties hereto, DeSoto shall assume, and shall be liable
and responsible for, as additional consideration pursuant to the Merger
Agreement, any and all of Narragansett's obligations set forth in Section 2
hereof as if DeSoto was originally bound thereby. DeSoto and Stockholder hereby
acknowledge and agree that upon consummation of the Closing, neither of such
parties shall have any recourse whatsoever to Narragansett, and each hereby
waives any recourse whatsoever to Narragansett and unconditionally releases
Narragansett from any and all obligations, with respect to this Agreement and
the transactions contemplated hereby, and that any default by DeSoto with
regard to the assumed payment obligations set forth in Section 2 hereof shall
not give
-2-
<PAGE> 3
Stockholder any right, claim or cause of action to seek relief from Narragansett
and/or any of its directors, officers, employees, agents or stockholders.
6. Stockholder, Narragansett and Narragansett First Fund ("NFF")
hereby agree that, as to the Stockholder only, the Letter Agreement (the
"Letter Agreement") dated March 31, 1988 by Narragansett and NFF in favor of
the stockholders of Narragansett relating to registration rights, shall,
without further notice or action by any party, be terminated and of no further
force or effect effective as of the Closing Date following the redemption
contemplated herein. In addition, the Stockholder and Narragansett hereby agree
that the Stockholders Agreement dated March 31, 1988 among Narragansett and its
stockholders (the "Stockholders Agreement") with respect to the Stockholder,
shall, without further notice or action by any party, be terminated and of no
further force or effect effective as of the Closing Date following the
redemption contemplated herein.
7. Stockholder represents and warrants to Narragansett as follows:
(a) Stockholder is the sole record and beneficial owner of
the Redemption Stock, has good, marketable and indefeasible title to
such Redemption Stock, and has the absolute right and power to deliver
such Redemption Stock pursuant to this Agreement, free and clear of
all claims, security interests, liens, pledges, charges, escrows,
options, proxies, rights of first refusal, or any other encumbrances
of any kind, other than as set forth in the Stockholders Agreement and
the Letter Agreement.
(b) The stock certificate(s) registered in the name of
Stockholder delivered into escrow on the date hereof represents all of
the capital stock of Narragansett owned by Stockholder.
(c) Stockholder has received a final copy of the Merger
Agreement and hereby acknowledges that pursuant to the terms thereof
and certain other documents to be entered into by Prescott in
connection therewith, (i) Narragansett is entitled to receive, as the
sole Stockholder of Prescott, for its own account, 261,387.5 shares of
common stock of DeSoto which shall be unregistered but subject to
certain registration rights and 261,387.5 contingent value rights and
(ii) Prescott's senior lenders shall be entitled to receive, upon the
direction of Narragansett following the Bank Debt Restructuring (as
defined in the Merger
-3-
<PAGE> 4
Agreement), 261,387.5 shares of DeSoto common stock and 261,387.5
contingent value rights. Stockholder understands that by entering into
this Agreement and upon the consummation of the transactions
contemplated hereby, Stockholder shall have no right of any kind as a
stockholder of Narragansett to any of the shares of DeSoto common
stock or contingent value rights to be received by Narragansett in
connection with the Merger, or by any of Prescott's senior lenders in
connection with the Bank Debt Restructuring. Stockholder further
acknowledges that he has elected to bargain for the liquidity of his
investment in Narragansett as contemplated by this Agreement rather
than a continued investment as a stockholder of Narragansett in the
DeSoto common stock and contingent value rights to be delivered to
Narragansett pursuant to the Merger Agreement and that Narragansett
has agreed to provide such liquidity at Stockholder's request and to
Narragansett's detriment.
(d) Narragansett has made available to Stockholder, prior to
the date hereof, the opportunity to ask questions of and receive
answers from representatives of Narragansett concerning the terms and
conditions of the Merger, and to obtain any information relative to
the financial data and business of Narragansett and DeSoto as of the
date hereof and as contemplated following the Closing Date.
(e) Stockholder's knowledge and experience in financial and
business matters and his status as a stockholder of Narragansett and
President of Prescott, Narragansett's sole asset, are such that
Stockholder has been able to evaluate the merits of selling the
Redemption Stock to Narragansett and has determined that it is a
suitable transaction for him.
8. At the Closing, Stockholder shall execute a release substantially
in the form attached hereto as Exhibit A.
9. Miscellaneous.
(a) Notices. All notices given hereunder shall be in writing and
shall be delivered personally or sent by prepaid registered or certified mail,
return receipt requested, addressed as follows:
If to Narragansett:
Narragansett/Prescott, Inc.
c/o Narragansett Capital, Inc. Manufacturing Group
One Turks Head Place
Suite 1550
Providence, RI 02903
Attention: Arthur D. Little
-4-
<PAGE> 5
with a copy to:
Edwards & Angell
2700 Hospital Trust Tower
Providence, RI 02903
Attention: Christopher D. Graham
If to Stockholder:
Matthew T. Carroll
26 West 465 Huntergate Road
St. Charles, IL 60175
with a copy to:
Rudnick & Wolfe
Suite 1800
203 North LaSalle Street
Chicago, IL 60601
Attention: Stephen A. Landsman
If to DeSoto:
DeSoto, Inc.
1471 Business Center Drive
Suite 800
Mt. Prospect, IL 60056
Attention: William Spier
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
1 New York Plaza
New York, NY 10004
Attention: Peter S. Golden
(b) Confidential. This Agreement is confidential and shall not be
made public by any party hereto except as required by law or if necessary in
order to enforce this Agreement.
(c) Severability. The invalidity or unenforceability of any
particular provision of this Agreement shall not affect the other provisions
hereof, and this Agreement shall be construed in all respects as if such
invalid or unenforceable provisions were omitted.
(d) Assignment; Survival of Representations. This Agreement shall be
binding upon the parties hereto and their respective heirs, executors,
administrators, personal
-5-
<PAGE> 6
representatives, successors and assigns; provided, however that Stockholder
shall not make any assignment of Stockholder's rights under this Agreement and
that Narragansett may assign its obligations hereunder to DeSoto. All
agreements, representations and warranties made herein or in connection
herewith shall survive the execution and delivery of this Agreement.
(e) Expenses. All legal and other expenses incurred in connection
with the negotiation, preparation and execution of this Agreement shall be paid
by the respective parties hereto.
(f) No Waiver; Cumulative Remedies. The parties to this Agreement
will not be deemed as a consequence of any act, delay, failure, omission,
forbearance or other indulgences granted from time to time by any of them to
have waived, or to be estopped from exercising, any of their rights or remedies
under this Agreement. Any waiver, modification, amendment, change, termination
or rescission of this Agreement shall be effective only if in writing and
signed by all of the parties hereto. No single or partial exercise by any party
to this Agreement of any right or remedy will preclude any other or further
exercise thereof or preclude the exercise of any other right or remedy. Except
as set forth herein, the remedies of the parties provided for in this Agreement
shall be cumulative and shall not preclude the assertion by any party of any
other rights such party may have under applicable law or otherwise.
(g) Governing Law. This Agreement and the rights and obligations of
the parties hereunder shall be construed and interpreted in accordance with and
governed by the laws of the State of Delaware.
(h) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
(i) Entire Agreement. This Agreement sets forth the entire agreement
and understanding of the parties in respect of the subject matter hereof and
supersedes all prior agreements, arrangements and understandings relating to
the subject matter hereof.
(j) Equitable Relief. The parties hereto agree and declare that legal
remedies may be inadequate to enforce the provisions of this Agreement and that
equitable relief, including specific performance and injunctive relief, may be
used to enforce such provisions.
-6-
<PAGE> 7
(j) ACKNOWLEDGEMENT. STOCKHOLDER HEREBY ACKNOWLEDGES THAT IT HAS READ
AND FULLY UNDERSTANDS THIS AGREEMENT AND HAS CONSULTED WITH AN ATTORNEY OF HIS
CHOICE REGARDING THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the day and year first above written.
NARRAGANSETT/PRESCOTT, INC.
By /s/ Arthur D. Little
------------------------------------
Chairman
DESOTO, INC.
By /s/ William Spier
------------------------------------
Chairman and Chief Executive Officer
/s/ Matthew Carroll
----------------------------------------
Matthew Carroll
Agreed and accepted to
insofar as its interests
may appear in Paragraph 6
hereof:
NARRAGANSETT FIRST FUND
By: Narragansett Management Partners,
its General Partner
By /s/ Arthur D. Little
-----------------------------
Arthur D. Little
-7-
<PAGE> 8
EXHIBIT A
RELEASE
To all to whom these presents shall come or may concern, know that
Matthew T. Carroll ("Releasor") for good and valuable consideration received
from Narragansett/Prescott, Inc. ("NPI"), a Delaware corporation, and
Narragansett First Fund (collectively, "Releasee"), including the release by
NPI of Releasor from non-competition covenants in that certain Stockholders'
Agreement as described in the Stock Redemption Agreement defined below, the
receipt whereof is hereby acknowledged, hereby releases and discharges the
Releasee and Releasee's shareholders, partners, directors, officers, employees,
successors and assigns from any and all actions, causes of action, suits,
debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties,
covenants, contracts, controversies, agreements, promises, variances,
trespasses, damages, judgments, extents, executions, claims and demands
whatsoever ("Claims"), in law, admiralty or equity, whether known or unknown,
which against such persons the Releasor and/or Releasor's heirs, executors,
administrators, successors and assigns ever had, now have or hereafter can,
shall or may have, for, upon, or by reason of any matter, cause or things
whatsoever from the beginning of the world to the day of the date of this
Release; including, but not limited to, any and all Claims relating to (i)
Releasor's employment by J.L. Prescott Company ("Prescott"), a wholly-owned
subsidiary of NPI, (ii) Releasor's appointment as an officer of Prescott, (iii)
Releasor's status as an equity holder of NPI and as a former equity holder of
Prescott, and (iv) any Claims by Releasor arising out of the Stock Redemption
Agreement (the "Stock Redemption Agreement") dated August 21, 1992 among
Releasor, NPI and DeSoto, Inc. ("DeSoto"), provided, however, that the release
contained in this clause (iv) shall not in any way constitute a release of
DeSoto of its obligations under the Stock Redemption Agreement.
Whenever the text hereof requires, the use of singular number shall
include the appropriate plural number as the text of the within instrument may
require.
This Release may not be changed orally.
IN WITNESS WHEREOF, the Releasor has executed this Release on this
_____ day of_______, 1992.
-------------------------------------
Matthew T. Carroll
<PAGE> 9
IN PRESENCE OF:
STATE OF
-------------------------
COUNTY OF
------------------------
In ___________________________, on the ____ day of ______________,
1992, before me personally appeared Matthew T. Carroll, to me known and known
by me to be the person executing the foregoing instrument and he acknowledged
said instrument by him executed to be his free act and deed.
---------------------------------------
Notary Public
My commission expires:
-2-
<PAGE> 1
EXHIBIT 10.15
NARRAGANSETT FIRST FUND
One Turks Head Place
Suite 1550
Providence, Rhode Island 02903
August 21, 1992
DeSoto, Inc.
1471 Business Center Drive
Suite 800
Mt. Prospect, Illinois 60056
Narragansett/Prescott, Inc.
One Turks Head Place
Suite 1550
Providence, Rhode Island 02903
Gentlemen:
Reference is made to the Plan and Agreement of Merger entered into on
the date hereof by and among DeSoto, Inc., DeSoto Subsidiary One Corp. and J.L.
Prescott Company (the "Merger Agreement"). Capitalized terms used and not
otherwise defined herein shall have the meanings ascribed to them in the Merger
Agreement.
Section 5.02(f) of the Merger Agreement provides that the obligation
of DeSoto and Newco to consummate the Merger is subject to the prior
contribution to the capital of the Company of a subordinated note of the
Company which is referred to in note 5 to the December 31, 1990 Audited
Financial Statements (the "Subordinated Note"). This will confirm that
Narragansett First Fund ("NFF") is the sole holder of the Subordinated Note.
NFF hereby agrees that, upon the satisfaction or waiver of each of the
conditions contained in Article V of the Merger Agreement (other than Sections
5.02(c), 5.02(f) and 5.03(b)), including, but
<PAGE> 2
DeSoto, Inc. -2- August 21, 1992
not limited to the condition set forth in Section 5.01(d) (which must be
satisfied or waived by each of the parties to the Merger Agreement), NFF, as a
stockholder of Parent, shall contribute the Subordinated Note to the capital of
Parent and, upon such contribution, shall cause Parent to contribute the
Subordinated Note to the capital of the Company as contemplated by Section
5.02(f) of the Merger Agreement. The foregoing undertaking is made by NFF in
order to induce DeSoto to enter into the Merger Agreement. The obligations of
NFF hereunder shall terminate if the Merger Agreement is terminated.
Sincerely,
NARRAGANSETT FIRST FUND
By: Narragansett Management Partners,
its general partner
By: /s/ Arthur D. Little
------------------------------------
Arthur D. Little,
a general partner
Accepted and acknowledged as of
the date first above written.
DESOTO, INC.
By: /s/ William Spier
------------------------------
Name: William Spier
Title: Chairman and
Chief Executive Officer
NARRAGANSETT/PRESCOTT, INC.
By: /s/ Arthur D. Little
------------------------------
Name: Arthur D. Little
Title: Chairman
<PAGE> 1
EXHIBIT 10.16
STOCKHOLDERS AGREEMENT (this "Agreement"), dated as of August 21,
1992, by and between DeSoto, Inc., a Delaware corporation ("DeSoto"), and
Narragansett/Prescott, Inc., a Delaware corporation ("NPI").
WHEREAS, DeSoto, DeSoto Subsidiary One Corp., a New Jersey corporation
and a direct wholly-owned subsidiary of DeSoto ("Newco"), and J.L. Prescott
Company, a New Jersey corporation and a direct wholly-owned subsidiary of NPI
(the "Company"), have entered into a Plan and Agreement of Merger, dated as of
the date hereof (the "Merger Agreement"), pursuant to which the Company will
merge with Newco and NPI, as the holder of all the shares of common stock, par
value $.01 per share, of the Company ("Prescott Shares"), will receive shares
of common stock, par value $1 per share, of DeSoto ("DeSoto Shares"), all on
the terms and subject to the conditions set forth in the Merger Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements hereinafter contained, the parties hereto do hereby agree as
follows:
ARTICLE I
DEFINITIONS
1.01. Certain Definitions. (a) Any capitalized term used and not
otherwise defined herein, and each of the terms "affiliate" and "subsidiary",
shall have the meaning ascribed to it in the Merger Agreement (a copy of which
has been previously provided to NPI and can be obtained by any Stockholder by
contacting DeSoto).
(b) As used herein:
"associate" shall have the meaning ascribed to such term in
Rule 12b-2 under the Exchange Act.
"Banks" shall mean the banks under the Prescott Credit
Agreement, being Fleet National Bank, Barclays Bank PLC and The Bank of Nova
Scotia.
"Board" shall mean the Board of Directors of DeSoto.
"Director" shall mean a member of the Board.
<PAGE> 2
"Encumbrance" shall mean any lien, option (excluding the
purchase option granted by the Banks to Narrangansett First Fund in connection
with the Bank Debt Restructuring), claim, security interest or other
encumbrance (including, without limitation, any right of first refusal or
similar right), except as created by this Agreement.
"Narragansett Family Members" shall mean (i) NPI, Narragansett
First Fund and their respective affiliates and associates, (ii) a liquidating
trust of Narrangansett First Fund, the sole trustee (who shall have sole voting
and dispositive power with respect to the property of such trust) of which
shall be Narragansett Management Partners or a bank or other institutional
trustee which in the regular course of business provides trust services to its
customers and (iii) the Banks and their respective affiliates.
"New DeSoto Shares" shall mean DeSoto Shares issued (x) in the
Merger, (y) to the Banks in connection with the Bank Debt Restructuring or (z)
pursuant to the CVRs.
"Preferred Stock Purchasers" shall mean the initial purchasers
under the Preferred Stock and Warrant Purchase Agreement with DeSoto dated as
of the date hereof.
"Public Offering" shall mean the offering of the primary or
secondary sale of any common stock of DeSoto consummated pursuant to an
effective registration statement under the Securities Act.
"Related Business Affiliate" shall mean (i) with respect to
any Stockholder which is a Narragansett Family Member, any other Narragansett
Family Member or (unless such Stockholder is a Bank) any shareholder or partner
(whether limited or general) or beneficiary (if such Stockholder is a trust) of
such Stockholder at the Effective Time, and (ii) with respect to any other
Stockholder which is a corporation, trust, partnership or joint venture, any
affiliate of such Stockholder.
"Related Individual" shall mean, with respect to any
individual Stockholder, an individual who is the parent, spouse or any lineal
descendant of such Stockholder.
"Related Person" shall mean, with respect to any Stockholder,
a Related Business Affiliate, a Related Individual or a Related Trust of such
Stockholder.
"Related Trust" shall mean, with respect to any individual
Stockholder, a trust, all the beneficiaries of which are the Stockholder, his
parents, his spouse and his lineal descendants.
2
<PAGE> 3
"Rule 144" shall mean Rule 144 under the Securities Act or any
similar rule or regulation hereafter adopted by the SEC.
"Stockholder" shall mean (i) NPI and (ii) any Person (other
than DeSoto) who shall have acquired New DeSoto Shares in accordance with
Section 5.02(b).
"Stockholder Representative" shall mean NPI until DeSoto shall
have been notified in writing by Narragansett First Fund that NPI was
liquidated, whereupon it shall mean Narragansett First Fund until DeSoto shall
have been notified by the general partner of Narragansett First Fund that it
was liquidated, and thereafter shall mean such Stockholder as is so designated
in a writing executed and delivered to DeSoto by the holders of 66% of the New
DeSoto Shares then outstanding and held by all Stockholders other than the
Banks.
"Third Party" shall mean any Person excluding each of the
following: (i) any Stockholder and its Related Persons; (ii) any of the
Narragansett Family Members; and (iii) DeSoto, the Company and any of the
Preferred Stock Purchasers, and any of their respective officers, directors,
affiliates or associates.
"Transfer" shall mean, with respect to any property, any sale,
assignment, transfer, pledge, hypothecation or other disposition thereof or an
appurtenant right thereto or participation therein.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF NPI
NPI represents and warrants to DeSoto as follows:
2.01. Organization. NPI is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
all requisite corporate power and authority to carry on its business as it is
now being conducted and to own, use and lease its assets and properties.
2.02. Authority Relative to This Agreement; Required Vote. NPI has
all requisite corporate power to enter into this Agreement and to carry out its
obligations hereunder. The execution, delivery and performance of this
Agreement have been duly authorized by the Board of Directors of NPI, and no
other corporate proceedings on the part of NPI are necessary to authorize this
Agreement or compliance herewith. This
3
<PAGE> 4
Agreement has been duly and validly executed and delivered by NPI and
constitutes a valid and binding obligation of NPI, enforceable against it in
accordance with its terms, except that such enforceability (i) may be limited
by applicable bankruptcy, insolvency, moratorium or other similar laws
affecting or relating to creditors' rights generally and (ii) is subject to
general principles of equity.
2.03. Consents; No Violations. Except as disclosed in writing by NPI
to DeSoto concurrently with the execution and delivery of this Agreement,
neither the execution, delivery or performance by NPI or the Company of this
Agreement, the Merger Agreement or any of the definitive agreements providing
for the Bank Debt Restructuring (collectively, the "Operative Agreements") nor
the consummation of any of the transactions contemplated by any of the
Operative Agreements (collectively, the "Operative Transactions") will (a)
conflict with, or result in any breach or violation of, any provision of the
Certificate of Incorporation or By-laws of NPI; (b) assuming compliance with
the matters referred to in Section 2.08 of the Merger Agreement and clause (c)
of this Section 2.03, constitute, with or without the passage of time or the
giving of notice or both, a breach, violation or default, create a lien, or
give rise to any contingencies, liquidated damages, penalties or rights of
termination, modification, cancellation, prepayment, suspension, limitation,
revocation or acceleration, under (i) any Law, or (ii) any note, bond,
mortgage, indenture, lease, agreement or other instrument of NPI, Narragansett
First Fund or Narragansett Management Partners, or to which any of them or any
of their respective properties is subject, except, with respect to the matters
set forth in clause (ii), for breaches, violations, defaults, liens, or
contingencies, liquidated damages, penalties or rights of termination,
modification, cancellation, prepayment, suspension, limitation, revocation or
acceleration, singly or in the aggregate, which would not have (and would not
reasonably be expected to have) a material adverse effect on the business,
financial condition, assets, liabilities, properties or results of operations
of NPI and its subsidiaries taken as a whole (a "NPI Material Adverse Effect")
or materially adversely affect the ability of NPI to consummate any of the
transactions contemplated by any of the Operative Agreements or to perform or
comply with any of its obligations thereunder; or (c) assuming the accuracy of
the representations and warranties contained in Section 3.04(a), require any
consent, approval or authorization of, notification to, filing with, or
exemption or waiver by, any Governmental Entity on the part of NPI other than
consents, approvals, authorizations, notifications, filings, exemptions or
waivers which, if not obtained or made would not, singly or in the
4
<PAGE> 5
aggregate, have a NPI Material Adverse Effect or materially adversely affect
the ability of NPI to consummate any of the transactions contemplated by any of
the Operative Agreements or to perform or comply with any of its obligations
thereunder.
