<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 240.14a-11(c) or Rule 240.14a-12
FIREPLACE MANUFACTURERS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, $0.01 par value
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(2) Aggregate number of securities to which transaction applies:
3,326,775
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was
determined):
$7.14 - Maximum price to be paid under Plan and Agreement of
Reorganization
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$23,750,000
-----------------------------------------------------------------------
(5) Total fee paid:
$4,750
-----------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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<PAGE>
FIREPLACE MANUFACTURERS, INCORPORATED
2701 SOUTH HARBOR BOULEVARD
SANTA ANA, CALIFORNIA 92704
(714) 549-7782
FAX NO. (714) 549-4723
August 3, 1998
To All Shareholders of
Fireplace Manufacturers, Inc.:
You are cordially invited to attend a Special Meeting of Shareholders of
Fireplace Manufacturers, Inc. ("FMI") at the Company's offices at 2701 South
Harbor Boulevard, Santa Ana, California 92704 on August 18, 1998, at 10:00 a.m.
local time.
At the Special Meeting, shareholders will be asked to approve and adopt an
Agreement and Plan of Reorganization (the "Merger Agreement") pursuant to which
FMI will merge with and into DESA International, Inc. and each outstanding share
of FMI Common Stock will be converted into the right to receive $7.14 in cash
(subject to unlimited reduction under certain limited circumstances), without
interest. The Management of FMI believes there will be no downward adjustment of
the $7.14.
FMI's Board of Directors, which owns a substantial amount of FMI's Common
Stock, has determined that the proposed merger is fair to, and in the best
interests of, FMI and its shareholders. The Board has unanimously approved the
Merger Agreement and recommends that you vote in favor of the Merger Agreement.
The members of the Board of Directors may have conflicts of interest in
proposing the merger.
It is very important that your shares be represented at the Special Meeting.
Whether or not you plan to attend the Special Meeting, please be sure to date,
sign and return the proxy card in the enclosed envelope as promptly as possible
so that your shares may be represented at the Special Meeting and voted in
accordance with your wishes. This will not prevent you from revoking your proxy
and then voting your shares in person if you subsequently choose to attend the
Special Meeting. FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE AT
THE SPECIAL MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER
AGREEMENT. Please do not send in your stock certificates at this time. You will
be sent a letter of transmittal for that purpose promptly after the merger is
consummated.
Sincerely,
/s/ Willard V. Harris, Jr.
--------------------------------------
Willard V. Harris, Jr.
CHAIRMAN OF THE BOARD
<PAGE>
FIREPLACE MANUFACTURERS, INC.
2701 SOUTH HARBOR BOULEVARD
SANTA ANA, CALIFORNIA 92704
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 18, 1998
To the Shareholders:
Notice is hereby given that a Special Meeting of Shareholders of Fireplace
Manufacturers, Inc. ("FMI") will be held at the Company's offices at 2701 South
Harbor Boulevard, Santa Ana, California 92704 on August 18, 1998 at 10:00 a.m.
local time, to vote with respect to the approval and adoption of the Agreement
and Plan of Reorganization (the "Merger Agreement") described in the attached
Proxy Statement pursuant to which FMI will merge directly into DESA
International, Inc. and each outstanding share of FMI's Common Stock will be
converted into the right to receive $7.14 in cash (subject to unlimited
reduction under certain limited circumstances), without interest. The Management
of FMI believes there will be no downward adjustment of the $7.14. See "THE
MERGER--Merger Consideration."
You are urged to read the accompanying Proxy Statement which provides you
with a description of the terms of the proposed merger. A copy of the Merger
Agreement is included as Appendix A to the Proxy Statement.
Only shareholders of record at the close of business on June 23, 1998, are
entitled to notice of and to vote at the Special Meeting. The affirmative vote
of holders of a majority of the outstanding shares of Common Stock is required
to approve and adopt the Merger Agreement. Failure to vote in person or by proxy
at the Special Meeting will have the same effect as a vote against the Merger
Agreement.
We hope you will be represented at the meeting by signing and returning the
enclosed proxy card in the accompanying envelope as promptly as possible,
whether or not you expect to be present in person. Your proxy may be revoked at
any time by following the procedures set forth in the accompanying Proxy
Statement.
By Order of the Board of Directors,
/s/ John D. Hornsby
--------------------------------------
John D. Hornsby
SECRETARY
August 3, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
GENERAL.................................................................................................... 1
ADDITIONAL INFORMATION..................................................................................... 2
SUMMARY.................................................................................................... 3
The Special Meeting.................................................................................... 3
Parties to the Merger Agreement........................................................................ 3
The Merger............................................................................................. 4
Selected Financial Data................................................................................ 7
THE SPECIAL MEETING........................................................................................ 8
Purpose of the Meeting................................................................................. 8
Voting Rights; Record Date............................................................................. 8
Solicitation of Proxies................................................................................ 8
THE MERGER................................................................................................. 9
General................................................................................................ 9
Merger Consideration................................................................................... 9
Background of the Merger............................................................................... 10
Recommendation of the Board of Directors and Reasons Therefor.......................................... 12
Opinion of Financial Advisor........................................................................... 13
Exchange of Certificates for Merger Consideration...................................................... 19
Interests of Certain Persons in the Merger............................................................. 19
Material Federal Income Tax Consequences of the Merger................................................. 21
THE MERGER AGREEMENT....................................................................................... 22
Representations and Warranties......................................................................... 22
Effect on Stock Options................................................................................ 22
No Solicitation........................................................................................ 23
Indemnification by and of Directors and Officers....................................................... 23
Conditions to the Merger............................................................................... 24
Termination............................................................................................ 24
Fees and Expenses...................................................