2.04. Title to Stock; Capitalization. NPI has legal and valid title
to, and is the owner of record of, all the issued and outstanding Prescott
Shares. Other than as provided in connection with the Prescott Credit Agreement
and NPI's guaranty and pledge related thereto and the Company's agreement as of
the date hereof with the Banks pertaining to the Bank Debt Restructuring, NPI
owns all such Prescott Shares free and clear of any and all Encumbrances and
has sole unencumbered investment and voting power with respect to all such
shares. The authorized capital stock of NPI consists of 1,250,000 shares of
common stock, par value $.01 per share ("NPI Shares"), of which 701,389 NPI
Shares are issued and outstanding and 34,722 NPI Shares are held in NPI's
treasury. An additional 34,722 NPI Shares will be redeemed and cancelled
immediately after the Effective Time as described in Section 1.07 of the Merger
Agreement. Schedule 2.04 hereto sets forth the name of each Person reflected in
NPI's books and records as the registered owner of NPI Shares and the number of
NPI Shares held by such Person.
2.05. Approval of Merger Agreement. NPI, as sole shareholder of the
Company, has duly approved and authorized the Merger Agreement in accordance
with the BCA, and no other corporate or partnership (as the case may be)
proceeding or action on the part of NPI or its shareholders or Narragansett
First Fund or Narragansett Management Partners is necessary to approve or
authorize the Merger Agreement or the transactions contemplated thereby.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF DESOTO
DeSoto represents and warrants to NPI as follows:
3.01. Organization. DeSoto is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
all requisite corporate power and authority to carry on its business as it is
now being conducted and to own, use and lease its assets and properties.
3.02. Authority Relative to This Agreement; Required Vote. DeSoto
has all requisite corporate power to enter into this Agreement and to carry out
its obligations hereunder. The execution, delivery and performance of this
Agreement and have been duly authorized by the Board, and no other corporate
proceedings on the part of DeSoto are necessary to authorize this Agreement or
compliance herewith. This Agreement has been
5
<PAGE> 6
duly and validly executed and delivered by DeSoto and constitutes a valid and
binding obligation of DeSoto, enforceable against it in accordance with its
terms, except that such enforceability (i) may be limited by applicable
bankruptcy, insolvency, moratorium or other similar laws affecting or relating
to enforcement of creditors' rights generally and (ii) is subject to general
principles of equity.
3.03. DeSoto Shares. The New DeSoto Shares will, upon their
issuance, be duly and validly issued, fully paid and nonassessable, will vest
in NPI and any other initial Stockholders legal and valid title to such New
DeSoto Shares free and clear of all Encumbrances (other than those Encumbrances
created by NPI (or such other Stockholders) as permitted by this Agreement) and
will not be issued in violation of any preemptive rights.
3.04. Consents; No Violation. (a) Assuming the accuracy of the
representations and warranties contained in Section 2.03, no consent, approval
or authorization of, notification to, filing with, or exemption or waiver by,
any Governmental Entity, is required on the part of DeSoto in connection with
the execution, delivery and performance by DeSoto of this Agreement or the
consummation of the Operative Transactions, other than consents, approvals,
authorizations, notifications, filings, exemptions or waivers which, if not
obtained or made would not, singly or in the aggregate, have a DeSoto Material
Adverse Effect or materially adversely affect the ability of DeSoto to perform
or comply with any of its obligations hereunder.
(b) Neither the execution, delivery or performance of
this Agreement by DeSoto or Newco nor the consummation of any of the Operative
Transactions will (x) conflict with, or result in any breach or violation of,
any provision of the Certificate of Incorporation or By-laws of DeSoto or
Newco; (y) assuming compliance with the matters referred to in Section 3.10 of
the Merger Agreement and Section 3.04(a) hereof, constitute, with or without
the passage of time or the giving of notice or both, a breach, violation or
default, create a lien, or give rise to any contingencies, liquidated damages,
penalties or rights of termination, modification, cancellation, prepayment,
suspension, limitation, revocation or acceleration, under (i) any Law, or (ii)
any note, bond, mortgage, indenture, lease, agreement or other instrument of
DeSoto or Newco, or to which it or any of its properties is subject, except,
with respect to the matters set forth in clause (ii), for breaches, violations,
defaults, liens, or contingencies, liquidated damages, penalties or rights of
termination, modification, cancellation, prepayment, suspension, limitation,
revocation or acceleration, singly or
6
<PAGE> 7
in the aggregate, which would not have (and would not reasonably be expected to
have) a DeSoto Material Adverse Effect or materially adversely affect the
ability of DeSoto to consummate any of the transactions contemplated by any of
the Operative Agreements or to perform or comply with any of its obligations
thereunder.
ARTICLE IV
BOARD OF DIRECTORS; VOTING ARRANGEMENTS
4.01. Nomination of Directors. If the Effective Time shall occur,
DeSoto (by action of the Board) shall thereupon create two vacancies on the
Board by enlarging the size of the Board to include two additional Directors
and the Stockholder Representative shall on behalf of the Stockholders have the
right to designate such two Directors to fill such vacancies, who shall
initially be Arthur D. Little and a person reasonably satisfactory to DeSoto
(it being agreed that any of the persons previously identified by Arthur D.
Little are satisfactory to DeSoto), each such individual to hold office until
his successor is elected and qualified or until his earlier resignation or
removal in accordance with applicable law. The Stockholder Representative shall
be entitled to maintain such Board representation on behalf of the Stockholders
after the Effective Time as follows:
(i) so long as the Narragansett Family Members
collectively own 100% of the New DeSoto Shares then
outstanding, the Stockholder Representative shall have the
right to maintain on behalf of the Stockholders a total of two
designees as Directors;
(ii) from and after such time as the Narragansett Family
Members collectively own 50% or more than 50% but in either
case less than 100% of the New DeSoto Shares then outstanding,
the Stockholder Representative shall have the right to
maintain on behalf of the Stockholders one designee as a
Director; and
(iii) from and after such time as the Narragansett Family
Members collectively own less than 50% of the New DeSoto
Shares then outstanding, the Stockholder Representative shall
not have any right to have any of its designees as Directors.
If and only to the extent necessary to permit the Stockholder Representative to
maintain the number of Directors specified in
7
<PAGE> 8
this section, at such time as a Director previously designated by the
Stockholder Representative is up for election at an annual meeting of DeSoto's
shareholders, DeSoto shall nominate an individual designated by the Stockholder
Representative and reasonably satisfactory to DeSoto for election as a Director
at such shareholders' meeting. Any such designee of the Stockholder
Representative may resign from the Board at any time. The Stockholder
Representative may at any time waive the right contained in Section 4.01 to
designate Directors or Section 4.02 to designate a replacement Director in
respect of a resignation described in the preceding sentence.
4.02. Vacancies on the Board. If for any reason there shall exist or
occur any vacancy on the Board with respect to a Director designated by the
Stockholder Representative in accordance with Section 4.01, then, if and only
to the extent necessary to permit the Stockholder Representative to maintain on
behalf of the Stockholders the number of Directors specified in Section 4.01,
the Stockholder Representative shall, if it so elects, designate an individual
reasonably acceptable to DeSoto to fill such vacancy. In the event of any other
vacancy on the Board, a majority of Directors then in office (other than those
Directors designated by the Stockholder Representative in accordance with this
Article IV) shall designate in their sole discretion an individual to fill such
vacancy.
4.03. Voting Agreement. If the Effective Time shall occur, each
Stockholder shall take all actions necessary to vote all DeSoto Shares owned or
held of record by it at any annual or special meeting at which Directors are to
be elected in favor of, or to take all actions by written consent in lieu of
any such meeting necessary to cause, the election as Directors of all
individuals nominated by DeSoto (including any designated by the Stockholder
Representative in accordance with this Article IV). If the Effective Time shall
occur, each Stockholder shall, with respect to all other matters to be voted
upon by DeSoto's shareholders, vote its DeSoto Shares as recommended by a
majority of Directors then in office (including those Directors designated by
the Stockholder Representative in accordance with this Article IV).
Notwithstanding the preceding two sentences, if at any time when the
Stockholder Representative is entitled to designate one or more Directors
pursuant to Section 4.01 or 4.02 and has designated such number of Director
designees but such number of designees are not elected or appointed to office
as Directors (other than during a temporary period preparatory to such election
or appointment), the voting agreements contained in the two preceding sentences
shall terminate and be of no further force or effect. The restrictions set
forth in this Section 4.03 to the extent they apply to the Narragansett
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Family Members and their Related Business Affiliates shall terminate and be of
no further force or effect upon the fifth anniversary of the Effective Time if
the CVR Payment (as defined in the CVR) has not been paid in full in cash,
DeSoto Securities (as defined in the CVR) or DeSoto Shares (or any combination
thereof) for a reason other than disagreement with respect to a CVR Value
Reduction (as defined in the CVR) or if any DeSoto Securities have been issued
in respect of a CVR Payment and remain outstanding and unpaid.
4.04. Restrictions on Other Agreements. Except as otherwise
contemplated hereby, if the Effective Time shall occur no Stockholder shall
enter into any agreements or arrangements of any kind (including, without
limitation, any grant of a proxy to a Third Party) with respect to the voting
of DeSoto Shares and no Stockholder shall execute a written consent to action
in lieu of a meeting of DeSoto's shareholders, except at the request of DeSoto.
ARTICLE V
RESTRICTIONS ON TRANSFER AND ASSIGNMENT
5.01. General Restrictions. Each Stockholder agrees that it will
not, directly or indirectly, effect any Transfer of, or create, incur or assume
or suffer to exist any Encumbrance with respect to, any New DeSoto Shares owned
by it (or solicit any offers to buy or otherwise acquire any such New DeSoto
Shares), except (a) in compliance with the Securities Act and any applicable
state securities laws and (b)(i) as permitted by Section 5.02 or 5.03 of this
Agreement or (ii) in a Public Offering pursuant to an exercise of the
registration rights set forth in Exhibit A (the "Registration Rights").
5.02. Permitted Transfers of New DeSoto Shares. (a) Except as
provided in Section 5.02(b) and Section 5.03 or in a Public Offering pursuant
to an exercise of the Registration Rights, no Stockholder shall, directly or
indirectly, effect any Transfer of, or create, incur or assume or suffer to
exist any Encumbrance with respect to, any New DeSoto Shares owned by it
without the prior written consent of DeSoto.
(b) A Transfer of all or any of a Stockholder's New
DeSoto Shares may be made to a Related Person of such Stockholder (including,
without limitation, pursuant to an exercise of the purchase option granted by
the Banks to Narragansett First Fund in connection with the Bank Debt
Restructuring) or to a Third Party without the prior written
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consent of DeSoto if all conditions set forth in Exhibit B are satisfied.
5.03 Special Resale Provisions. Each Stockholder may sell New
DeSoto Shares in open market transactions in conformity with the requirements
of Rule 144, provided that:
(x) the number of New DeSoto Shares that may be so sold
by a Stockholder in the aggregate in any open market sale, together
with all other New DeSoto Shares sold by all Stockholders in open
market sales within the three-month period preceding such sale, shall
not exceed the largest number of shares of DeSoto common stock that
may be sold by one person in accordance with the volume limitations
prescribed by paragraph (e)(1) of Rule 144 as such rule is in effect
at the Effective Time, regardless of whether any of such Stockholders
(or all the Stockholders taken together) is an "affiliate" within the
meaning of Rule 144 or whether the provisions of paragraph (k) of Rule
144 or any other provision of Rule 144 would permit such sales to be
made not in compliance therewith,
(y) each such open market transaction shall be made in
compliance with the provisions of paragraph (f) of Rule 144 as such
rule is in effect at the Effective Time, regardless of whether such
Stockholder is an "affiliate" within the meaning of Rule 144 or
whether the provisions of paragraph (k) of Rule 144 or any other
provision of Rule 144 would permit such sale to be made not in
compliance therewith, and
(z) no Stockholder will, in any series of related open
market transactions pursuant to this Section 5.03, knowingly sell,
transfer or otherwise dispose of New DeSoto Shares constituting more
than 3% of the then outstanding shares of common stock of DeSoto to a
single person or to a "group" (within the meaning of Section 13(d)(3)
of the Exchange Act) or any New DeSoto Shares to a person or "group"
then owning in excess of 5% of such then outstanding shares.
5.04. Legend; Improper Transfer. (a) The certificates representing
the New DeSoto Shares, and any replacement certificate or certificates, shall
bear the
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following legend or any similar legend which may from time to time be deemed
appropriate by counsel to DeSoto:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO
REGISTRATION OF TRANSFER OF SUCH SECURITIES WILL BE MADE ON
THE BOOKS OF THE ISSUER WITHOUT AN OPINION OF COUNSEL,
SATISFACTORY TO THE ISSUER, THAT SUCH TRANSFER MAY PROPERLY BE
MADE WITHOUT REGISTRATION UNDER SUCH ACT, UNLESS SUCH TRANSFER
IS MADE IN CONNECTION WITH AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT.
THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS ON TRANSFER AND OTHER LIMITATIONS AS SET
FORTH IN A STOCKHOLDERS' AGREEMENT DATED AS OF AUGUST 21,
1992, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE
OFFICES OF THE ISSUER. NO REGISTRATION OF TRANSFER OF SUCH
SECURITIES WILL BE MADE ON THE BOOKS OF THE ISSUER UNLESS AND
UNTIL SUCH RESTRICTIONS SHALL HAVE BEEN COMPLIED WITH.
(b) In the event of a Transfer of any New DeSoto Shares
in a Public Offering pursuant to an exercise of the Registration Rights or
pursuant to Section 5.03, all of the restrictions set forth in this Agreement
shall cease to apply to the shares subject of such Transfer and DeSoto shall,
upon the written request of the holder thereof, issue to such holder a new
certificate evidencing such New DeSoto Shares without the legend required by
Section 5.04(a).
(c) Any purported Transfer of, or creation, incurrence or
assumption of an Encumbrance with respect to, any New DeSoto Shares not in
compliance with this Agreement shall be null and void, and neither DeSoto nor
any transfer agent of DeSoto shall give any effect in DeSoto's stock records to
such purported Transfer or creation, incurrence or assumption of an
Encumbrance.
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ARTICLE VI
ADDITIONAL COVENANTS
6.01. Filings, Consents and Arrangements. Until the Effective Time
or prior termination of the Merger Agreement in accordance with its terms,
DeSoto and NPI shall cooperate with each other and use (i) their best efforts
in promptly determining whether any submissions, notifications or filings are
required to be or should be made or whether any consents, approvals, permits,
authorizations, exemptions or waivers are required to be or should be obtained
under any other Law or from any Third Parties to Commitments material to the
Company's business in connection with the consummation of any of the Operative
Transactions and (ii) their reasonable efforts in promptly making any such
submissions, notifications or filings, furnishing information required in
connection therewith and seeking timely to obtain any such consents, approvals,
permits, authorizations, exemptions or waivers.
6.02. Further Action. Until the Effective Time or prior termination
of the Merger Agreement in accordance with its terms, and subject to the terms
and conditions of the Operative Agreements, each of DeSoto and NPI shall use
its best efforts to take, or cause to be taken, all actions and to do, or cause
to be done, all other things necessary, proper or advisable, and shall provide
all reasonable assistance to and shall cooperate with each other, to consummate
and make effective as promptly as practicable the Operative Transactions.
Notwithstanding the foregoing, nothing herein shall impose upon DeSoto any
obligation to accept terms of the Financing which are not acceptable to it in
its sole discretion. Until the earlier of the Effective Time or the termination
of the Merger Agreement in accordance with its terms, NPI shall cause the
Company not to take any action which would result in a breach (with or without
the passage of time or the giving of notice or both) of any of the Company's
agreements or covenants contained in the Merger Agreement. At any time or from
time to time after the Effective Time, the parties hereto, at the request of
any other and at such other party's expense, shall execute and deliver any
further instruments or documents and take all such further action as such other
may reasonably request in order to evidence the consummation of the Operative
Transactions.
6.03. No Solicitation of Transactions. Until the Effective Time or
the prior termination of the Merger Agreement in accordance with its terms, NPI
will not, and will cause its employees, representatives, investment bankers,
consultants, advisors, agents or affiliates not to, directly or indirectly,
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<PAGE> 13
(a) initiate contact with, solicit or encourage submission of any inquiries,
proposals or offers by, or (b) participate in any discussions or negotiations
with, or disclose any information concerning the Company to, or afford any
access to the properties, books or records of the Company to, or otherwise
assist, facilitate or encourage, any Person (other than DeSoto, Newco, their
respective employees, consultants, affiliates, agents and representatives and
those of DeSoto's and the Company's lenders in connection with the Operative
Transactions) in connection with any Acquisition Proposal. NPI represents that
as of the date hereof it has ceased any and all existing activities,
discussions or negotiations with any parties (other than DeSoto and Newco and
the Company's lenders in connection with the Operative Transactions) conducted
heretofore with respect to any of the foregoing. Until the Effective Time or
the prior termination of the Merger Agreement in accordance with its terms, NPI
will (i) notify DeSoto immediately if any inquiry or proposal is made or any
such information or access is requested in connection with an Acquisition
Proposal or potential Acquisition Proposal and (ii) immediately communicate to
DeSoto the terms and conditions of any such Acquisition Proposal or potential
Acquisition Proposal or inquiry and the identity of the offeror or potential
offeror.
6.04. Access and Information. Until the Effective Time or the prior
termination of the Merger Agreement in accordance with its terms, NPI shall,
and shall cause its officers, directors, employees and agents to, afford to
DeSoto and its officers, directors, employees, counsel, accountants, advisors,
representatives, consultants and agents and those of DeSoto's lenders full
access to the officers, employees, agents, properties, offices and other
facilities, and to the books, records (including, without limitation, tax
returns and work papers of NPI's independent auditors) and Commitments of NPI,
and shall furnish DeSoto and such others all financial, operating, technical
and other data and information which DeSoto or its lenders, through their
respective officers, employees or agents, may from time to time reasonably
request. DeSoto will treat, and will cause it sources of financing and their
respective accountants, counsel and other representatives and Persons described
in the preceding sentence to treat, confidentially all non-public information,
whether written or oral, concerning NPI furnished to DeSoto in connection with
the Operative Transactions and not disclose such information to any other
Person without NPI's written consent, subject to the requirements of Law and
the provisions of this Agreement, and upon NPI's written request and the
termination of the Merger Agreement in accordance with its terms, DeSoto shall
deliver to NPI or destroy all such information in written or tangible form
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without retaining any copies, summaries, analyses or extracts thereof.
6.06. Tender Offers. If the Effective Time shall occur,
notwithstanding anything in this Agreement (including Sections 5.02(a) and
5.03) to the contrary: (i) each Stockholder may sell any or all of its New
DeSoto Shares pursuant to a tender offer (as such term is used in the Exchange
Act and the rules and regulations thereunder) made by a Person or "group"
(within the meaning of Section 13(d)(3) of the Exchange Act) to purchase or
exchange for cash or other consideration any shares of DeSoto common stock with
respect to which tender offer (A) a majority of the Board recommends
stockholder acceptance or (B) a majority of the Board does not recommend
stockholder acceptance (an "Opposed Tender Offer") if but only if William Spier
or any of the Preferred Stock Purchasers or his or their respective affiliates
elect to tender shares into such Opposed Tender Offer; and (ii) no Stockholder
may sell any of its New DeSoto Shares pursuant to an Opposed Tender Offer other
than as permitted by clause (i)(B) above.
(b) In the event that any Stockholder is required to file
a Schedule 13D under the Exchange Act, individually or as a member of a
"group", such Schedule 13D will recite that such Stockholder's New DeSoto
Shares were acquired by it as a passive investor with no intent on the part of
such Stockholder to acquire or affect control of DeSoto (except to the extent
the Stockholder Representative has the right to designate Directors pursuant to
Article IV and except for the actions of such Directors in their capacity as
Directors).
6.07. No Transfer of Shares. Until the Effective Time or the prior
termination of the Merger Agreement in accordance with its terms, NPI will not
Transfer, or create, incur or assume or suffer to exist any Encumbrance (other
than that created in respect of the Prescott Credit Agreement) with respect to,
any of the Prescott Shares held by it. Subject to the terms and conditions of
the Merger Agreement, at the Closing, NPI shall deliver to DeSoto certificates
representing all Prescott Shares issued and outstanding immediately prior to
the Effective Time, duly endorsed in blank for transfer or accompanied by duly
executed stockpowers assigning all such Prescott Shares in blank and, at the
Effective Time, DeSoto shall deliver to NPI the consideration provided in
Section 1.07(a) of the Merger Agreement duly issued and in authenticated form
in such amount as is provided in the Merger
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Agreement (it being agreed that NPI shall bear the cost of any documentary or
stamp taxes payable in respect of the issuance of New DeSoto Shares in exchange
for Prescott Shares as contemplated by the Merger Agreement). In addition, at
the Closing NPI (i) shall deliver to DeSoto an affidavit pursuant to Section
1.1445-2(b)(2) of the United States Treasury Regulations which (A) states that
NPI is not a "foreign person" for purposes of United States income taxation,
(B) sets forth NPI's taxpayer identification number and its office address, and
(C) is duly signed under penalties of perjury, and (ii) shall deliver to DeSoto
an accurate and complete signed original of Internal Revenue Service Form W-9
(or successor form) indicating that NPI is entitled to receive payment of the
consideration provided for in Section 1.07(a) of the Merger Agreement without
any deduction or withholding of any federal income Taxes (it being agreed that
if NPI does not deliver such form, DeSoto shall be entitled to withhold from
any such payments any amounts required by applicable law to be withheld).
6.08. Registration Rights. The Stockholders as a group shall have
the Registration Rights, all the terms and provisions of which being
incorporated herein by this reference as if set forth in full in this
Agreement. The Stockholders collectively will not, in any single Public
Offering or series of Public Offerings, after reasonable inquiry by the
Stockholders of the underwriters of such Public Offering, knowingly sell,
transfer or otherwise dispose of New DeSoto Shares constituting more than 3% of
the then outstanding shares of common stock of DeSoto to a Third Party or to a
"group" (within the meaning of Section 13(d)(3) of the Exchange Act) or any New
DeSoto Shares to a person or "group" then owning in excess of 5% of such then
outstanding shares. In the event that any New DeSoto Shares are sold by any
Stockholders in an underwritten Public Offering, NPI will cause the
underwriters to use their reasonable efforts to distribute such shares in a
manner consistent with the provisions of the preceding sentence (provided,
however, that if the underwriters advise the Stockholders that the Public
offering cannot be successfully completed on this basis, then the Public
Offering shall be cancelled and shall not count as an exercise of Registration
Rights by the Stockholders; and, provided, further, that if DeSoto common stock
is sold in contravention of the foregoing maximum percentage stock ownership
and sale limitations pursuant to a Public Offering as to which the underwriters
did not know of such contravention and used the reasonable efforts described
above, then none of the Stockholders or underwriters shall have any liability
in connection therewith).
6.09. Capital Contribution. NPI shall prior to the Effective Time
contribute to the capital of the Company all
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indebtedness of the Company held or received by NPI, including any notes or
indebtedness to be contributed to NPI by Narragansett First Fund pursuant to
the letter from Narragansett First Fund to each of NPI and DeSoto dated as of
the date hereof at the time and subject to the conditions set forth in such
letter.
ARTICLE VII
MISCELLANEOUS PROVISIONS
7.01. Investment Intent. Each Stockholder hereby represents and
warrants to DeSoto at the time it becomes a Stockholder that it is acquiring
the New DeSoto Shares for investment and not with a view to, or in connection
with, any public resale or other distribution thereof except in compliance with
all applicable federal and state securities Laws and the provisions of this
Agreement. NPI and its affiliates hereby acknowledge that they have had the
opportunity to obtain from DeSoto and its representatives any information they
wish regarding DeSoto, its business, financial condition, assets, liabilities
and prospects. Each Stockholder hereby represents and warrants to DeSoto at the
time it becomes a Stockholder that (i) its financial situation is such that
such Stockholder can afford to bear the economic risk of holding the New DeSoto
Shares for an indefinite period of time and suffer complete loss of such
Stockholder's investment in the New DeSoto Shares, (ii) it understands that the
New DeSoto Shares have not been registered under the Securities Act and that an
offer or Transfer of New DeSoto Shares without registration under the
Securities Act will require the availability of an exemption from such
registration and, in addition, must be effected in compliance with the
provisions of this Agreement, and (iii) it understands that the New DeSoto
Shares are an investment which involves a degree of risk of loss of such
Stockholder's investment therein and that there are substantial restrictions on
the transferability of the New DeSoto Shares, and, accordingly, it may not be
possible to liquidate such Stockholder's investment in DeSoto in case of
emergency, if at all.
7.02. Binding Effect; Assignment. Except as otherwise provided
herein, the provisions of this Agreement shall be binding upon the parties
hereto and their respective heirs, legal representatives and permitted
successors and assigns. DeSoto may not assign or otherwise Transfer, or create,
incur or assume or suffer to exist any Encumbrance with respect to, any of its
rights or obligations hereunder. No Stockholder may assign or otherwise
Transfer, or create, incur or assume or suffer to exist any Encumbrance with
respect to, any of its rights or obligations hereunder to any Person other than
in
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compliance with the provisions of this Agreement (including, without limitation,
Sections 5.02 and 5.03) in all respects; provided, however, that in no event
may the Stockholder Representative assign or otherwise Transfer, or create,
incur or assume or suffer to exist any Encumbrance with respect to, any of its
rights or powers as the Stockholder Representative except to a successor
Stockholder Representative. Upon the Transfer of New DeSoto Shares permitted by
this Agreement, the obligations of any Stockholder hereunder shall terminate at
such time as it shall no longer own any New DeSoto Shares, except with respect
to breaches of this Agreement made in connection with or prior to any such
Transfer.
7.03. Recapitalization, Exchanges, Etc. The provisions of this
Agreement shall apply, to the full extent set forth herein with respect to the
New DeSoto Shares, to any and all shares of capital stock of DeSoto or any
permitted successor or assign of DeSoto (whether by merger, consolidation, sale
of assets or otherwise) which capital stock may be issued in respect of, in
exchange for, or in substitution of, New DeSoto Shares, by reason of (i) any
merger or consolidation in which the holders of DeSoto Shares immediately prior
to such merger or consolidation continue to hold at least 50% of the common
stock of the surviving or resulting corporation (or its ultimate parent) or
(ii) any stock dividend, stock split, stock issuance, reverse stock split,
combination, recapitalization or reclassification.
7.04. Amendments. This Agreement may be amended only by a written
instrument signed by (i) DeSoto and (ii) such Stockholders who shall own in the
aggregate not less than 66% of all New DeSoto Shares then outstanding and held
by all Stockholders. Each Stockholder shall be bound by any amendment
authorized by this Section 7.04, whether or not such Stockholder shall have
consented thereto.
7.05. Entire Agreement. This Agreement and the other Operative
Agreements constitute the sole understanding of the parties with respect to the
subject matter hereof and thereof and supersede all prior agreements among the
parties with respect to the subject matter hereof and thereof.
7.06. Waiver. Any of the terms or provisions of this Agreement may
be waived (either generally or in a particular instance and either
retroactively or prospectively) only in writing at any time by the party which
is entitled to the benefits of such waived terms or provisions. No waiver of
any of the provisions of this Agreement shall be deemed to or shall constitute
a waiver of any other provision hereof (whether or not similar). No delay on
the part of any party in exercising
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any right, power or privilege hereunder shall operate as a waiver thereof.
7.07. Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement (except to the extent that effectiveness of such other provisions is
conditioned upon the effectiveness of provisions which are invalid or
unenforceable) or affecting the validity or enforceability of any of the terms
or provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
7.08. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addition to any other
remedy to which they are entitled at law or in equity.
7.09. Public Announcements. Prior to the Closing, none of the
parties hereto (or any of their respective officers, directors or employees)
shall make any public statements, including, without limitation, any press
releases, with respect to this Agreement or any of the other Operative
Agreements or any of the Operative Transactions, except as may be required by
Law (in which case, to the extent practicable, the nature of the statement
shall be described to the other party prior to dissemination to the public) or
as agreed to by the parties hereto.
7.10. Expenses. Except as otherwise explicitly set forth herein or
in the Operative Agreements, if the Effective Time shall occur, the reasonable
legal, accounting and tax advice expenses incurred by NPI and the Company in
connection with the Merger, this Agreement and the redemption of the Parent's
minority stockholder shall be borne by DeSoto in accordance with DeSoto's
existing policies and practices regarding the fees and expenses of its own
legal counsel and other outside professional advisors and subject to receipt of
documentary evidence of such expenses reasonably satisfactory to DeSoto, and
all reasonable costs and expenses of the Parent and the Company in connection
with the Bank Debt Restructuring shall be borne by the Company (and assumed by
the Surviving Corporation), subject to the same requirements as to
documentation and existing policies and practices of DeSoto.
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If the Effective Time does not occur, each of the parties hereto shall pay all
costs and expenses incurred by it or on its behalf in connection with this
Agreement, the other Operative Agreements and the Operative Transactions,
including, without limiting the generality of the foregoing, fees and expenses
of its own financial consultants, accountants and counsel.
7.11. Notices. Any notice, request, instruction or other document to
be given hereunder (a "Notice") by any party hereto to any other party shall be
dated and in writing and delivered personally, sent by a recognized overnight
delivery service with charges prepaid, sent by registered or certified mail
with postage prepaid, or sent by facsimile transmission:
if to DeSoto to:
DeSoto, Inc.
1471 Business Center Drive
Suite 800
Mt. Prospect, Illinois 60056
Facsimile: (708) 391-9043
Confirmation: (708) 391-9000
Attention: William Spier
with a copy to:
Fried, Frank, Harris, Shriver Jacobson
One New York Plaza
New York, New York 10004
Facsimile: (212) 747-1526
Confirmation: (212) 820-8000
Attention: Peter Golden
if to NPI or the Stockholder Representative to:
Narragansett/Prescott, Inc.
c/o Narragansett Capital Inc.
Manufacturing Group
One Turks Head Place
Suite 1550
Providence, Rhode Island 02903
Facsimile: (401) 455-0076
Confirmation: (401) 751-8110
Attention: Arthur D. Little
with a copy to:
Edwards & Angell
2700 Hospital Trust Tower
Providence, Rhode Island 02903
Facsimile: (401) 276-6611
Confirmation: (401) 274-9200
Attention: Christopher D. Graham
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or at such other address for a party as shall be specified by like Notice.
Any Notice which is delivered in the manner provided herein shall be deemed to
have been duly given to the party to whom it is directed upon actual receipt by
such party, except that any Notice delivered by facsimile transmission shall be
deemed to have been given upon confirmation of transmission; provided that
Notice so delivered is promptly followed by duplicate Notice to that same party
sent by recognized overnight delivery service with changes prepaid, or by
registered or certified mail, postage prepaid.
7.12. Termination. This Agreement (and each of the provisions
contained herein or in the Exhibits hereto) shall terminate and be of no
further force and effect on the earlier of (i) the termination prior to the
Effective Time of the Merger Agreement in accordance with its terms or (ii) the
sixth anniversary of the Effective Time, unless the parties hereto shall
otherwise agree to extend such provisions.
7.13. Miscellaneous. All representations and warranties contained
herein shall survive the execution and delivery of this Agreement, regardless
of any investigation made by any party hereto or on such party's behalf. This
Agreement shall be construed and enforced in accordance with and governed by
the law of the State of Delaware without giving effect to the conflict of laws
principles thereof which require the application of any other law; provided;
however, that insofar as the provisions of Article VI relate to the voting of
Prescott Shares, such provisions shall be governed by New Jersey law. The
headings in this Agreement are for purposes of reference only and shall not
limit or otherwise affect the meaning hereof. This Agreement may be executed in
any number of counterparts, each of which shall be deemed to be an original,
but all of which together shall constitute one instrument.
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IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed on its behalf as of the date first above written.
DESOTO, INC.
By: /s/ William Spier
-----------------------------------
Name: William Spier
Title: Chairman and Chief
Executive Officer
NARRAGANSETT/PRESCOTT, INC.
By: /s/ Arthur D. Little
-----------------------------------
Name: Arthur D. Little
Title: Chairman
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Exhibit A
REGISTRATION RIGHTS
(Capitalized terms used and not otherwise defined herein shall have
the meanings ascribed to them in the Stockholders Agreement to which
this Exhibit A is annexed (the "Stockholders Agreement"). The terms
"affiliate" and "subsidiary" each shall have the meaning ascribed to
it in the Merger Agreement, and the term "associate" shall have the
meaning ascribed to it in Rule 12b-2 under the Exchange Act.)
1. Demand Registration Rights. At any time at which there has not
been a Public Offering during the preceding six months (other than pursuant to
a stock option or other employee benefit plan), upon the written request of the
Stockholder Representative DeSoto will file with the SEC as reasonably promptly
as practicable (and in any event within 60 days) after receiving such request,
a registration statement under the Securities Act covering the New DeSoto
Shares included in such request, and DeSoto shall use its best efforts to cause
such registration statement to become effective as expeditiously as
practicable; provided, however, that such request shall cover at least 100,000
New DeSoto Shares. Such request by the Stockholder Representative shall: (1)
express the Stockholders' present intent to offer such shares for distribution;
(2) describe in reasonable detail the nature or method of the proposed offer
and sale thereof; (3) contain information as to all prior sales of New DeSoto
Shares in the preceding twelve months by the Stockholders in detail reasonably
sufficient to complete such registration statement; and (4) contain an
undertaking to furnish all such information and materials and take all such
action as may be required in order to permit DeSoto to comply with all
applicable requirements of the SEC and to obtain acceleration of the effective
date of the registration statement. The Stockholders collectively shall be
entitled to one request for registration pursuant to this Section 1.
2. Other Registration Rights. If DeSoto proposes to file a
registration statement under the Securities Act for a Public Offering for cash,
DeSoto shall give written notice as promptly as practicable of such
registration statement to the Stockholder Representative and will use all
reasonable efforts (or, if greater, such efforts as DeSoto may then be required
to exert with respect to an exercise by a third party of incidental
registration rights granted by DeSoto) to include such New DeSoto Shares owned
by the Stockholders in such Public Offering as the Stockholder Representative
shall request within
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<PAGE> 23
10 days after receipt of such notice from DeSoto; provided, however, that
DeSoto shall not be required to include such New DeSoto Shares in any such
registration statement if it relates solely to shares of DeSoto common stock to
be issued pursuant to a stock option or other employee benefit plan, an
exchange offer, a merger or consolidation with another corporation or an
acquisition of assets. There shall be no limit as to the number of times the
Stockholders may participate in registration statements pursuant to this
Section 2.
3. Expenses.
In connection with any registration pursuant to this Exhibit A, the
Stockholders and any other holders of New DeSoto Shares which are included in
such registration statement pursuant to this Exhibit A shall pay all
underwriting discounts and commissions (insofar as they are attributable to
shares of DeSoto common stock being sold by the Stockholders or such other
holder pursuant to an effective registration statement) and fees and
disbursements of the Stockholders' (including the Stockholder Representative's)
and such other holders', counsel and accountants. DeSoto will pay all other
expenses of the offering, including without limitation SEC registration and
filing fees and underwriting discounts and commissions (other than those
attributable to shares of DeSoto common stock being sold by the Stockholders or
such other holders pursuant to such registration statement), underwriting
expenses, SEC and "blue sky" registration and filing fees, printing expenses,
fees and disbursements of legal counsel and accountants for DeSoto and blue sky
counsel, transfer agents' and registrars' fees, fees and disbursements of
experts used by DeSoto in connection with such registration, expenses of any
special audits of DeSoto incidental to or required by such registration, and
expenses incidental to any post-effective amendment to any such registration
statement.
4. DeSoto's Obligations in Connection with Registrations. In
connection with any registration by DeSoto pursuant to this Exhibit A, DeSoto
shall:
Use its best efforts to prepare and file with the SEC such amendments
and supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective and to comply with the provisions of the Securities Act with respect
to the disposition of all shares of DeSoto common stock (including New DeSoto
Shares) covered by such registration statement for the period required to
effect the distribution of such shares of DeSoto common stock, but in no event
shall
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<PAGE> 24
DeSoto be required to do so for a period of more than 75 days following the
effective date of such registration statement.
Furnish to the Stockholders such number of copies of a summary
prospectus or other prospectus, including a preliminary prospectus, in
conformity with the requirements of the Securities Act and such other documents
as the Stockholder Representative may reasonably request in order to facilitate
the disposition of their New DeSoto Shares, but only while DeSoto is required
under the provisions hereof to cause the registration statement to remain
current.
Use its best efforts to register or qualify the shares of DeSoto
common stock (including New DeSoto Shares) covered by such registration
statement under such other securities or blue sky laws of such jurisdictions in
the United States as the managing underwriter shall request, and do any and all
other acts and things which may be reasonably necessary to enable the
Stockholders to consummate the disposition in such jurisdiction of the New
DeSoto Shares owned by them; Provided, however, that DeSoto shall in no event
be required to qualify to do business as a foreign corporation or as a dealer
in any jurisdiction where it is not so qualified, to conform the composition of
its assets at the time to the securities or blue sky laws of such jurisdiction,
to execute or file any general consent to service of process in suits other
than those arising out of the offer and sale of the New DeSoto Shares covered
by such registration statement or to subject itself to taxation in any
jurisdiction where it has not theretofore done so.
To the extent not specifically deemed improper under any statement or
Auditing Procedure issued by the American Institute of Certified Public
Accountants, Inc., or any successor to such organization, obtain a "comfort"
letter from DeSoto's independent public accountants in customary form and
covering such matters of the type customarily covered by "comfort" letters as
the Stockholder Representative shall reasonably request.
Deliver an opinion of counsel for DeSoto, dated the effective date of
such registration statement or any post-effective amendment or supplement
thereto, addressed to the Stockholder Representative and any underwriter, in
the form usual and customary in connection with secondary public offerings of
securities.
5. Limitations, Conditions and Qualifications of DeSoto Under
Registration Rights. The obligations of DeSoto to use all reasonable efforts to
cause New DeSoto Shares to be
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registered under the Securities Act are subject to the following limitations:
DeSoto shall be entitled to postpone once (and only once) for a
reasonable period of time not to exceed 90 days from the date it receives the
written request of the Stockholder Representative pursuant to this Exhibit A
the filing of any registration statement otherwise required to be prepared and
filed by it pursuant to Section 1 of this Exhibit A if at the time DeSoto
determines, in its reasonable judgment, that such registration and related
Public Offering would materially adversely affect or interfere with any
financing, acquisition, corporate reorganization or other material transaction
involving DeSoto or any of its affiliates and as promptly as practicable gives
the Stockholder Representative written notice of such determination. If DeSoto
shall so postpone the filing of a registration statement the Stockholder
Representative shall within 60 days after receipt of the notice of postponement
advise DeSoto in writing whether or not it has determined to withdraw the
Stockholders' request for registration, and, in the event of a withdrawal, such
request for registration shall not be counted for purposes of determining the
number of requests for registration to which the Stockholders collectively are
entitled pursuant to Section 1 of this Exhibit A. Failure by the Stockholder
Representative to timely notify DeSoto of its determination shall for all
purposes be treated as a withdrawal of its request for registration and any
such withdrawn requests for registration shall not be counted for purposes of
determining the number of requests for registration to which the Stockholders
collectively are entitled pursuant to Section 1 of this Exhibit A. In the event
that the Stockholder Representative notifies DeSoto that it does not withdraw
its request for registration, DeSoto shall be obligated to file a registration
statement by the later of (i) the date to which DeSoto determined to postpone
the filing of such registration statement and (ii) sixty days from the date on
which the Stockholder Representative advises DeSoto that it has determined not
to withdraw its request for registration, less the number of days that had
elapsed from the date the Stockholder Representative requested registration
until the date DeSoto advised the Stockholder Representative that it had
determined to postpone the filing of the registration statement.
DeSoto may, at its option, require that the number of shares offered
for sale by the Stockholders, pursuant to a request for registration under
Section 2 hereof be decreased if, in the written opinion of DeSoto's managing
underwriters, such reduction (a "Scale-Back") is reasonably necessary in order
to permit the orderly distribution and sale of the shares
25
<PAGE> 26
of DeSoto common stock being offered by DeSoto and such other holders of shares
of DeSoto common stock covered by such Public Offering; provided that the
number of shares of DeSoto common stock (including New DeSoto Shares) offered
for sale pursuant to such registration by any sellers other than DeSoto
(including the Stockholders) shall be reduced proportionately. If DeSoto shall
require a Scale-Back, any participant in such registration shall have the right
to withdraw from the Public offering.
In the event the Stockholders request registration pursuant to Section
1 hereof, (i) the offering or distribution of New DeSoto Shares shall be
pursuant to a firm commitment underwriting in which the Stockholders, any other
holder of shares of DeSoto common stock selling pursuant to such registration
and any underwriter in the registration shall agree to use its reasonable
efforts not to knowingly sell (either alone or in conjunction with any other
holder of shares or underwriter or member of the selling group) more than 3% of
the then outstanding shares of DeSoto common stock to any one Person (including
the affiliates of the foregoing and other members of a "group" (within the
meaning of Section 13(d)(3) of the Exchange Act) of which such Person is a
member, but excluding another underwriter or member of the selling group) or
any shares of DeSoto common stock to a Person or group which owns in excess of
5% of the then outstanding shares of DeSoto common stock (provided, however,
that if the underwriters advise the Stockholders that the Public Offering
cannot be successfully completed on this basis, then the Public Offering shall
be cancelled and shall not count as an exercise of Registration Rights by the
Stockholders; and, provided, further, that if DeSoto common stock is sold in
contravention of the foregoing maximum stock ownership and sale limitations
pursuant to a Public Offering as to which the underwriters did not know of such
contravention and used the reasonable efforts described above, then none of the
Stockholders or underwriters shall have any liability in connection therewith),
(ii) the managing underwriter shall be a member firm in good standing of the
New York Stock Exchange, Inc. or a recognized investment banking firm approved
by DeSoto (which approval shall not be unreasonably withheld) and (iii) DeSoto
shall enter into an underwriting agreement containing representations,
warranties and agreements (including customary agreements with respect to
indemnification of the underwriters) not substantially different from those
customarily included by an issuer in underwriting agreements with respect to
secondary distributions; provided, however, that DeSoto shall not be obligated
to enter into an agreement with respect to indemnification of the underwriters
different in any material respect from that set forth in Section 6(a) of this
Exhibit A.
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<PAGE> 27
DeSoto shall not be obligated to prepare and file a registration
statement otherwise required pursuant to Section 1 hereof or to include New
DeSoto Shares owned by the Stockholders in a registration statement pursuant to
Section 2 hereof if counsel to DeSoto delivers an opinion addressed to the
Stockholder Representative, in form reasonably satisfactory to the Stockholder
Representative, stating that a Transfer of such New DeSoto Shares without
registration under the Securities Act will comply in all respects with the
Securities Act and the rules promulgated thereunder. In such event, the request
for registration shall not be counted for purposes of determining the number of
requests for registration to which the Stockholders collectively are entitled
pursuant to Section 1 of this Exhibit A.
6. Indemnification
(a) By DeSoto. In the case of each registration effected
by DeSoto pursuant to this Exhibit A, DeSoto will indemnify and hold harmless
each Stockholder and the Stockholder Representative (for the purpose of this
Section, each Stockholder and the Stockholder Representative shall be referred
to individually as a "Seller" and collectively as "Sellers"), any underwriter
and each other Person, if any, who controls such Seller or underwriter within
the meaning of the Securities Act, against any losses, claims, damages or
liabilities (or actions in respect thereof), joint or several, to which any
Seller or any such controlling Person or underwriter may become subject under
the Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of, or are based upon,
any untrue statement or alleged untrue statement of any material fact contained
in such registration statement or final or summary prospectus contained therein
(if used during the period DeSoto is required to keep the registration
statement effective), or any amendment or supplement thereto, or arise out of
or are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements made
therein not misleading, and will reimburse each such Seller, underwriter and
controlling Person for any legal or any other expenses reasonably incurred by
them in connection with investigating or defending any such action or claim,
excluding any amounts paid in settlement of any litigation, commenced or
threatened, if such settlement is effected without the prior written consent of
DeSoto; provided, however, that DeSoto will not be liable to a particular
Seller or underwriter in any such case to the extent that any such loss, claim,
damage, liability or expense arises out of or is based upon an untrue statement
or omission or alleged omission made in said
27
<PAGE> 28
registration statement or said final or summary prospectus, or any amendment or
supplement thereto, in reliance upon and in conformity with information
furnished to DeSoto by that Seller or any of its affiliates or associates, or
by that underwriter, as the case may be, specifically for use in the
preparation thereof.
(b) By Sellers. In the case of each such registration,
each Seller shall indemnify and hold harmless DeSoto, each of its directors,
each of its officers who have signed such registration statement, any
underwriter and each other Person, if any, who controls DeSoto or any such
underwriter within the meaning of the Securities Act or who is an affiliate or
associate of DeSoto, against any losses, claims, damages or liabilities, joint
or several, to which DeSoto or any such director, officer, underwriter or
controlling Person or affiliate or associate may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of, or are based upon,
any untrue statement or alleged untrue statement of any material fact contained
in such registration statement or final or summary prospectus contained
therein, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements made therein not
misleading, and will reimburse DeSoto and each such director, officer,
underwriter and controlling Person and affiliate and associate for any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such action or claim, excluding any amounts paid in settlement of
any litigation, commenced or threatened, if such settlement is effected without
the prior written consent of the Seller; but in all such cases only if, and to
the extent that, any such loss, claim, damage, liability or expense arises out
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission therein made in reliance upon and in conformity with
information furnished to DeSoto by the Seller or any of its affiliates or
associates specifically for use in the preparation thereof.
(c) Actions Commenced. Promptly after receipt by an
indemnified party under Sections 6(a) or 6(b) hereof of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against the indemnifying party, notify the indemnifying
party in writing of the commencement thereof. In case any such action is
brought against the indemnified party and it shall so notify the indemnifying
party of the commencement thereof, the indemnifying party shall be entitled to
participate in, and, to
28
<PAGE> 29
the extent that it so chooses, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party, and, after notice from the
indemnifying party to such indemnified party that it so chooses, such
indemnifying party shall not be liable for the costs of defense incurred by
such indemnified party in connection with the defense thereof; provided,
however, that if the indemnifying party fails to take reasonable steps
necessary to diligently defend such claim within 20 days after receiving notice
from the indemnified party that the indemnified party believes the indemnifying
party has failed to take such steps, the indemnifying party shall be liable for
any expenses therefor. The indemnity agreements in this Section 6 shall be in
addition to any liabilities which the indemnifying parties may have pursuant to
other agreement or law.
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<PAGE> 30
Exhibit B
CONDITIONS TO TRANSFER
(Capitalized terms used and not otherwise defined herein shall have
the meanings ascribed to them in the Stockholders Agreement to which
this Exhibit B is annexed (the "Stockholders Agreement"). The terms
"affiliate" and "subsidiary" each shall have the meaning ascribed to
it in the Merger Agreement, and the term "associate" shall have the
meaning ascribed to it in Rule 12b-2 under the Exchange Act.)
1. Standard Conditions. Any Transfer of New DeSoto Shares
pursuant to Section 5.02(b) of the Stockholders Agreement is subject to
satisfaction of all the following conditions:
(i) prior to such Transfer, the transferor Stockholder
must deliver to DeSoto an unqualified written opinion of counsel
reasonably acceptable to DeSoto, in form and substance satisfactory to
DeSoto, to the effect that such Transfer is being made in compliance
with the registration provisions (or exemptions thereto) of the
Securities Act; and
(ii) prior to such Transfer, the transferee must execute
and deliver to the transferor Stockholder and DeSoto an undertaking,
in form and substance reasonably satisfactory to DeSoto, agreeing to
be bound as a Stockholder by the terms of the Stockholders Agreement
and, unless the transferee is any of the Narragansett Family Members
at the time of the Transfer, by the terms set forth in Sections 2(b)
and 3 of this Exhibit B (and upon such execution, all such terms set
forth in Sections 2(b) and 3 of Exhibit B shall be deemed incorporated
in the Stockholders Agreement with respect to the transferee as if set
forth in full in the Stockholders Agreement).
2. Notices; Consent to Jurisdiction. (a) The undertaking
contemplated by clause (ii) of Section 1 of this Exhibit B shall specify the
address for the transferee Stockholder for all Notices, and upon consummation
of the Transfer pursuant to which such undertaking is executed, Section 7.11 of
the Stockholders Agreement shall be deemed correspondingly amended.
30
<PAGE> 31
(b) If the transferee Stockholder is not a Narragansett
Family Member, the undertaking contemplated by clause (ii) of Section 1 of this
Exhibit B shall include the following additional provisions:
(i) The transferee Stockholder hereby irrevocably submits
to the jurisdiction of any State of Delaware court, State of New York
court or Federal court sitting in the State of Delaware or the City of
New York in any action or proceeding arising out of any breach of any
representation or warranty, or the failure to perform any covenant or
other agreement to be performed by such Stockholder contained in or
contemplated by the Stockholders Agreement and each of the other
agreements and documents referred to in, contemplated by, or to be
entered into in connection with, the Stockholders Agreement. The
undersigned also hereby irrevocably waives, to the fullest extent it
may effectively do so, the defense of an inconvenient forum to the
maintenance of any such action or proceeding.
(ii) The transferee Stockholder also hereby irrevocably
appoints CT Corporation System with an office located at 1633
Broadway, New York, New York 10019, as such Stockholder's agent. Such
agent shall receive, on behalf of such Stockholder and such
Stockholder's property, service of copies of the summons and complaint
and any other process which may be served in any such action or
proceeding referred to herein. Such service may be made by mailing or
delivering a copy of any such process addressed to such Stockholder in
care of the aforementioned agent at the address set forth above for CT
Corporation System, and such Stockholder hereby irrevocably authorizes
and directs said agent to accept such service on its behalf. DeSoto
shall mail to the Stockholder at the last address provided to DeSoto
by such Stockholder a copy of any process so delivered to the agent;
it being understood and agreed that the failure of DeSoto to mail such
a copy to the Stockholder shall not constitute a defect in or
invalidate process given to the agent in accordance with the preceding
sentence. In addition to, and without limiting the foregoing, as an
alternative method of service, such Stockholder also irrevocably
consents to the service of any and all process in any such action or
proceeding in such State of Delaware or State of New York court or
Federal court sitting in the State of Delaware or the City of New York
by the
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<PAGE> 32
mailing of copies of such process to such Stockholder at the address
set forth for such Stockholder in Section 7.11 of the Stockholders
Agreement. Such Stockholder agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other matter provided
by law.
(iii) Nothing herein shall affect the right of such
Stockholder or the right of any other party to the Stockholders
Agreement, or the agent referred to herein, to serve process in any
other manner permitted by Law or affect the right of such Stockholder
or any other party referred to herein to bring any action or
proceeding against such Stockholder or such Stockholder's property in
the courts of any other jurisdiction.
(iv) The foregoing consents to jurisdiction as set forth
in this undertaking shall not constitute general consents to service
of process in the State of New York and shall have no effect for any
purpose except as provided above and shall not be deemed to confer
rights on any Person other than the parties to the Stockholders
Agreement.
3. Standstill. If the transferee Stockholder is not a
Narragansett Family Member, the undertaking contemplated by clause (ii) of
Section 1 of this Exhibit B shall include the following additional provisions:
The transferee Stockholder and each of its affiliates and associates
will not, and will not assist, advise, induce or encourage others
(including by providing financing), to, directly or indirectly, from
the date hereof until the termination of the Stockholders Agreement in
accordance with its terms (i) acquire or agree, offer, seek or propose
to acquire ownership (including but not limited to beneficial
ownership as defined in Rule 13d-3 under the Exchange Act) of (x)
DeSoto or any of its assets (except in the ordinary course) or
businesses, (y) any securities issued by DeSoto, its assets or
businesses (other than New DeSoto Shares), or (z) any rights or
options to acquire such ownership (including from a Person other than
DeSoto), (ii) seek or propose to influence or control the management
or policies of DeSoto, its assets or business (other than through any
Director designated by the Stockholder Representative in accordance
with Article IV of the Stockholders Agreement in his capacity as a
Director),
32
<PAGE> 33
(iii) solicit or become a "participant" in any "solicitation" of
"proxies" or written consents to vote DeSoto securities or become a
"participant" in any "election contest" involving DeSoto or seek to
advise or influence any Person with respect to the voting of any
DeSoto securities (as such terms are used in the "proxy rules" of the
SEC), (iv) form, join or in any way participate (including, without
limitation, by acquiring or agreeing to acquire securities of any
Person which is publicly disclosed (or otherwise known by the
transferee Stockholder or any of its affiliates or associates) to be
the beneficial owner of more than 5% of the outstanding DeSoto common
stock) in a "group" within the meaning of Section 13(d)(3) of the
Exchange Act with respect to any DeSoto securities (except to the
extent specifically provided in the Stockholders Agreement), (v) sell
any DeSoto Shares in connection with or pursuant to any Opposed Tender
Offer unless permitted by Section 6.06 of the Stockholders Agreement
to sell New DeSoto Shares pursuant to such Opposed Tender Offer, (vi)
make any public announcement or make any written or oral proposal or
invitation to discuss any possibility, intention, plan or arrangement
relating to a tender or exchange offer for securities of DeSoto or a
business combination (or other similar transaction which would result
in a change of control), sale of assets, liquidation or other
extraordinary corporate transaction involving DeSoto or any of its
subsidiaries, (vii) make any request or proposal to DeSoto or any
other Person to amend, terminate, modify or waive any provision of
this Section or to permit otherwise any action or statement prohibited
by this Section or (viii) enter into any discussions, negotiations,
arrangements or understandings with any Person with respect to,
announce any intention to do, or take any action which might require
DeSoto to make a public announcement regarding, any of the foregoing.
The restrictions contained in subclauses (x) and (y) of clause (i) of
this Section shall not be applicable to ordinary brokerage or trading
transactions by a securities broker or dealer or by an investor solely
for investment purposes aggregating less than 5% of DeSoto's
outstanding equity securities or less than 10% of any class of
DeSoto's outstanding non-equity securities.
33
<PAGE> 1
EXHIBIT 10.17
REAL ESTATE SALE CONTRACT
THIS REAL ESTATE SALE CONTRACT (hereinafter referred to as this
"Contract") is made and entered into as of the 1st day of December, 1994, by
and between DESOTO, INC., a Delaware corporation (hereinafter referred to as
"Seller"), and JOHN M. GILLEN, not personally but solely as Trustee of the
DeSoto, Inc. Pension Plans Real Property Trust under Trust Agreement dated
October 1, 1992 (hereinafter referred to as "Purchaser").
R E C I T A L S:
A. Seller currently holds title to approximately 14.88 acres of
land legally described in Exhibit "A" attached hereto and by this reference
incorporated herein, which is improved with a building containing approximately
195,560 square feet of floor area, located at 16750 South Vincennes Road, South
Holland, Illinois and appurtenant rights (said land and building and
appurtenant rights are hereinafter referred to collectively as the "Project").
B. Purchaser desires to purchase the Project from Seller, and
Seller desires to sell the Project to Purchaser, upon the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and promises
of Seller and Purchaser, Seller and Purchaser hereby covenant and agree as
follows:
1. Sale and Purchase. Seller agrees to sell and Purchaser agrees
to purchase the Project upon the terms and conditions herein set forth for a
purchase price of FOUR MILLION ONE HUNDRED SEVENTEEN THOUSAND AND NO/100
($4,117,000.00) DOLLARS (hereinafter referred to as the "Purchase Price").
2. Lease. At the Closing (as hereinafter defined), Seller and
Purchaser shall enter into the Lease attached hereto as Exhibit "B" and by this
reference incorporated herein (hereinafter referred to as the "Lease"), whereby
Purchaser demises and leases the Project to Seller pursuant to the terms and
conditions thereof.
3. Conveyance. Seller agrees to convey to Purchaser title to the
Project by recordable, stamped Quitclaim Deed in Trust, subject only to: (a)
general real estate taxes and special assessments not due and payable as of the
date of the Closing hereof, (b) the Lease; (c) acts of Purchaser and those
parties acting through or for Purchaser; (d) building lines, zoning laws,
statutes and ordinances; and (e) the easements, covenants, rights of way,
conditions and restrictions set forth on Exhibit "C" attached hereto and by
this reference incorporated herein.
4. Closing. The consummation of the transaction herein described
(herein referred to as the "Closing") shall be held on December 7, 1994,
unless subsequently mutually agreed otherwise, at the offices of Katz Randall &
Weinberg in Chicago, Illinois or such other location as is acceptable to
Purchaser and Seller, provided title is shown to be good or is acceptable to
Purchaser. At the Closing, Seller shall deliver the Deed described in Paragraph
3 hereof and a Bill of Sale conveying to Purchaser
<PAGE> 2
the personal and intangible property owned by Seller and relating to the
operation of the Project, as opposed to personal property owned by Seller and
used in the operation of Seller's business on the Project.
5. Condition. Seller agrees to deliver and Purchaser agrees to
accept possession of the Project in the same condition as it is at the date of
this Contract, ordinary wear and tear excepted. Purchaser acknowledges and
represents that at neither Seller nor any party acting on behalf of Seller has
made any warranty or representation concerning the Project and Seller is
purchasing the Project in an "as-is" condition.
6. Evidence of Title, Survey. Seller shall deliver to Purchaser
at the Closing a current survey of the Project and a current title commitment
from First American Title Insurance Company on the Project whereby such title
company agrees to issue an ALTA (1990) Form B Owner's Title Insurance in the
amount of the Purchase Price as set forth in Paragraph 1 hereof. The aforesaid
commitment shall show title in Seller, subject only to (a) the title exceptions
set forth in Paragraph 3 hereof, (b) title exceptions pertaining to liens or
encumbrances of a definite or ascertainable amount which may be removed by the
payment of money at the Closing and which the Seller may so remove at that time
by using the funds to be paid to Seller hereunder, and (c) the general
exceptions contained on said form of policy (all of which are herein referred
to as the "Permitted Exceptions"). The title policy shall be conclusive
evidence of good title as therein shown as to all matters insured by the policy
or policies subject only to the exceptions therein stated. If the said survey
is not available by the Closing, Seller shall continue to be obligated to
deliver same after the Closing subject to Purchaser's right to reasonably
reject same and repay the Purchase Price and reconvey the Project to Seller, at
Purchaser's cost and expense, without further liability on either party.
7. Closing Adjustments. General real estate taxes and assessments
shall not be adjusted with respect to the subject transaction, provided Seller
shall pay when due all real estate taxes, assessments and other governmental
impositions payable with respect to the Project through the date of the
Closing. Seller shall also pay all utility charges imposed with respect to the
Project through the Closing. No items shall be prorated at the Closing. Seller
shall pay all transfer taxes and Seller and Purchaser shall furnish completed
Real Estate Transfer Declarations in the forms required pursuant to the
applicable Real Estate Transfer Tax Acts.
8. Damage. The provisions of the Uniform Vendor and Purchaser
Risk Act of the State of Illinois shall be applicable to this Contract.
9. Time. Time is of the essence of this Contract.
10. Miscellaneous. If the date for Closing or performance of an
obligation falls on a Saturday, Sunday or holiday, the date shall be deferred
until the first business day following. No amendments, modifications or changes
shall be binding upon a party unless set forth in a duly executed document.
11. No Broker. Purchaser and Seller hereby represent to each other
that neither of them have had any dealings with respect to the Project with any
broker or real estate dealer.
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<PAGE> 3
12. Authority to Execute. Purchaser and Seller hereby covenant
that the execution of this Contract and the transaction herein contemplated
have been duly approved and that the party executing this Contract on behalf of
Seller and Purchaser, as applicable, is authorized to execute same.
13. Entire Agreement. This Contract contains the entire agreement
of the parties with respect to the sale and purchase of the Project. All
previous and contemporaneous negotiations, understandings and agreements
between the parties hereto, with respect to the transaction set forth herein,
are merged in this instrument, which alone fully and completely expresses the
parties' rights and obligations. The preparation of this Contract has been a
joint effort of the parties hereto and the resulting documents shall not,
solely as a matter of judicial construction, be construed more severely against
one of the parties than the other.
14. Terms. As used herein, the terms (a) "person" shall mean an
individual, a corporation, a partnership, a trust, an unincorporated
organization or any agency or political subdivision thereof, (b) "including"
shall mean including, without limiting the generality of the foregoing, and (c)
the masculine shall include the feminine and the neuter.
15. Binding Effect and Survival. This Contract shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
heirs, executors, administrators, legal representatives, successors and
assigns. Notwithstanding the foregoing, neither party may assign its rights
hereunder without the prior written consent of the other party. No assignment
of this Contract shall relieve the assigning party of its obligations
hereunder.
16. Captions. The captions of this Contract are inserted for
convenience of reference only and in no way define, describe or limit the scope
or intent of this Contract or any of the provisions hereof.
17. Notices. All notices, demands, requests and other
communications under this Agreement shall be in writing and shall be deemed
properly served when received if delivered by hand or expedited messenger
service with proof of receipt to the party to whose attention it is directed or
when received if sent, postage prepaid, by registered or certified mail, return
receipt requested, postage prepaid, addressed as follows:
If intended for Purchaser: John M. Gillen, Trustee
50 Jane Street
New York, NY 10014
If intended for Seller: DeSoto, Inc.
16750 South Vincennes Road
South Holland, Illinois 60473
Attn: Anne E. Eisele, Sr. Vice President
or such other address or to such other party which any party entitled to
receive notice hereunder designates to the others in writing by a notice duly
given hereunder.
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18. Exculpation. This Contract is executed by John M. Gillen, not
personally but solely as Trustee of the DeSoto, Inc. Pension Plans Real
Property Trust under Trust Agreement dated October 1, 1992, in the exercise of
the power and authority conferred upon and vested in it as such Trustee. All
the terms, provisions, stipulations, covenants and conditions to be performed
by John M. Gillen are undertaken by it solely as Trustee, as aforesaid, and not
individually, and all statements herein made are made on information and belief
and are to be construed accordingly, and no personal liability shall be
asserted or be enforceable against John M. Gillen, personally, by reason of any
of the terms, provisions, stipulations, covenants and/or statements contained
in this Contract.
IN WITNESS WHEREOF, the parties hereto have executed this Real Estate
Sale Contract as of the day first above written.
PURCHASER: /s/ JOHN M. GILLEN
--------------------------------------
JOHN M. GILLEN, not personally or
individually, but as Trustee
as aforesaid
SELLER: DESOTO, INC., a Delaware corporation
By: /s/ [ILLEGIBLE]
-----------------------------------
Its: Sr. V.P.
4
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EXHIBIT "A"
LEGAL DESCRIPTION
16750 South Vincennes Road
South Holland, Illinois 60473
Parcel I (North Parcel): Lot 13 in South Holland Industrial Park 1st Addition,
being a subdivision of part of the southwest quarter and part of the southeast
quarter of Section 21, Township 36 North, Range 14 east of the Third Principal
Meridian in Cook County, Illinois.
Parcel 2 (South Parcel): That part of the north 292.90 feet of Lot 4 in DeVries
and others' subdivision of the southeast quarter of Section 21, Township 36
north, Range 14 east of the Third Principal Meridian, lying east of a line
described as beginning at the point of intersection of the north line of said
Lot 4 with the east line of that portion of said Lot 4 conveyed to Chicago
Terminal Transfer Company by deed recorded as Document No. 2972842; and running
thence southeasterly on a line parallel with the center line of Vincennes Road
(Thornton Blue Island Road) to the south line of the north 292.90 feet of said
Lot 4, all in Cook County, Illinois.
Permanent Index Numbers: 29-21-400-108
29-21-400-031
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EXHIBIT "B"
LEASE
(ATTACHED)
6
<PAGE> 7
EXHIBIT "C"
PERMITTED TITLE EXCEPTIONS
1. BUILDING LINE 25 FEET ON THE EASTERLY LINE OF THE LAND AS SHOWN ON THE
PLAT OF SUBDIVISION.
(AFFECTS PARCEL 1)
2. EASEMENT FOR PUBLIC UTILITIES AS SHOWN ON THE PLAT OF SUBDIVISION.
(AFFECTS THE NORTH AND SOUTH 10 FEET OF THE LAND)
(AFFECTS PARCEL 1)
3. EASEMENT IN FAVOR OF NORTHERN ILLINOIS GAS FOR THE INSTALLATION,
MAINTENANCE, REPAIR, RELOCATION, REMOVAL AND RENEWAL OF GAS MAINS
GRANTED BY DOCUMENT 21193241 ON JUNE 25, 1970, AND THE TERMS AND
CONDITIONS THEREOF.
(AFFECTS PARCEL 2)
4. PLAT OF DEDICATION FOR PUBLIC STREETS (VINCENNES AVENUE) DATED APRIL
18,1977 AND RECORDED JUNE 9,1977 AS DOCUMENT 23961218.
(AFFECTS PARCEL 2)
5. EASEMENT FOR INGRESS AND EGRESS OVER THE NORTH 18 FEET OF PARCEL 2,
CREATED BY DOCUMENTS 13364166 AND 13364168.
(AFFECTS PARCEL 2)
6. SPURS, SWITCH TRACKS, AND RAILROAD RIGHTS OF WAY, IF ANY.
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<PAGE> 1
EXHIBIT 10.18
SOUTH HOLLAND
LEASE
THIS LEASE, made this 7th day of December, 1994 between JOHN M.
GILLEN, not personally or individually, but solely as Trustee of the DeSoto,
Inc. Pension Plans Real Property Trust under Trust Agreement dated October 1,
1992 (hereinafter referred to as "Landlord"), and DESOTO, INC., a Delaware
corporation (hereinafter referred to as "Tenant");
WITNESSETH:
ARTICLE I
PREMISES
SECTION 1.1. Landlord, for and in consideration of the rents
herein reserved and of the covenants and agreements herein contained on the
part of Tenant to be kept, observed and performed, does by these presents,
lease to Tenant, and Tenant hereby leases from Landlord, the real estate
located at 16750 South Vincennes Road in South Holland, Illinois, and legally
described on Exhibit "A" attached hereto and by this reference incorporated
herein (hereinafter referred to as the "Land"), together with easements and
rights and obligations appurtenant thereto and all improvements now located or
hereafter constructed thereon (hereinafter referred to as the "Improvements"),
subject to covenants, conditions, agreements, easements, encumbrances and
restrictions affecting the Land and the Improvements thereon.
SECTION 1.2. The Land and Improvements are hereinafter referred to
collectively as the "Premises."
ARTICLE II
TERM
SECTION 2.1. The initial term of this Lease shall commence on
December ____, 1994 (hereinafter referred to as the "Commencement Date") and
shall end on December 31, 2004 unless sooner terminated as hereinafter set
forth.
SECTION 2.2. The initial ten (10) year term as so fixed is herein
referred to as the "Initial Term", and the Initial Term as may be extended or
sooner terminated is hereinafter referred to as the "Term".
ARTICLE III
CONDITION OF PREMISES
SECTION 3.1. Tenant agrees to accept the Premises in an absolutely
"as-is" condition, and Tenant acknowledges that Landlord, its agents,
attorneys, representatives and employees have not and do not make any
representation or warranties, express or implied, to Tenant regarding the
Premises, including, but not limited to those relating to: (i) the zoning of
the Premises; (ii) the condition of any underground, above ground or surface
<PAGE> 2
improvements; (iii) the size, area, use or type of the Premises or the fitness
of the Premises for any intended or particular use; (iv) the nature of the soil
on and underlying the Premises or its suitability for development or any other
use thereof; (v) any financial information pertaining to the operation of the
Premises; (vi) the status of any requirements or obligations imposed, implied
or to be undertaken by the owner or developer of the Premises pursuant to any
zoning, subdivision, development laws or agreements with any governmental
entities; (vii) the presence or absence of any toxic wastes, hazardous
materials or structural defects in, on or under the Premises or any
improvements thereon; or (viii) the presence or absence of any rights of any
governmental authority, or of owners of property in the vicinity of the
Premises, to obtain reimbursement, recapture or special assessments from any
owner of the Premises for all or a portion of the cost of any utilities, roads,
or other improvements heretofore or hereafter located on or in the vicinity of
the Premises (and if such rights exist, Tenant agrees to pay all sums due
pursuant thereto, it being expressly acknowledged and agreed that, Tenant
hereby waives any claim Tenant may have or may hereafter acquire against
Landlord, its agents, attorneys, representatives or employees for said costs),
any and all such representations and warranties, express or implied, being
hereby expressly waived by Tenant and disclaimed by Landlord, Tenant waives any
claim that may exist for patent and/or latent defects or for mutual or
unilateral mistake of fact.
SECTION 3.2. The Landlord has made no promise to alter, remodel,
decorate, clean or improve the Premises or any portion thereof and no
representation respecting the condition of the Premises or any portion thereof
have been made by Landlord to Tenant.
ARTICLE IV
RENT
SECTION 4.1 In consideration of the leasing aforesaid, Tenant
agrees to pay Landlord, without offset or deduction, a total Base Rent for the
Initial Term of THREE MILLION NINE HUNDRED ELEVEN THOUSAND TWO HUNDRED AND
NO/100 (3,911,200.00) DOLLARS, plus any prorata Base Rent for the period
commencing with the Commencement Date and ending on December 31, 1994, payable
monthly in advance in installments of THIRTY-TWO THOUSAND FIVE HUNDRED
NINETY-THREE AND 33/100 ($32,593.33) DOLLARS commencing on January 1, 1995 and
continuing on the first day of each month thereafter for the balance of the
Initial Term of this Lease, and in addition thereto, shall, commencing on the
Commencement Date, pay such charges as are herein described as Additional Rent.
The term "Rent" when used in this Lease shall include all Base Rent payable
under this Section 4.1. as well as the charges herein described as "Additional
Rent". Any installment of Rent accruing under the provisions of this Lease
which shall not be paid when due, shall bear interest at the "Lease Interest
Rate", as defined in Section 35.8 hereof, from the date when the same is due
hereunder until the same shall be paid. All Rent payable hereunder shall be
payable to DeSoto Pension, c/o DeSoto, Inc., 16750 South Vincennes Road, South
Holland, Illinois, 60473, Attention: Anne E. Eisele, Senior Vice President, or
as Landlord may otherwise from time to time designate in writing.
SECTION 4.2. Monthly Base Rent for the period commencing with the
Commencement Date and ending on December 31, 1994 shall be payable on the
Commencement Date in the amount of ONE THOUSAND FIFTY-ONE AND 40/100
($1,051.40) DOLLARS per day.
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ARTICLE V
TAXES
SECTION 5.1. Tenant further agrees to pay before any fine, penalty,
interest or cost may be added thereto for the nonpayment thereof, as Additional
Rent for the Premises, all "Taxes" (as hereinafter defined) levied, assessed or
imposed upon the Premises or any part thereof accruing during the Term of this
Lease, notwithstanding that such taxes may not be due and payable until after
the expiration of the Term of this Lease; provided, however, that the Taxes
levied against the Premises shall be prorated between Landlord and Tenant for
the first year of the Initial Term hereof as of the Commencement Date and as of
the date of expiration of the Term of this Lease for the last year of said Term,
all on the basis of the most recent ascertainable taxes as applied to the most
recent assessed valuation of the Premises. Tenant shall be responsible for all
increases in Taxes based upon Tenant's occupancy of the Premises. After the
expiration of the Term hereof, including any extensions thereof, Tenant hereby
agrees to reprorate Taxes if necessary in Landlord's discretion. In the event of
any increase in Taxes from the Taxes reflected on the proration made upon the
expiration of the Term of this Lease, Tenant agrees to immediately pay to
Landlord such sums as reflected by such reproration. Benefit may be taken by
Tenant of the provisions of any statute or ordinance permitting any special
assessment to be paid over a period of years; provided, however, Tenant shall
pay all installments of special assessments due during the Term hereof. Tenant
shall, in addition to the foregoing, pay any new Tax of a nature not presently
in effect but which may hereafter be levied, assessed or imposed upon Landlord
or upon the Premises, if such Tax shall be based upon or arise out of the
ownership, use or operation of the Premises; provided, however, that for the
purpose of computing Tenant's liability for such new type of Tax, the Premises
shall be deemed the only property of Landlord. As used herein, the term "Taxes"
shall mean real estate taxes, assessments, sewer rents, rates and charges,
permit and license fees, transit taxes, taxes based upon the receipt of rent,
and any other federal, state or local governmental charge, general, special,
ordinary or extraordinary, which may now or hereafter be assessed against the
Premises or any portion thereof in any year during the Term hereof, and shall
also include any personal property taxes (attributable to the year in which
paid) imposed upon the furniture, fixtures, machinery, equipment, apparatus,
systems and appurtenances used in connection with the operation of the Premises.
Nothing contained herein shall be construed to require Tenant to pay
any franchise, inheritance, estate, succession or transfer tax of Landlord or
any income or excess profits tax assessed upon or in respect of all income of
Landlord or chargeable to or required to be paid by Landlord unless such tax
shall be specifically levied against the rental income of Landlord derived
hereunder (as opposed to a general income tax), which tax shall be paid by
Tenant as part of Taxes hereunder provided said rental income shall be
considered as the sole income of Landlord.
SECTION 5.2. Tenant further agrees to pay as Additional Rent for
the Premises all utilities and all other impositions, ordinary and
extraordinary, of every kind and nature whatsoever, which may be levied,
assessed or imposed upon the Premises or any part thereof accruing or becoming
due and payable during the Term of this Lease, including but not limited to all
costs and obligations under that certain Parking Easement recorded as Document
No. 92780730.
SECTION 5.3. The Tenant shall pay all of the obligations contained
in Section 5.1 hereof at least five (5) days prior to the due date thereof and
shall thereupon provide Landlord with evidence of such payment.
SECTION 5.4. Landlord shall, at its option, have the right, without
notice to Tenant, at all times during the Term to pay any such Taxes not timely
paid by Tenant, and the amounts so paid, including reasonable expenses, shall be
so much Additional Rent due at the next rent day after any such payments, with
interest at the Lease Interest Rate from the date of payment thereof.
SECTION 5.5. Tenant shall not be required to pay any Tax, Tax lien
or other imposition or charge upon or against the Premises or any part thereof
so long as Tenant shall, in good faith and with due diligence, contest the same
or the validity thereof by appropriate legal proceeding which shall have the
effect of preventing the collection of the tax, tax lien or other imposition or
charge so contested; provided that on or before
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<PAGE> 4
the due date of any such Tax, Tax lien or other imposition or charge, Tenant
shall either pay such Tax or deposit with Landlord an amount equal to the
amount of such Tax, Tax lien, imposition or charge so contested, which amount,
together with all interest earned thereon, shall be held by Landlord as
security to insure payment of the amount of the Tax, Tax lien or other
imposition or charge, and all interest and penalties thereon. The amount so
deposited and all interest earned therein shall be held by Landlord in a
separate account at a federally insured banking institution until final
resolution of such contest.
SECTION 5.6. In the event that Tenant at any time institutes suit
to recover any Tax, Tax lien or other imposition or charge paid by Tenant under
protest in Landlord's name, Tenant shall have the right, at its sole expense, to
institute and prosecute such suit or suits in Landlord's name, in which event
Tenant covenants and agrees to indemnify Landlord and save it harmless from and
against all costs, charges or liabilities in connection with any such suit. All
funds received as a result of any such suit shall belong to Tenant unless any
such recovery relates to a period of time which is not part of the Term, and in
such case shall be paid to Landlord.
ARTICLE VI
USE
SECTION 6.1. The Premises shall be used for manufacturing,
distribution, warehousing, office, retail, research and other legal uses.
Tenant shall not use or occupy the Premises or permit the Premises to be used
or occupied contrary to any statute, rule, order, ordinance, requirement,
regulation or restrictive covenant applicable thereto or in any manner which
would violate any certificate of occupancy affecting the same or which would
render the insurance thereon void or the insurance risk more hazardous, or
which would cause structural injury to the Improvements or cause the value or
usefulness of the Premises or any part thereof to diminish or which would
constitute a public or private nuisance or waste, and Tenant agrees that it
will, promptly upon discovery of any such use, immediately notify Landlord and
take all necessary steps to compel the discontinuance of such use.
SECTION 6.2. Tenant shall not permit the Premises, or any portion
thereof, to be used in such manner which impairs Landlord's right, title or
interest in the Premises or any portion thereof, or in such manner which gives
rise to a claim or claims of adverse possession or of a dedication of the
Premises, or any portion thereof, for public use.
ARTICLE VII
MAINTENANCE OF PREMISES
SECTION 7.1. Tenant agrees to take good care of the Premises,
including the Improvements, and keep same and all parts thereof, including
without limitation, the entire exterior and interior, the roof, foundations,
parking areas, sidewalks and appurtenances thereto together with any and all
alterations and additions thereto, in good order, condition and repair,
suffering no waste or injury. Tenant shall, at its sole cost and expense,
promptly make all necessary repairs and replacements, structural or otherwise,
ordinary as well as extraordinary, foreseen as well as unforeseen, in and to any
Improvements or equipment now or hereafter located upon the Land, including,
without limitation, the entire interior and exterior of the Improvements, the
roof, the foundation, sidewalks, parking areas, railroad tracks, water, sewer,
gas and electricity connections, pipes, mains and all other fixtures,
machinery, apparatus, equipment and appurtenances now or hereafter belonging
to, connected with or used in conjunction with the Premises. All such repairs
and replacements shall be of first class quality and sufficient for the proper
maintenance and operation of the Premises. Tenant shall keep and maintain the
Premises, including the Improvements and all sidewalks, vault space, parking
areas and areas adjacent thereto, safe, secure and clean,
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<PAGE> 5
specifically including, but not by way of limitation, snow and ice clearance,
landscaping and removal of waste and refuse matter so as to comply with any
applicable governmental law, statute, ordinance or regulation. Tenant shall not
permit anything to be done upon the Premises (and shall perform all maintenance
and repairs thereto so as not) to invalidate, in whole or in part, or prevent
the procurement of any insurance policies which may, at any time, be required
under the provisions of this Lease. Tenant shall not obstruction of any parking
area, adjoining street or sidewalk.
SECTION 7.2. Tenant shall not create any openings in the roof or
exterior walls of the Improvements, without the prior written consent of
Landlord , nor shall Tenant make any alterations, additions or improvements to
the Premises, except as permitted by Section 12.1 hereof, without the prior
written consent of Landlord. All alterations, additions and improvements
(except "Tenant's Equipment", as defined in Section 20.2 hereof), put in at the
expense of Tenant shall become the property of Landlord and shall remain upon
and be surrendered with the Premises as a part thereof at the termination of
this Lease, or at Landlord's option, Landlord may require Tenant to remove such
alterations, additions and improvements and restore the Premises to its original
condition. Tenant, at its sole cost and expense, will make all additions,
improvements and alterations on the Premises which may be necessary by the act
or neglect of any other person or corporation (public or private), including
supporting the streets and alleys adjoining the Premises. No additions,
improvements or alterations shall be commenced until Tenant has first satisfied
the requirements set forth in Section 10.2 hereof.
SECTION 7.3. Tenant at its own cost and expense also shall
promptly comply with any and all governmental requirement to or affecting the
Premises or any part thereof, irrespective of the nature of the work required
to be done, extraordinary as well as ordinary, whether or not the same involve
or require any structural changes or additions in or to the Improvements and
irrespective of whether or not such changes or additions be required on account
of any particular use to which the Premises or any part thereof are being put.
SECTION 7.4. Landlord shall not be required to furnish any
services of facilities whatsoever to the Premises. Tenant hereby assumes full
and sole responsibility for condition, operation, repair, alteration,
improvement, replacement, maintenance and management of the Premises. Landlord
shall not be responsible for any loss or damage to the person or property of
Lessee, any guests or invitees, any persons using or working on the Premises, or
any persons claiming by, through or under, or any agents, employees, heirs,
legal representatives, successors or assigns of, any of the foregoing.
SECTION 7.5. Tenant covenants and agrees to hold Landlord (if
Landlord is a trustee, the term "Landlord" for the purpose of this Section 7.5
shall include the trustee and all beneficiaries of such trust) and its
partners, shareholders, officers, directors, agents, employees and their
respective successors and assigns harmless and indemnified at all times against
any loss, liability, claim, damage, cost or expense, including reasonable
attorneys' fees, by reasons of any accident, loss or damage resulting to
persons or property from any use which may be made of the Premises or of any
equipment at any time situated thereon, or by reason of or growing out of any
act or thing done or omitted to be done upon the Premises or in any equipment
at any time situated thereon. Tenant further agrees that it will keep Landlord
and the Premises free and clear of and from any and all loss, liabilities,
damage, cost or expenses, including reasonable attorneys' fees, arising out
of any damage which may be sustained by adjoining property or adjoining owners
or other persons or property in connection with any maintenance, remodeling
altering or repairing of any improvements or the erection of any new
improvements on the Land.
ARTICLE VIII
LIABILITY INSURANCE
SECTION 8.1. Tenant further agrees that it will at all times
during the Term hereof, at its sole cost and expense, carry and maintain, for
the benefit of Landlord, Landlord's agents and beneficiaries and
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<PAGE> 6
Tenant, comprehensive general public liability insurance against claims for
personal injury, sickness or disease, including death and property damage,
including Scaffolding Act coverage, in, on or about the Premises, or in, on or
about the streets, sidewalks or premises adjacent to the Premises, such
insurance to afford protection in such amounts as Landlord may, from time to
time, require, but not less than $2,000,000.00 in respect to each person, and
to the limit of not less than $5,000,000.00 in respect to any one occurrence
causing bodily injury, personal injury or death, and to the limit of not less
than $1,000,000.00 in respect to property damage, and will also carry, for the
mutual benefit of Landlord and of Tenant, if any is required, steam boiler
insurance on all steam boilers, pressure vessels and other such apparatus,
including piping, in such amounts as Landlord may from time to time reasonably
require.
SECTION 8.2. Tenant will, at all such times as there may be one or
more passenger or freight elevators in any Improvements during the Term hereof,
carry and maintain elevator liability insurance, for the mutual benefit of
Landlord and Tenant, in an amount, in form and with companies satisfactory to
Landlord.
SECTION 8.3. In the event the Premises are owned by a trust,
Tenant shall maintain all insurance required pursuant to this Lease in the name
of said trust, as well as the agents and beneficiaries thereof, as their
respective interests may appear. At Landlord's request, Tenant shall cause any
lender of Landlord secured in whole or in part to be a named insured under any
policy of insurance required to be maintained by Tenant under this Lease.
SECTION 8.4 Tenant shall furnish Landlord with certified copies
or duplicate originals of all insurance policies required to be procured by
Tenant under this Lease. All such insurance shall be procured from a
responsible insurance company or companies reasonably satisfactory to Landlord
and to Landlord's mortgagee, if any, and authorized to do business in the state
where the Premises are located and may, with Landlord's prior written consent,
be obtained by Tenant by endorsement on its blanket insurance policies. All
policies of insurance required to be procured of Tenant under this Lease shall
provide that the same may not be canceled or altered except upon thirty (30)
days' prior written notice to Landlord and Landlord's mortgagee, if any.
ARTICLE IX
HAZARD INSURANCE
SECTION 9.1. Tenant shall, at all times during the Term of this
Lease, at its sole expense, keep in effect insurance on all Improvements
against loss by fire and lightning, the risks covered by what is commonly known
as extended coverage, malicious mischief and vandalism, and all other risks of
direct physical loss, in an amount equal to the full replacement value on the
replacement form basis, of such Improvements. The policy or policies evidencing
such insurance shall be written by a company or companies reasonably
satisfactory to Landlord and to Landlord's mortgagee, if any, and authorized to
do business in the state where the Premises are located, shall name Landlord
and Tenant as insureds thereunder, and shall provide that losses shall be paid
to said insureds as their respective interests may appear. At the request of
Landlord, a mortgage clause may be included in said policies covering
Landlord's mortgagee, if any. Said policies shall provide that the same may not
be canceled or altered except upon thirty (30) day's prior written notice to
Landlord and to Landlord's mortgagee, if any. The originals or certified copies
of such policies shall be deposited with Landlord who may deposit the same with
its mortgagee, if any.
SECTION 9.2. Tenant further agrees that, at Landlord's written
request, if and when obtainable, it will procure and maintain so-called war
risk and war damage insurance, earthquake and flood insurance on the
Improvements for not less than one hundred (100%) percent of the full insurance
value above foundation. Such insurance shall provide for payment of loss
thereunder to Landlord and Tenant, as their interests may appear, and shall, at
Landlord's request, contain a mortgage clause in favor of Landlord's mortgage,
if any.
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SECTION 9.3. Tenant shall furnish insurance against loss of Rents
due to the occurrence of any casualty or hazard in the amount of all Base Rent
payments, Taxes and insurance premiums required hereunder for a twelve (12)
month period.
SECTION 9.4. In the event Tenant shall at any time fail, neglect
or refuse to procure such insurance and keep the same in full force as provided
for in this Lease, then Landlord may, at its election, procure or renew such
insurance, and any amounts paid therefor by Landlord shall be so much
Additional Rent due at the next Rent payment date after any such payment, with
interest at the Lease Interest Rate from the date of payment thereof.
SECTION 9.5. Landlord and Tenant hereby waive all claims for
recovery from the other party for any loss or damage (whether or not such loss
or damage is caused by negligence of the other party and, notwithstanding any
provision or provisions obtained in the Lease to the contrary) to any person or
property insured under valid and collectible insurance policies to the extent
of any recovery collectible under such insurance, subject to the limitation
that this waiver shall apply only when it is permitted by the applicable policy
of insurance.
SECTION 9.6. Policies or certificates evidencing all insurance
required under this Lease shall be delivered to Landlord within sixty (60) days
after demand, and renewals thereof shall be delivered to Landlord at least
thirty (30) days prior to the expiration dates of the respective policies.
ARTICLE X
DAMAGE OR DESTRUCTION
SECTION 10.1 Tenant agrees that in case of damage to or
destruction of any Improvements or of the fixtures and equipment therein, by
fire or other casualty, it will promptly, at its sole cost and expense, subject
to Section 10.3 hereof, repair, restore, or rebuild the same and upon the
completion of such repair, restoration or rebuilding, the value and rental
value of the Improvements shall be at least equal to the value and rental value
of the Improvements immediately prior to the happening of such fire or other
casualty. Rent and all other charges payable by Tenant hereunder shall not
abate during the period of such repair, restoration or rebuilding and during
any period that the Improvements are not tenantable because of any damage or
destruction. If any such loss or damage is not fully insured, Tenant shall
repair, restore or rebuild at its sole cost and expense.
SECTION 10.2. Before commencing any repairing, restoring or
rebuilding, involving an estimated cost of more than $100,000.00, (a) plans and
specifications therefor, prepared by a licensed architect, shall be submitted
to and approved by Landlord; (b) Tenant shall furnish to Landlord an estimate
of the cost of the proposed work, certified by the architect who prepared such
plans and specifications; and (c) all contracts for any proposed work shall be
submitted to and approved by Landlord. All restoration, repair, rebuilding and
other construction performed by or on behalf of Tenant to the Premises shall be
performed in a good and workmanlike manner in accordance with all applicable
governmental statutes, ordinances and regulations.
SECTION 10.3. In the event of loss under any policy or policies of
insurance described in Article IX hereof, the proceeds thereof shall, subject to
the rights of Landlord's mortgagee, if any, be paid to Landlord and shall
thereafter be disbursed from time to time by Landlord for the expense of
repairing or rebuilding the Improvements which have been damaged or destroyed;
provided, however, that it shall first appear to the satisfaction of Landlord
that the amount of insurance money in its hands, plus any additional funds
deposited by Tenant, shall at all times be sufficient to pay for the completion
of said repairs or rebuilding. Upon the completion of said repairs or
rebuilding, free from all liens of mechanics and materialmen and others, any
surplus insurance proceeds subject to the rights of Landlord's mortgagee, if
any, shall be paid to Landlord. If, in the reasonable estimate of Tenant, the
cost of repair or rebuilding exceeds $500,000.00, Tenant shall deposit with
Landlord any
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sums required to the end that the sums held by Landlord shall, prior to
commencement of such work and at all times during the prosecution of same be
sufficient to fully and completely pay all costs of such work. All payouts by
Landlord as hereinabove required, shall be made after making provision for a
holdback of ten (10%) percent of the cost of such work and upon the written
request of Tenant accompanied by the certificate of the architect or engineer
in charge of the repairs and rebuilding stating:
(a) that the sum requested is due to the
contractors, materialmen, laborers, engineers, architects or other
persons (whose names and address shall be stated) who have furnished
services or materials for the repairs and restoration, or is required
to reimburse Tenant for expenditures made by Tenant in connection with
the repairs and restoration;
(b) that the sum requested when added to all sums
previously paid out under this Article for the repairs and restoration
does not exceed the value of the repairs and restoration done to the
date of such certificate;
(c) the progress of the repairs and restoration
and a certification that the same have been made in a good and
workmanlike manner;
(d) that the repairs and restoration have been
done pursuant to all plans and specifications required by Section
10.2. hereof; and
(e) that in the opinion of the architect or
engineer, the remaining amount of the sum on deposit will be
sufficient to pay for same in full upon completion of the repairs and
restoration.
Tenant shall furnish Landlord at the time of any such payment,
statements and waivers of lien as may be required under the mechanic's lien law
of the state wherein the Premises are located to fully waive lien rights with
respect to any payment to be made, and an official title or other search, or
other evidence satisfactory to Landlord, that there has not been filed with
respect to the Premises any mechanic's or other lien which has not been
discharged of record, in respect of any work, labor, services or materials
performed, furnished or supplied, in connection with the repair and
restoration, and that all of said materials have been purchased free and clear
of any security agreement or title retention agreement. Landlord shall not be
required to pay out any sum when the Premises shall be encumbered with any such
lien or agreement, or when Tenant is in default under any covenant or
obligation set forth herein.
SECTION 10.4. In the event Tenant shall not commence the repair,
restoration or rebuilding as required by this Article within a reasonable time
(but in no event in excess of six (6) months) after any damage or destruction
and diligently pursue the completion of same, then Tenant shall be in default
under this Lease and in addition to any remedy of Landlord provided for herein,
at law or in equity, Landlord may retain the balance of all sums deposited
pursuant to this Article remaining in the hands of Landlord.
ARTICLE XI
LIENS
SECTION 11.1. Tenant shall not do any act which shall in any way
encumber the title of Landlord in and to the Premises, nor shall any interest
or estate of Landlord in the Premises be in any way subject to any claim by way
of lien or encumbrance, whether by operation of law or by virtue of any express
or implied contract by Tenant, and any claim to or lien upon the Premises
arising from any act or omission of Tenant shall accrue only against the
leasehold estate of Tenant and shall in all respects be subject and subordinate
to the paramount title and rights of Landlord in and to the Premises. Tenant
will not permit the Premises to become subject
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to any mechanics', laborers' or materialmen's lien on account of labor or
material furnished to Tenant or claimed to have been furnished to Tenant in
connection with work of any character performed or claimed to have been
performed on the Premises by or at the direction of sufferance of Tenant;
provided, however that Tenant shall have the right to contest in good faith and
with reasonable diligence, the validity of any such lien or claimed lien if
Tenant shall first give to Landlord an amount equal to the amount of the lien
or claimed lien which, together with interest earned thereon, shall be held by
Landlord as security to insure payment thereof and to prevent any sale,
foreclosure or forfeiture of the Premises by reason of non-payment thereof. The
amount so deposited with Landlord shall be held by Landlord in an account
established at a federally insured banking institution until satisfactory
removal of said lien or claim of lien. On any final determination of the lien
or claim for lien, Tenant will immediately pay any judgment rendered, with all
proper costs and charges, and will, at its own expense, have the lien released
and any judgment satisfied. Should Tenant fail to diligently contest and pursue
such lien contest, Landlord may, at its option, use the sums so deposited to
discharge any such lien upon the renewal of such lien or encumbrance Landlord
shall pay all such sums remaining on deposit to Tenant.
SECTION 11.2. If Tenant shall fail to contest the validity of any
lien or claimed lien or fail to give security to Landlord to insure payment
thereof, or shall fail to prosecute such contest with diligence, or shall fail
to have the same released and satisfy any judgment rendered thereon, then
Landlord may, at its election (but shall not be so required) remove or
discharge such lien or claim for lien (with the right, in its discretion, to
settle or compromise the same), and any amounts advanced by Landlord, including
reasonable attorneys' fees, for such purposes shall be so much Additional Rent
due from Tenant to Landlord at the next rent date after any such payment, with
interest thereon at the Lease Interest Rate from the date so advanced.
ARTICLE XII
ALTERATIONS AND IMPROVEMENTS
SECTION 12.1. The Tenant may make alterations, improvements and
additions to the Premises provided that no alteration, addition or improvement
to the Premises shall be commenced by Tenant until Tenant has furnished
Landlord with a satisfactory certificate or certificates from an insurance
company reasonably acceptable to Landlord, evidencing workmen's compensation
coverage, and insurance coverage in amounts reasonably satisfactory to Landlord
and protecting Landlord against public liability and property damage to any
person or property, on or off the Premises arising out of and during the making
of such alterations, additions or improvements. Any alteration, addition or
improvement by Tenant hereunder shall be done in a good and workmanlike manner
in compliance with any applicable governmental law, statute, ordinance or
regulation and shall, upon termination of this Lease, automatically be deemed
the property of Landlord.
ARTICLE XIII
CONDEMNATION
SECTION 13.1. In the event the whole of the Premises shall be taken
as a result of the exercise of the power of eminent domain or condemned for a
public or quasi-public use or purpose by any competent authority or sold to the
condemning authority under threat of condemnation, or in the event a portion of
the Premises shall be taken or sold as a result of such event, and as a result
thereof the balance of the Premises cannot be used for the same purpose as
before such taking, sale or condemnation, then and in either of such events, the
Term of this Lease shall terminate as of the date of vesting of title pursuant
to such proceeding of sale. The total award, compensation or damages received
from such proceeding or sale (hereinafter collectively called the "Award"),
shall be paid to and be the property of Landlord, whether the Award shall be
made as compensation for diminution of the
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value of the leasehold or the fee of the Premises or otherwise. Tenant may
petition the condemning authority for loss of its leasehold and moving
expenses. Tenant shall execute, immediately upon demand of Landlord, such
documents as may be necessary to facilitate collection by Landlord of any such
Award.
SECTION 13.2. In the event only a part of the Premises shall be
taken as a result of the exercise of the power of eminent domain or condemned
for a public or quasi-public use or purpose by any competent authority or sold
to the condemning authority under threat of condemnation, and as a result
thereof the balance of the Premises can be used for the same purpose as before
such taking, sale or condemnation, this Lease shall not terminate and Tenants at
its sole cost and expense, shall promptly repair and restore the Premises. Any
Award paid as a consequence of such taking, sale, or condemnation, shall be
paid to Landlord and shall be disbursed in accordance with the provisions of
Section 10.3. hereof. Any sums not so disbursed shall be retained by Landlord.
In the event Tenant shall not promptly commence the repair or restoration
required hereby, and diligently pursue the completion of same, Tenant shall be
deemed in default under this Lease and, in addition to any remedy of Landlord
provided for under this Lease, at law or in equity, Landlord may retain the
Award, or the balance thereof remaining in the hands of Landlord.
ARTICLE XIV
RENT ABSOLUTE
SECTION 14.1. This Lease shall be deemed and construed to be a "net
lease" and Tenant agrees to pay all costs and expenses of every kind and nature
whatsoever, ordinary and extraordinary, arising out of or in connection with
the ownership, maintenance, repair, replacement, use and occupancy of the
Premises during the Term of this Lease, which, except for the execution and
delivery hereof, would otherwise have been payable by Landlord. Any damage to
or destruction of all or any portion of the Improvements by fire, the elements
or any other cause whatsoever, whether with or without fault on the part of
Tenant, shall not terminate this Lease or entitle Tenant to surrender the
Premises or entitle Tenant to any abatement of, or set off to, or reduction in
the rent payable, or otherwise affect the respective obligations of the parties
hereto. If the use of the Premises for any purpose should, at any time during
the Term of this Lease, be prohibited by law or ordinance or other governmental
regulation, or prevented by injunction, this Lease shall not be thereby
terminated nor shall Tenant be entitled by reason thereof to surrender the
Premises, or to any abatement or reduction in Rent nor shall the respective
obligations of the parties hereto be otherwise affected.
ARTICLE XV
ASSIGNMENT-SUBLETTING BY TENANT
SECTION 15.1. Tenant may assign this Lease or any interest
hereunder, and may sublet or permit the use or occupancy of the Premises or any
part thereof by anyone other than Tenant, without the consent of Landlord.
Notwithstanding the foregoing provisions of this Article XV. no assignment or
subletting shall relieve Tenant of its obligations hereunder, and Tenant shall
continue to be liable as a principal and not as a guarantor or surety, to the
same extent as though no assignment or sublease had been made.
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ARTICLE XVI
ANNUAL STATEMENTS
SECTION 16.1. Tenant agrees, upon the prior written request of
Landlord, to furnish Landlord annually, within one hundred twenty (120) days of
the end of Tenant's fiscal year with a copy of its annual audited financial
statements and agrees that Landlord may deliver such statements to any
mortgagee, prospective mortgagee or prospective purchaser of the Premises.
ARTICLE XVII
INDEMNITY FOR LITIGATION
SECTION 17.1. Tenant agrees to pay all costs and expenses,
including fees, which may be incurred by or imposed on Landlord, either in
enforcing this Lease (whether or not suit is filed) or in any litigation or
claims to which Landlord, without fault on its part, may be a party, and if
paid by Landlord, shall be so much Additional Rent due on the next Rent date
after such payment together with interest at the Lease Interest Rate.
ARTICLE XVIII
ESTOPPEL CERTIFICATES
SECTION 18.1. Each party thereto agrees that at any time and from
time to time, upon not less than ten (10) days' prior written request by the
other party, it will execute, acknowledge and deliver to the requesting party
or its Lender or proposed purchaser, a statement in writing certifying that (i)
this Lease is unmodified and in full force and effect (or if there have been
modifications, that the same is in full force and effect as modified, and
stating the modifications), (ii) the party requesting the certificate is not in
default under any term or condition of this Lease and there are no existing
circumstances that with the giving of notice or the passage of time or both
would give rise to such a default (or if any default exists same will be
specified), (iii) the date to which the rent and other charges have been paid
in advance, if any, (iv) the date that the Lease terminates, and (v) such other
matters as the party so requesting the statement, any prospective purchaser or
any Lender may reasonably request, it being intended that any such statement
delivered pursuant to this Section 18.1. may be relied upon by any prospective
purchaser of the fee, or mortgagee or assignee of any mortgage upon the fee, of
the Premises. If the Landlord requests such a statement, the Tenants shall also
certify (a) the Tenant has unconditionally accepted the Premises, (v) the
Premises are acceptable to Tenant as is, and Tenant agrees not to look to
Landlord to remedy or cure any faults therein, including, without limitation,
latent defects, (b) there are no set-offs or defenses to the enforcement of any
or all of the terms, conditions and covenants contained in the Lease, and (c)
there are no obligations of the Landlord to reduce any future rent payable under
the Lease or construct any improvements to the Premises or make any monetary
payments to such Tenant.
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ARTICLE XIX
INSPECTION OF PREMISES
SECTION 19.1. Tenant agrees to permit Landlord and any authorized
representatives of Landlord, to enter the Premises at all reasonable times on
reasonable advance notice, except in the case of emergency, for the purpose of
inspecting the same. Any such inspections shall be solely for Landlord's
purposes and may not be relied upon by Tenant or any other person.
SECTION 19.2. Tenant agrees to permit Landlord and any authorized
representative of Landlord to enter the Premises at all reasonable times during
business hours on reasonable advance notice to exhibit the same for the purpose
of sale, mortgage or lease, and during the final year of the Term hereof or any
extension thereof, Landlord may display on the Premises customary "For Sale" or
"For Rent" signs.
ARTICLE XX
FIXTURES
SECTION 20.1. All Improvements and all plumbing, heating, lighting,
electrical and air-conditioning fixtures and equipment, and other articles of
personal property used in the operation of the Premises (as distinguished from
operations incident to the business of Tenant), whether or not attached or
affixed to the Premises (hereinafter referred to as "Building Fixtures"),
including but not limited to the items identified in Exhibit "B" attached
hereto, shall be and remain a part of the Premises and shall constitute the
property of Landlord.
SECTION 20.2. All of Tenant's trade fixtures and all personal
property, fixtures, apparatus, machinery and equipment now or hereafter located
upon the Premises, other than Building Fixtures, as shall be and remain the
personal property of Tenant, and the same are herein referred to as "Tenant's
Equipment"
SECTION 20.3. Tenant's Equipment may be removed from time to time by
Tenant; provided, however, that if such removal shall injure or damage the
Premises, Tenant shall repair the damage and place the Premises in the same
condition as it would have been if such Tenant's Equipment had not been
installed.
ARTICLE XXI
DEFAULT
SECTION 21.1. Tenant agrees that any one or more of the following
events shall be considered "Events of Default" as said term is used herein:
(a) If an order, judgment or decree shall be entered
by any court adjudicating Tenant a bankrupt or insolvent, or approving
a petition seeking reorganization of Tenant or appointing a receiver,
trustee or liquidator of Tenant, or of all or a substantial part of
its assets, and such order, judgment or decree shall continue unstayed
and in effect for any period of sixty (60) days; or
(b) Tenant shall file an answer admitting the
material allegations of a petition filed against Tenant in any
bankruptcy, reorganization or insolvency proceeding or under
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any laws relating to the relief of debtors, readjustment or
indebtedness, reorganization, arrangements, composition or extension;
or
(c) Tenant shall make any assignment for the benefit
of creditors or shall apply for or consent to the appointment of a
receivers trustee or liquidator of Tenant or any of the assets of
Tenant; or
(d)Tenant shall file a voluntary petition in
bankruptcy, or shall admit in writing its inability to pay its debts
as they come due, or shall file a petition or an answer seeking
reorganization or arrangement with creditors or take advantage of any
insolvency law; or
(e) A decree or order appointing a receiver of the
property of Tenant shall be made and such decree or order shall not
have been vacated within sixty (60) days from the date of entry or
granting thereof; or
(f) Tenant shall default in making any payment of
Rent or other payment required to be made by Tenant hereunder when due
and such default shall continue for in excess of five (5) days after
notice thereof to Tenant; or
(g) Tenant shall be in default in the performance of
or compliance with any of the agreements, terms, covenants or
conditions in this Lease other than those referred to in the foregoing
subparagraphs (a) through (f) of this Section for a period of twenty
(20) days after notice from Landlord to Tenant specifying the items in
default or in the case of a default which cannot, with due diligence,
be cured within said twenty (20) day period, Tenant fails to proceed
within said twenty (20) day period to cure the same and thereafter to
prosecute the curing of such default with due diligence (it being
intended in connection with a default not susceptible of being cured
with due diligence within said twenty (20) day period that the time of
Tenant within which to cure the same shall be extended for such period
as may be necessary to complete the same with all due diligence).
Upon the occurrence of any one or more of such Events of
Default, Landlord may at its election terminate this Lease or terminate
Tenant's right to possession only, without terminating this Lease. Upon
termination of this Lease or of Tenant's right to possession, Tenant shall
immediately surrender possession and vacate the Premises, and deliver
possession thereof to Landlord, and Landlord or Landlord's agents may
immediately or any time thereafter without notice, re-enter the Premises and
remove all persons and all or any property therefrom either by any suitable
action or proceeding at law or equity or by force or otherwise, without being
liable in indictment prosecution or damages, therefor, and repossess and enjoy
the Premises, together with the right to receive all income of, and from, the
Premises.
If Landlord elects to terminate Tenant's right to possession
only, without terminating this Lease, Landlord may, at Landlord's option, enter
into the Premises. remove Tenant's signs and other evidences of tenancy, and
take and hold possession thereof as hereinabove provided. without such entry and
possession terminating this Lease or releasing Tenant, in whole or in part, from
Tenant's obligations to pay the Rent hereunder for the full Term or from any
other obligations of Tenant under this Lease. Landlord shall use commercially
reasonably efforts to relet all or any part of the Premises for such rent and
upon terms as shall be satisfactory to Landlord (including the right to relet
the Premises for a term greater or lesser than that remaining of the Term of
premises and the right to relet the Premises as a part of a larger area, the
right to change the character or use made of the Premises and the right to grant
concessions of free rent). For the purpose of such reletting, Landlord may
decorate or make any repairs, changes, alterations, or additions in or to the
Premises that may be necessary or desirable. If Landlord is unable to relet the
Premises after using such commercially reasonably efforts to do so, Tenant shall
pay to Landlord damages equal to the amount of the Rent, and other sums provided
herein to be paid by Tenant for the remainder of the Term.
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If the Premises are relet and sufficient sums shall not be realized from such
reletting after payment of all expenses of such decorations, repairs, changes,
alterations, additions and the expenses of repossession and such reletting, and
the collection of the Rent herein provided and other payments required to be
made by Tenant under the provisions of this Lease for the remainder of the Term
of this Lease then, in such event, Tenant shall pay to Landlord on demand any
such deficiency and Tenant agrees that Landlord may file suit to recover any
sums falling due under the terms of this Section from time to time, and all
costs and expenses of Landlord, including attorneys' fees, incurred in
connection with any such suit shall be paid by Tenant.
SECTION 21.2. Tenant hereby expressly waives, so far as permitted by
law, the service of any notice of intention to re-enter provided for in any
statute, and except as is herein otherwise provided. Tenant for and on behalf of
itself and all persons claiming through or under Tenant, also waives any and all
rights of redemption or re-entry or repossession in case Tenant shall be
dispossessed by a judgment or by warrant of any court or judge or in case of
re-entry or repossession by Landlord or in case of any expiration or termination
of this Lease. The terms "enter," "re-enter," "entry" or "re-entry" as used in
this Lease are not restricted to their technical legal meanings.
ARTICLE XXII
LANDLORD'S PERFORMANCE OF TENANT'S COVENANTS
SECTION 22.1. Should Tenant at any time fail to do any act or make
any payment required to be done or made by it under the provisions of this
Lease, Landlord, at its option, may (but shall not be required to) do the same
or cause the same to be done, and the amounts paid and expenses incurred by
Landlord in connection therewith shall be so much Additional Rent due on the
next rent date after such payment, together with interest at the Lease Interest
Rate from the date of payment.
ARTICLE XXIII
EXERCISE OF REMEDIES
SECTION 23.1. No remedy contained herein or otherwise conferred upon
or reserved to Landlord, shall be considered exclusive of any other remedy, but
the same shall be cumulative and shall be in addition to every other remedy
given herein, now or hereafter existing at law or in equity or by statute, and
every power and remedy given by this Lease to Landlord may be exercised from
time to time and as often as occasion may arise or as may be deemed expedient.
No delay or omission of Landlord to exercise any right or power arising from any
default shall impair any such right or power or shall be construed to be a
waiver of any such default or an acquiescence therein.
SECTION 23.2. No waiver of any breach of any of the covenants of
this Lease shall be construed, taken or held to be a waiver of any other breach,
or a waiver, acquiescence in or consent to any further or succeeding breach of
the same covenant. The acceptance by Landlord of any payment of Rent or other
sums payable hereunder after the termination by Landlord of this Lease or of
Tenant's right to possession hereunder shall not, in the absence of agreement in
writing to the contrary by Landlord, be deemed to restore this Lease or Tenant's
right to possession hereunder, as the case may be, but shall be construed as a
payment on account and not in satisfaction of damages due from Tenant to
Landlord. Receipt of Rent by Landlord, with knowledge of any breach of this
Lease by Tenant or of any default by Tenant in the observance or performance of
any of the conditions or covenants of this Lease, shall not be deemed to be a
waiver of any provision of this Lease.
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SECTION 23.3. In the event of any breach or threatened breach by
Tenant of any of the agreements, terms, covenants or conditions contained in
this Lease, Landlord shall be entitled to enjoin such breach or threatened
breach and shall have the right to invoke any right and remedy allowed at law
or in equity or by statute or otherwise as though re-entry, summary
proceedings, and other remedies were not provided for in this Lease.
ARTICLE XXIV
SUBORDINATION TO MORTGAGES
SECTION 24.1. Landlord may execute and deliver a mortgage or trust
deed in the nature of a mortgage (both sometimes hereinafter referred to as
"Mortgage") against the Premises or any portion thereof. This Lease and the
rights of Tenant hereunder shall automatically, and without the requirement of
the execution of any further documents, be and are hereby made expressly
subject and subordinate at all times to the lien of any Mortgage now or
hereafter encumbering any portion of the Improvements, and to all advances made
or hereafter to be made upon the security thereof. Notwithstanding the
foregoing, Tenant agrees to execute and deliver such instruments subordinating
this Lease to the lien of any such Mortgage as may be requested in writing by
Landlord from time to time. Notwithstanding anything to the contrary contained
herein, any mortgagee under a Mortgage may, by notice in writing to the Tenant,
subordinate its Mortgage to this Lease.
SECTION 24.2. Tenant agrees to give the holder of any Mortgage, by
registered or certified mail, a copy of any notice of default served upon the
Landlord by Tenant, provided that prior to such notice Tenant has received
notice (by way of service on Tenant of a copy of an assignment of rents and
leases, or otherwise) of the address of such mortgagee and containing a request
therefor. Tenant further agrees that if Landlord shall have failed to cure such
default within the time provided for in this Lease, then said mortgagee shall
have an additional thirty (30) days after receipt of notice thereof within
which to cure such default or, if such default cannot be cured within that
time, then such additional time as may be necessary, if, within such thirty (30)
days, any mortgagee has commenced and is diligently pursuing the remedies
necessary to cure such default (including but not limited to commencement of
foreclosure proceedings, if necessary to effect such cure). Such period of time
shall be extended by any period within which such mortgagee is prevented from
commencing or pursuing such foreclosure proceedings by reason of Landlord's
bankruptcy. Until the time allowed as aforesaid for said mortgagee to cure such
defaults has expired without cure, Tenant shall have no right to, and shall
not, terminate this Lease on account of default. This Lease may not be modified
or amended so as to reduce the rent or shorten the term, or so as to adversely
affect in any other respect to any material extent the rights of the Landlord,
nor shall this Lease be cancelled or surrendered, without the prior written
consent, in each instance, of the mortgagee.
ARTICLE XXV
INDEMNIFY AND WAIVER
SECTION 25.1. Tenant will protect indemnify and save Landlord, its
partners, shareholders, employees officers, directors, agents and their
respective successors and assigns harmless (if Landlord is a trustee, the term
"Landlord" for the purposes of this Article XXV only, shall include the trustee
and all beneficiaries of the trust) from and against all liabilities,
obligations, claims, damages penalties, causes of action, costs and expenses
(including without limitation, reasonable attorneys' fees and expenses) imposed
upon, incurred by or asserted against Landlord by reason of (a) any accident,
injury to or death of persons or loss of or damage to property occurring on or
about the Premises or any part thereof or the adjoining properties, sidewalks,
curbs, streets or ways, or resulting from an act or omission of Tenant or
anyone claiming by, through or under Tenant; (b) any failure on the part of
Tenant to perform or comply with any of the terms of this Lease or any other
agreements affecting the Premises;
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(c) the use, occupation, condition, or operation of the Premises or any part
thereof; or (d) performance of any labor or services or the furnishing of any
materials or other property in respect of the Premises or any part thereof. In
case any action, suit or proceeding is brought against Landlord by reason of
any such occurrence. Tenant will, at Tenant's sole expense, resist and defend
such action, suit or proceeding, or cause the same to be resisted and defended.
SECTION 25.2. Tenant agrees to pay, and to indemnify and defend
Landlord against, all costs and expenses (including reasonable attorney's fees)
incurred by or imposed upon Landlord by or in connection with any litigation to
which Landlord becomes or is made a party without fault on its part, whether
commenced by or against Tenant, or any other person or entity or that may be
incurred by Landlord in enforcing any of the covenants and agreements of this
Lease with or without the institution of any action or proceeding relating to
the Premises or this Lease, or in obtaining possession of the Premises after an
Event of Default hereunder or upon expiration or earlier termination of this
Lease. The foregoing notwithstanding, Tenant's responsibility under this
Section 25.2 to pay Landlord's costs and expenses (including reasonable
attorneys fees) shall not extend to such costs and expenses incurred in
defending an action brought by Tenant to enforce the terms of this Lease in
which there is a court determination that Landlord failed to perform its
obligations under this Lease. The provisions of this Section 25.2 shall survive
the expiration or earlier termination of this Lease.
SECTION 25.3. Tenant waives all claims it may have against Landlord
and Landlord's agents for damage or injury to person or property sustained by
Tenant or any persons claiming through Tenant or by any occupant of the
Premises, or by any other person, resulting from any part of the Premises
becoming out of repair, or resulting from any accident on or about the Premises
or resulting directly or indirectly from any act or neglect of any person,
including Landlord to the extent permitted by law. This Section 25.3. shall
include, but not by way of limitation, damage caused by water, snow, frost,
steam, excessive heat or cold, sewage, gas, odors, or noise, or caused by
bursting or leaking pipes or plumbing fixtures and shall apply equally whether
any such damage results from the act or neglect of Tenant or of any other
person, including Landlord to the extent permitted by law, and whether such
damage be caused or result from anything or circumstance above mentioned or
referred to, or to any other thing or circumstance whether of a like nature or
of a wholly different nature. All Tenant's Equipment and other personal property
belonging to Tenant or any occupant of the Premises that is in or on any part of
the Premises shall be there at the risk of Tenant or of such other person only,
and Landlord shall not be liable for any damage thereto or for the theft or
misappropriation thereof.
ARTICLE XXVI
SURRENDER
SECTION 26.1. Upon the termination of this Lease whether by
forfeiture, lapse of time or otherwise, or upon the termination of Tenant's
right to possession of the Premises, Tenant will at once surrender and deliver
up the Premises to Landlord, broom clean, in good order, condition and repair,
reasonable wear and tear excepted. "Broom clean" means free from all debris,
dirt, rubbish, personal property of Tenant, oil, grease, tire tracks or other
substances, inside and outside of the Improvements and on the grounds comprising
the Premises. Any damage caused by removal of Tenant from the Premises,
including any damages caused by removal of tenant's equipment as herein defined,
shall be repaired and paid for by Tenant prior to the expiration of the Term.
All additions, hardware, alterations and improvements, temporary or
permanent, excluding Tenant's Equipment, in or upon the Premises placed there by
Tenant, shall become Landlord's property and shall remain upon the Premises upon
such termination of this Lease by lapse of time or otherwise, without
compensation or allowance or credit to Tenant, unless Landlord requests their
removal. If Landlord so requests removal of said additions, hardware,
alterations or improvements and Tenant does not make such removal by the
termination of this Lease, or within ten (10) days after such request, whichever
is later, Landlord may remove the same and deliver the same to
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any other place of business of Tenant or warehouse same, and Tenant shall pay
the cost of such removal, delivery and warehousing to Landlord on demand.
SECTION 26.2. Upon the termination of this Lease by lapse of time,
or otherwise, Tenant may remove Tenant's Equipment provided, however, that
Tenant shall repair any injury or damage to the Premises which may result from
such removal. If Tenant does not remove Tenant's Equipment from the Premises
prior to the end of the Term, however ended, Landlord may, at its option,
remove the same and deliver the same to any other place of business of Tenant
or warehouse the same, and Tenant shall pay the cost of such removal (including
the repair of any injury or damage to the Premises resulting from such
removal), delivery and warehousing to Landlord on demand, or Landlord may treat
tenant's equipment as having been conveyed to Landlord with this Lease as a
Bill of Sale, without further payment or credit by Landlord to Tenant.
SECTION 26.3. If Tenant retains possession of the Premises or any
part thereof after the termination of the Term, by lapse of time and otherwise,
then Tenant shall pay to Landlord monthly rent, at double the rate payable for
the month immediately preceding said holding over (including increases for
additional rent which Landlord may reasonably estimate), computed on a
per-month basis, for each month or part thereof (without reduction for any such
partial month) that Tenant thus remains in possession, and in addition thereto,
Tenant shall pay Landlord all damages, consequently as well as direct,
sustained by reason of Tenant's retention of possession. Alternatively, at the
election of Landlord expressed in a written notice to Tenant and not otherwise,
such retention of possession shall constitute a renewal of this Lease for one
(1) year, at a rental equal to one hundred twenty (120) percent of the Rent
during the previous year. The provisions of this paragraph do not exclude the
Landlord's rights of re-entry or any other right hereunder. Any such extension
or renewal shall be subject to all other terms and conditions herein contained.
ARTICLE XXVII
COVENANT OF QUIET ENJOYMENT
SECTION 27.1. Landlord agrees that at all times when Tenant is not
in default under the terms of and during the Term of this Lease, Tenant's quiet
and peaceable enjoyment of the Premises shall not be disturbed or interfered
with by Landlord or by any other person claiming by, through or under Landlord.
ARTICLE XXVIII
SHORT FORM LEASE
SECTION 28.1. This Lease shall not be recorded, but the parties
agree, at the request of either of them, to execute a Short Form Lease for
recording, containing the names of the parties, the legal description and the
Term of this Lease.
ARTICLE XXIX
NOTICES
SECTION 29.1. All notices, consents, approvals to or demands upon or
by Landlord or Tenant desired or required to be given under the provisions
hereof, shall be in writing. Any notices or demands from Landlord to Tenant
shall be deemed to have been duly and sufficiently given if a copy thereof has
been personally
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served, forwarded by expedited messenger service with evidence of delivery or
mailed by United States registered or certified mail in an envelope properly
stamped and addressed to Tenant at the premises or at such other address as
Tenant may theretofore have furnished by written notice to Landlord, and any
notices or demands from Tenant to Landlord shall be deemed to have been duly
and sufficiently given if forwarded by expedited messenger service with
evidence of delivery or mailed by United States registered or certified mail in
an envelope properly stamped and addressed to Landlord c/o DeSoto, Inc., 16750
South Vincennes Road, South Holland, Illinois, 60473, Attention: Anne E.
Eisele, Senior Vice President or at such other address as Landlord may
theretofore have furnished by written notice to Tenant. The effective date of
such notice shall be the earlier of three (3) days after delivery of the same
to the United States Post Office for mailing or the date of actual delivery.
ARTICLE XXX
COVENANTS RUN WITH LAND
SECTION 30.1. All of the covenants, agreements, conditions and
undertakings in this Lease contained shall extend and inure to and be binding
upon the heirs, executors, administrators, successors and assigns of the
respective parties hereto, the same as if they were in every case specifically
named, and shall be construed as covenants running with the land, and wherever
in this Lease reference is made to either of the parties hereto, it shall be
held to include and apply to, wherever applicable, the heirs, executors,
administrators, successors and assigns of such party. Nothing herein contained
shall be construed to grant or confer upon any person or persons, firm,
corporation or governmental authority, other than the parties hereto, their
heirs, executors, administrators, successors and assigns, any right, claim or
privilege by virtue of any covenant, agreement, condition or undertaking in this
Lease contained.
SECTION 30.2. The term "Landlord" as used in this Lease, so far as
covenants or obligations on the part of Landlord are concerned, shall be
limited to mean and include only the owner or owners at the time in question of
the fee of the Premises, and in the event of any transfer or transfers of the
title to such fee, Landlord herein named (and in the case of any subsequent
transfers or conveyances, the then grantor) shall be automatically freed and
relieved, from and after the date of such transfer or conveyance, of all
personal liability as respects the performance of any covenants or obligations
on the part of Landlord contained in this Lease thereafter to be performed;
provided that any funds in the hands of such Landlord or the then grantor at
the time of such transfer, in which Tenant has an interest, shall be turned
over to the grantee, and any amount then due and payable to Tenant by Landlord
or the then grantor under any provisions of this Lease, Shall be paid to
Tenant.
ARTICLE XXXI
ENVIRONMENTAL MATTERS
SECTION 31.1. Tenant agrees that it will not use, handle, generate,
treat, store or dispose of, or permit the use, handling, generation, Treatments
storage or disposal of any Hazardous Materials (as hereinafter defined) in, on,
under, around or above the Premises now or at any future time and will
indemnify, defend and save Landlord harmless from any and all actions,
proceedings, claims, costs, expenses and losses of any kind, including, but not
limited to, those arising from injury to any person, including death, damage to
or loss of use or value of real or personal property, and costs of
investigation and cleanup or other environmental remedial work, which arise
prior to the Term of this Lease during any period Tenant owned or occupied the
Premises (hereinafter referred to as "Tenant's Prior Ownership or Occupancy"),
or which may arise during the Term hereof, in connection with the existence of
Hazardous Materials on the Premises. The term "Hazardous Materials," when used
herein, shall include, but shall not be limited to, any substances, materials
or wastes that are regulated by any local governmental authority,
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the state where the Premises is located, or the United States of America
because of toxic, flammable, explosive, corrosive, reactive, radioactive or
other properties that may be hazardous to human health or the environment,
including without limitation, above or underground storage tanks, flammables,
explosives, radioactive materials, radon, petroleum and petroleum products,
asbestos, urea formaldehyde foam insulation, methane, lead-based paint,
polychlorinated biphenyl compounds, hydrocarbons or like substances and their
additives or constituents, pesticides and toxic or hazardous substances on
materials of any kind, including without limitation, substances now or
hereafter defined as "hazardous substances," "hazardous materials," "toxic
substances" or "hazardous wastes" in the following statutes, as amended: the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
(42 U.S.C. Section 9601, et seq., "CERCLA"); the Superfund Amendments and
Reauthorization Act of 1986 (42 U.S.C. Section 9671 et seq., "SARA"); the
Hazardous Materials Transportation Act (49 U.S.C. Section 1801, et seq.,
"HMTA"); the Toxic Substances Control Act (15 U.S.C. Section 2601, et seq.,
"TSCA"); the Resource Conservation and Recovery Act (42 U.S.C. Section 6901, et
seq., "RCRA"); the Clean Air Act (42 U.S.C. Section 7401 et seq., "CAA"); the
Clean Water Act (33 U.S.C. Section 1251, et seq., "CWA"); the Rivers and Harbors
Act, (33 U.S.C. Section 401 et seq., "RHA"); and any so-called "Superlien law";
and in the regulations promulgated pursuant thereto, and any other applicable
federal, state or local law, common law, code, rule, regulation, order, policy
or ordinance, presently in effect or hereafter enacted, promulgated or
implemented, or any other applicable governmental regulation imposing liability
or standards of conduct concerning any hazardous, toxic or dangerous
substances, waste or material, now or hereafter in effect. The foregoing
covenant shall not extend to substances typically found or used in Tenant's
business operations so long as: (i) such substances and any equipment which
generates such substances are maintained only in such quantities as are
reasonably necessary for Tenant's operations in the Premises; (ii) such
substances are used strictly in accordance with the manufacturers' instructions
therefor; (iii) such substances are not disposed of in or about the Premises in
a manner which would constitute a release or discharge thereof, and (iv) all
such substances and any equipment which generates such substances are removed
from the Premises by Tenant upon the expiration or earlier termination of this
Lease. Any use, storage, generation, disposal, release or discharge by Tenant
of hazardous materials in or about the Premises shall be carried out in
compliance with all applicable federal, state and local laws, ordinances, rules
and regulations.
SECTION 31.2. Tenant does hereby indemnify, defend and hold
harmless Landlord and its agents and their respective officers, directors,
beneficiaries, lenders, shareholders, partners, agents and employees and their
respective successors and assigns from all fines, suits, procedures, claims
liabilities, damages (including consequential damages) and actions of every
kind, and all costs associated therewith (including reasonable attorneys',
experts' and consultants' fees and costs of testing) arising out of or in any
way connected with any deposit, spill, discharge or other release of Hazardous
Materials that occurred during Tenant's Prior Ownership or Occupancy and that
occurs during the Term of this Lease, in either case at or from the Premises or
which arises at any time from (i) Tenant's failure to provide all information,
make all submissions, and take all steps required by all applicable
governmental authorities; (ii) any Hazardous Materials on, in, under or
affecting all or any portion of the Premises or the groundwater as a result of
events that occurred during Tenant's Prior Ownership or Occupancy or that occur
during the Term of this Lease or as a result of the construction of the
Improvements; (iii) any violation by Tenant or claim of a violation by Tenant
of any governmental law, statute, rule, regulation, ordinance, requirement,
decree, order or judgment now or hereafter in effect relating to public health,
safety, protection of the environment or any Hazardous Material; (iv) the
imposition of any lien for damages caused by, or the recovery of any costs for,
the remediation cleanup of Hazardous Material as a result of events that
occurred during Tenant's Prior Ownership or Occupancy or that occur during the
Term of this Lease or as a result of the construction of the Improvements; (v)
costs of removal of any and all Hazardous Material from all or any portion of
the Premises, which Hazardous Material were placed on the Premises during
Tenant's Prior Ownership or Occupancy or are placed on the Premises during the
Term of this Lease or as a result of the construction of the Improvements; (vi)
costs incurred to comply, in connection with all or any portion of the Premises,
with all governmental regulations with respect to Hazardous Materials on, in,
under or affecting the Premises, which Hazardous Materials were placed on the
Premises during Tenant's Prior Ownership or Occupancy or are placed on the
Premises during the Term of this Lease or as a result of the construction of
the Improvements; or (vii) any spills, discharges, leaks, escapes, releases,
dumping, transportation, storage, treatment or disposal of any Hazardous
Substances which occurred during Tenant's Prior
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Ownership or Occupancy or which occur during the Term of this Lease or as a
result of the construction of the Improvements, but only to the extent that
such Hazardous Materials originated from or were or are located on the
Premises. Tenant's obligations and liabilities under this Section 31.2 shall
survive the expiration of this Lease.
ARTICLE XXXII
EXCULPATION
SECTION 32.1. Notwithstanding anything to the contrary herein
contained, there shall be absolutely no personal liability asserted or
enforceable against Landlord or on any persons, firms or entities who constitute
Landlord with respect to any of the terms, covenants, conditions and provisions
of this Lease, and Tenant shall, subject to the rights of any mortgagee, look
solely to the interest of Landlord, its successors and assigns in the Premises
for the satisfaction of each and every remedy of Tenant in the event of default
by Landlord hereunder, such exculpation of personal liability is absolute and
without any exception whatsoever.
ARTICLE XXXIII
RENEWAL OPTIONS
SECTION 33.1. Tenant shall have options (hereinafter referred to
individually as a "Renewal Option" and collectively as the "Renewal Options")
to renew the Initial Term for all of the Premises as of the expiration date of
the Initial Term, for two additional periods of five (5) years each
(hereinafter referred to individually as a "Renewal Term" and collectively as
the "Renewal Terms") upon the following terms and conditions:
(a) Tenant gives Landlord written notice of its
exercise of the first Renewal Option at least three full calendar
months prior to the expiration of the Initial Term, and gives Landlord
written notice of its exercise of the second Renewal Option at least
three full calendar months prior to the expiration of the first
exercised Renewal Term.
(b) Tenant is not in default under this Lease either
on the date Tenant delivers the notice required under (a) above or at
any time thereafter prior to the commencement of the Renewal Term so
exercised.
(c) Should Tenant fail to exercise the first Renewal
Option, the second Renewal Option shall be void.
(d) All of the terms and provisions of this Lease
(except this Article XXXIII shall be applicable to the Renewal Terms,
except that monthly Base Rent for each Renewal Term shall be 90% of
Landlord's determination of the Fair Value as hereinafter defined for
such Renewal Term, which determination shall be given to Tenant by
Landlord not later than ten (10) months prior to the expiration of the
Initial Term or the first Renewal Term, as applicable. Notwithstanding
the foregoing, if Tenant does not agree with Landlord's determination
of Fair Value for any Renewal Term and notifies Landlord in writing of
same within thirty (30) days after receipt of Landlord's determination
(hereinafter referred to as the "Rental Agreement Date"), the Base
Rent payable under this Lease for such Renewal Term shall be equal to
ninety percent (90%) of the fair market rental value (hereinafter
referred to as the "Fair Value") for the Premises for such Renewal
Term which shall be determined by appraisal as hereinafter set forth.
Within fifteen (15) days after the applicable Rental Agreement Date,
Landlord and Tenant shall institute an
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appraisal procedure to determine the Fair Value of the Premises for
the applicable Renewal Term by jointly nominating and appointing one
appraiser who shall forthwith make a determination of the Fair Value
of the Premises. If Landlord and Tenant fail to jointly agree on the
nomination and appointment of one appraiser within said 15-day period,
each party shall then each nominate and appoint one appraiser within
thirty (30) days after the applicable Rental Agreement Date and give
notice of such appointment to the other party. Upon the appointment of
the two appraisers as aforesaid, the two appraisers so appointed shall
forthwith jointly make a determination of the Fair Value of the
Premises for the applicable Renewal Term. If either party fails to
appoint an appraiser within said 30-day period, the appraiser
appointed by the other party shall forthwith make the said
determination of the Fair Value of the Premises. If the two appraisers
are unable to agree upon a determination of such Fair Value of the
Premises within thirty (30) days after the appointment of the second
appraiser, the two appraisers shall jointly nominate and appoint a
third appraiser within fifteen (15) days after the expiration of said
30-day period and give written notice of such appointment to both
parties. In the event the two appraisers fail to appoint such third
appraiser within said 15-day period, either party may thereafter apply
to the United States District Court for the Northern District of
Illinois for the appointment of such third appraiser. The third
appraiser shall forthwith make a determination of the Fair Value of
the Premises. In the event the three appraisers are unable to agree
upon a determination of the Fair Value of the Premises within thirty
(30) days after the appointment of the third appraiser, then the Fair
Value of the Premises shall be an amount equal to the average of the
three values contained in the respective written appraisals submitted
by the appraisers. The appraisers shall make their determination in
writing and give notice thereof to both parties. The Fair Value of the
Premises shall be the highest Base Rent which the Premises would
generate for each Renewal Term in a competitive and open market lease
transaction under all conditions requisite to a fair lease and
assuming that (i) the Landlord and the Tenant are each acting
voluntarily, prudently and knowledgeably, (ii) no real estate broker's
commission or finder's fee is to be paid by the Landlord, (iii) the
Landlord and the Tenant are each typically motivated and are acting
without malice, (iv) Landlord and Tenant are each well informed or
well advised and each acting in what it considers its own best
interest, and (v) a reasonable time is allowed for exposure in the
open market. Each appraiser shall afford both parties a hearing and the
right to submit evidence, with the privilege of cross-examination in
connection with its determination of the Fair Value of the Premises.
In the event any appraiser appointed as aforesaid shall die or become
unable or unwilling to act before completion of the appraisal, such
appraiser's successor shall be appointed in the same as provided
above. Any appraiser appointed hereunder shall (x) be independent of
both parties (and of all persons and entities with interest in either
party); (y) have not less than five (5) years' experience in the
appraisal of real property; and (z) hold the professional designation
M.A.I., or if the M.A.I. ceases to exist, a comparable designation from
an equivalent professional appraiser organization. All appraisal fees
and expenses shall be borne equally by the parties.
SECTION 33.2. Tenant agrees to accept the Premises to be covered by
this Lease during any Renewal Term in an "as is" physical condition and Tenant
shall not be entitled to receive any allowance, credit, concession or payment
from Landlord for the improvement thereof.
SECTION 33.3. In the event Tenant exercises a Renewal Option,
Landlord and Tenant shall mutually execute and deliver an amendment to this
Lease reflecting the renewal of the Term on the terms herein provided, which
amendment shall be executed and delivered promptly after the determination of
the monthly Base Rent to be applicable to the Renewal Term as hereinabove
provided.
SECTION 33.4. The Renewal Options herein granted shall automatically
terminate upon the earliest to occur of (i) the expiration or termination of
this Lease, (ii) the termination of Tenant's right to possession
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of the Premises, (iii) any assignment or subletting by Tenant, or (iv) the
failure of Tenant to timely or properly exercise any applicable Renewal Option.
SECTION 33.5. Landlord and Tenant acknowledge and agree that no
real estate brokerage commission or finder's fee shall be payable by Landlord
in connection with any exercise by Tenant of the Renewal Options herein
contained.
ARTICLE XXXIV
RIGHT OF FIRST OFFER TO PURCHASE
SECTION 34.1. Landlord agrees that if, at any time during the Term
of this Lease, Landlord desires to sell the Premises, Landlord shall first offer
to sell the Premises to Tenant on the following terms and conditions:
(a) If at any time Landlord desires to sell the
Premises to any third party pursuant to a written agreement to
purchaser agreed to by such third party (said agreement is hereinafter
referred to as the "Proposed Contract") (except as set forth in
subparagraph (b) below), Landlord shall submit the Proposed Contract
to Tenant and Tenant shall have the right within ninety (90) days
after receipt of the Proposed Contract, to agree to purchase the
Premises on such terms and conditions as set forth in the Proposed
Contract. If Tenant notifies Landlord in writing within said ninety
(90) day period that it intends to purchase the Premises, then such
purchase shall occur within sixty (60) days after Tenant's notice,
pursuant to the terms of the Proposed Contract. If Tenant does not
give Landlord notice in writing within said ninety (90) day period
that Tenant intends to exercise its rights hereunder, then Landlord
shall be free to sell the Premises to the aforesaid third party upon
the terms and conditions set forth in the Proposed Contract. Should
such sale not be consummated or should Landlord's successor in
interest desire to sell the Premises, the provisions of this Article
XXXIV shall apply to any subsequent sale by Landlord or its successors
or assigns.
(b) Tenant shall have no rights hereunder if Landlord
obtains a bona fide mortgage from an unrelated third party and the
Premises are purchased by said mortgagee or as a result of a
foreclosure action or if the Premises are sold in a transaction
involving the simultaneous lease back of the Premises by Landlord or
if the Premises or interests therein are transferred in any way to said
mortgagee.
ARTICLE XXXV
SECURITY DEPOSIT
SECTION 35.1. Tenant agrees to deposit with Landlord, upon the
execution of this Lease, the sum of THREE HUNDRED NINETY-ONE THOUSAND ONE
HUNDRED TWENTY AND NO/100 ($391,120.00) DOLLARS as security for the full and
faithful performance by Tenant of each and every term, provision, covenant and
condition of this Lease. If Tenant defaults in respect to any of the terms,
provisions, covenants and conditions of this Lease including, but not limited
to, payment of all rental and other sums required to be paid by Tenant
hereunder, Landlord may use, apply or retain the whole or any part of the
security so deposited for the payment of such rent in default, for any sum which
Landlord may expend or be required to expend by reason of Tenant's default
including, without limitation, any damages or deficiency in the reletting of the
Premises, whether such damages or deficiency shall have accrued before or after
re-entry by Landlord. If any of the security deposit
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shall be so used, applied or retained by Landlord at any time or from time to
time. Tenant shall promptly, in each such instance, on written demand therefor
by Landlord, pay to Landlord such additional sums as may be necessary to
restore the security deposit to the original amount set forth in the first
sentence of this section.
SECTION 35.2. If Tenant shall fully and faithfully comply with all
the terms, provisions, covenants and conditions of this Lease, the security
deposit, or the balance thereof, shall be returned to Tenant after the earlier
to occur of the following: (a) the time fixed as the expiration of the Term of
this Lease; (b) the removal of Tenant from the Premises; (c) the surrender of
the Premises by Tenant to Landlord in accordance with this Lease; (d) Tenant's
financial statements, in form required by Landlord, indicate a profit for a
period of two (2) consecutive calendar quarters; (e) this Lease is assigned to
an entity in which Tenant owns less than a fifty (50%) percent ownership
interest and which entity has a net worth, as determined by Landlord, of not
less than FIVE MILLION AND NO/100 ($5,000,000.00) DOLLARS, or such an entity
becomes a guarantor of this Lease; and (f) final determination of all amounts
payable by Tenant hereunder and payment of same.
SECTION 35.3. Tenant shall be entitled to interest on the aforesaid
security deposit, payable annually on or before January 31 of each year with
respect to the prior calendar year, at an interest rate equal to the average
interest rate earned by Landlord on its investments for such prior calendar
year. The security deposit may be commingled with other funds of Landlord.
SECTION 35.4. In the absence of evidence satisfactory to Landlord
of an assignment of the right to receive the security deposit or the remaining
balance thereof, Landlord may return the security deposit to the original
Tenant, regardless of one or more assignments of this Lease.
ARTICLE XXXVI
MISCELLANEOUS
SECTION 36.1. The captions of this Lease are for convenience only
and are not to be construed as part of this Lease and shall not be construed as
defining or limiting in any way the scope or intent of the provisions hereof.
SECTION 36.2. If any covenant, agreement or condition of this Lease
or the application thereof to any person, firm or corporation or to any
circumstances, shall to any extent be invalid or unenforceable, the remainder of
this Lease, or the application of such covenant, agreement or condition to
persons, firms or corporations or to circumstances other than those as to which
it is invalid or unenforceable, shall not be affected thereby. Each covenant,
agreement or condition of this Lease shall be valid and enforceable to the
fullest extent permitted by law.
SECTION 36.3. This Lease shall be construed and enforced in
accordance with the laws of the state where the Premises are located.
SECTION 36.4. None of the covenants, terms or conditions of this
Lease, to be kept and performed by either party, shall in any manner be altered,
waived, modified, changed or abandoned, except by a written instrument, duly
signed, acknowledged and delivered by the other party.
SECTION 36.5. Nothing contained herein shall be deemed or construed
by the parties hereto, nor by any third party, as creating the relationship of
principal and agent or of partnership, or of joint venture by the parties
hereto, it being understood and agreed that no provision contained in this
Lease nor any acts of the parties hereto shall be deemed to create any
relationship other than the relationship of Landlord and Tenant.
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SECTION 36.6. Tenant warrants that it has no dealings with any real
estate broker or agent in connection with this lease and Tenant covenants to
pay, hold harmless and indemnify Landlord from and against any and all cost,
expense or liability for any compensation, commissions and charges claimed by
any other broker or other agent with respect to this Lease or the negotiation
thereof arising out of any acts of Tenant.
SECTION 36.7. No payment by Tenant or receipt by Landlord of a
lesser amount than the monthly rent herein stipulated and additional rent shall
be deemed to be other than on account of the earliest stipulated rent, nor
shall any endorsement or statement on any check or any letter accompanying any
check or payment as rent be deemed an accord and satisfaction, and Landlord may
accept such check or payment without prejudice to Landlord's right to recover
the balance of such rent or pursue any other remedy in this Lease provided.
SECTION 36.8. The term "Lease Interest Rate," when used herein,
shall be defined as being an annual interest rate equal to two (2%) percent per
annum over and above the corporate base or prime rate of interest published
from time to time by the First National Bank of Chicago as such rate may change
from time to time.
SECTION 36.9. The preparation of this Lease has been a joint effort
of the parties hereto and the resulting documents shall not, solely as a matter
of judicial construction, be construed more severely against one of the parties
than the other.
SECTION 36.10. Tenant hereby waives a jury trial in action brought by
Landlord hereunder.
SECTION 36.11. Time is of the essence of this Lease, and all
provisions herein relating thereto shall be strictly construed.
SECTION 36.12. Landlord's granting of any consent under this Lease,
or Landlord's failure to object to any action taken by Tenant without
Landlord's consent required under this Lease, shall not be deemed a waiver by
Landlord of its rights to require such consent for any further similar act by
Tenant. No waiver by Landlord of any other breach of the covenants of this Lease
shall be construed, taken or held to be a waiver of any other breach or to be a
waiver, acquiescence in or consent to any further or succeeding breach of the
same covenant. None of the Tenant's covenants under this Lease, and no breach
thereof, shall be waived, altered or modified except by a written instrument
executed by Landlord.
SECTION 36.13. Landlord is not, and shall not be deemed to be, in
any way or for any purpose, the partner, employer, principal, master or agent
of or with Tenant.
SECTION 36.14. This Lease is executed by John M. Gillen, not
personally but solely as Trustee of the DeSoto, Inc. Pension Plans Real
Property Trust under Trust Agreement dated October 1, 1992, in the exercise of
the power and authority conferred upon and vested in it as such Trustee. All
the terms, provisions, stipulations, covenants and conditions to be performed
by John M. Gillen are undertaken by it solely as Trustee, as aforesaid, and not
individually, and all statements herein made are made on information and belief
and are to be construed accordingly, and no personal liability shall be
asserted or be enforceable against John M. Gillen, personally, by reason of any
of the terms, provisions, stipulations, covenants and/or statements contained
in this Lease.
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IN WITNESS WHEREOF, the parties have executed this Lease on
the day and year first above written.
LANDLORD:
/s/ JOHN M. GILLEN
------------------------------------
JOHN M. GILLEN, not personally or
individually, but as Trustee as
aforesaid
TENANT:
DESOTO, INC., a Delaware corporation
By: /s/ ANNE E. EISELE
---------------------------------
Its: SENIOR VICE PRESIDENT
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EXHIBIT "A"
LEGAL DESCRIPTION
16750 South Vincennes Road
South Holland, Illinois, 60473
Parcel 1 (North Parcel): Lot 13 in South Holland Industrial Park 1st Addition,
being a subdivision of part of the southwest quarter and part of the southeast
quarter of Section 21, Township 36 North, Range 14 east of the Third Principal
Meridian in Cook County, Illinois.
Parcel 2 (South Parcel): That part of the north 292.90 feet of Lot 4 in DeVries
and others' subdivision of the southeast quarter of Section 21, Township 36
north, Range 14 east of the Third Principal Meridian, lying east of a line
described as beginning at the point of intersection of the north line of said
Lot 4 with the east line of that portion of said Lot 4 conveyed to Chicago
Terminal Transfer Company by deed recorded as Document No. 2972842; and running
thence southeasterly on a line parallel with the center line of Vincennes Road
(Thornton Blue Island Road) to the south line of the north 292.90 feet of said
Lot 4, all in Cook County, Illinois.
Permanent Index Numbers: 29-21-400-108
29-21-400-031
26
<PAGE> 1
EXHIBIT 10.19
DESOTO, INC
16750 SOUTH VINCENNES ROAD
SOUTH HOLLAND, ILLINOIS 60473
August 6, 1993
Mr. John Gillen, not personally
or individually, but as Trustee
of the DeSoto, Inc. Pension Plan's
Real Property Trust under Trust
Agreement dated October 1, 1992.
Dear Mr. Gillen:
DeSoto, Inc. is about to enter into a Real Estate Sale Contract (the
"Sale Contract") providing for the sale of approximately 8.126 acres of land,
which is improved with buildings containing in the aggregate approximately
275,025 square feet of floor area, located at 1700 South Mt. Prospect Road, Des
Plaines, Illinois (the "Property") and other real property to the Illinois Gas
Institute. As you are aware, DeSoto has entered into a Lease (the "Lease"), as
tenant, whereby it currently leases the Property from the DeSoto, Inc. Pension
Plan's Real Property Trust under Trust Agreement dated October 1, 1992 (the
"Trust").
DeSoto, Inc. has indicated to you that it desires to purchase the
Property from the Trust in order to sell the Property pursuant to the Sale
Contract.
Upon the consummation of the sale described in the Sale Contract or, upon
the earlier election of DeSoto, Inc., DeSoto, Inc. will purchase the property
from the Trust for a sum equal to Five Million Five Hundred Five Thousand Five
Hundred and no/100 ($5,505,500.00) Dollars. Upon such purchase, the Trust shall
convey the Property either to DeSoto, Inc. or to its designee. Upon the
conveyance of the Property, the Lease shall be terminated. There shall be no
prorations or apportionments of any nature which would cause a deduction from
the Purchase Price, and the Trust shall not be required to provide DeSoto, Inc.
a survey or title policy, however, with respect to the Property, the trust
shall convey title to the Property to DeSoto, Inc. or its nominee in the same
condition as DeSoto, Inc. conveyed same to the Trust. The aforesaid sale may
occur at any time on or prior to April 1, 1994.
<PAGE> 2
August 6, 1993
Page 2
Should the foregoing be acceptable to you, kindly execute the enclosed
copy of this letter to evidence your agreement to the terms and conditions set
forth herein.
Very truly yours,
DE SOTO, INC.
By: /s/ ANDERS U. SCHROEDER
----------------------------
Anders U. Schroeder
Vice Chairman
AGREED TO AND ACCEPTED
this 9th day of August,
1993
/s/ JOHN M. GILLEN, JR.
- ---------------------------------
JOHN GILLEN, as Trustee aforesaid
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion by reference in this registration statement on Form
S-4 (Registration Statement Under the Securities Act of 1933 - Registration
number 333-0917) of our report dated February 16, 1996, except for Note 14 as
to which the date is March 13, 1996, on our audits of the consolidated
financial statements and the financial statement schedule of Keystone
Consolidated Industries, Inc. as of December 31, 1995 and 1994 and for the
years ended December 31, 1995, 1994 and 1993. We also consent to the
reference to our firm under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
Dallas, Texas
August 22, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our Firm included in or made a part of Registration
Statement No. 333-0917.
/s/ ARTHUR ANDERSEN LLP
Chicago, Illinois
August 22, 1996
<PAGE> 1
EXHIBIT 23.6
[SALOMON BROTHERS LETTERHEAD]
New York, New York
August 22,1996
CONSENT OF SALOMON BROTHERS INC
We hereby consent to the use of our name and to the description of our
opinion letter dated the date of the Joint Proxy Statement/Prospectus referred
to below, under the caption "The Merger and Related Transactions - Opinion of
Financial Advisors" in, and to the inclusion of such opinion letter as Appendix
C to, the Joint Proxy Statement/Prospectus of Keystone Consolidated Industries,
Inc., which Joint Proxy Statement/Prospectus is part of the Registration
Statement on Form S-4 (File Number 33-0917) of Keystone Consolidated
Industries, Inc. By giving such consent we do not thereby admit that we are
experts with respect to any part of such Registration Statement within the
meaning of the term "expert" as used in, or that we come within the category of
persons whose consent is required under, the Securities Act of 1933, as
amended, or the rules and regulations of the Securities and Exchange Commission
promulgated thereunder.
SALOMON BROTHERS INC
By /s/ [ILLEGIBLE]
-------------------------
Managing Director
<PAGE> 1
EXHIBIT 99.1
PROXY
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
5430 LBJ FREEWAY, SUITE 1740
DALLAS, TX 75240
SOLICITED BY THE BOARD OF DIRECTORS
FOR SPECIAL MEETING OF STOCKHOLDERS
FRIDAY, SEPTEMBER 27, 1996
The undersigned, having received Notice of Special Meeting and Joint
Proxy Statement/Prospectus dated August 23, 1996, hereby appoints Ralph P. End
and Sandra K. Myers, or either of them, proxies, with full power of
substitution, to vote, as specified, in this proxy, all the shares of common
stock of KEYSTONE CONSOLIDATED INDUSTRIES, INC., a Delaware corporation (the
"Company"), held of record by the undersigned on the record date, August 23,
1996, at the Special Meeting of Stockholders to be held on September 27, 1996,
and all adjournments thereof, as directed and, in their discretion, on all
other matters which may properly come before the Special Meeting or any
adjournments thereof. The undersigned directs said proxies to vote as specified
upon the items shown on the reverse side, which are referred to in the Notice
of Special Meeting and set forth in the Joint Proxy Statement/Prospectus.
(Continued, and to marked, dated and signed, on the other side)
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE> 2
This Proxy, when properly executed, will be voted in the manner directed herein
by the undersigned shareholder. If no direction is made, this Proxy will be
voted "FOR" the issuance of Keystone Common Stock pursuant to the Agreement and
Plan of Reorganization dated June 26, 1996.
FOR AGAINST ABSTAIN
Please mark, date and sign exactly as
your name appears on this proxy card.
When shares are held jointly, both
holders should sign. When signing as
attorney, executor, administrator,
trustee or guardian, please give your
full title. If the holder is a
corporation or partnership, the full
corporate or partnership name should be
signed by a duly authorized officer.
-----------------------------------
Signature
-----------------------------------
Signature, if shares held jointly
Date: 1996
--------------------
THIS PROXY MAY BE REVOKED AS SET FORTH IN
THE KEYSTONE CONSOLIDATED INDUSTRIES,
INC. JOINT PROXY STATEMENT/PROSPECTUS
THAT ACCOMPANIED THIS PROXY.
Dear Stockholder:
Enclosed you will find material relative to the Company's Special Meeting of
Stockholders. The Notice of Special Meeting and Joint Proxy
Statement/Prospectus describe the formal business to be transacted at the
meeting.
Whether or not you expect to attend the Special Meeting, please complete and
return promptly the attached proxy card in the accompanying envelope, which
requires no postage if mailed in the United States.
Keystone Consolidated Industries, Inc.
<PAGE> 1
EXHIBIT 99.2
PROXY DESOTO, INC.
The undersigned hereby appoints ANNE E. EISELE and IRVING KAGAN, and each of
them, as Proxies with the power of substitution and revocation (to act by a
majority present or if only one acts then by that one) and hereby authorizes
them to represent and to vote as designated below all of the shares of stock of
DeSoto, Inc. held of record by the undersigned on August 23, 1996, at the
special meeting of stockholders to be held in New York, New York, on Friday,
September 27, 1996, at 10:00 A.M., New York time, or any adjournment thereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF DESOTO, INC.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR THE APPROVAL AND ADOPTION OF THE AGREEMENT AND PLAN OF REORGANIZATION
DATED AS OF JUNE 26, 1996 BETWEEN DESOTO, INC. AND KEYSTONE CONSOLIDATED
INDUSTRIES, INC. (THE "REORGANIZATION AGREEMENT").
The undersigned hereby revokes any proxy or proxies heretofore given to vote
such shares at said meeting or any adjournment thereof.
(CONTINUED AND TO BE SIGNED ON OTHER SIDE)
<PAGE> 2
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE LISTED PROPOSAL.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. / /
[ ]
APPROVAL AND ADOPTION OF THE PLAN OF FOR AGAINST ABSTAIN
REORGANIZATION / / / / / /
PLEASE SIGN EXACTLY AS NAME APPEARS HEREON. When shares are held
by joint tenants, both should sign. When signing as attorney,
executor, administrator, trustee or guardian, please give your
full title as such. If a corporation, please sign in full
corporate name by the President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
Dated: , 1996
------------------------------------------------------
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Signature(s) of Stockholder(s)
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
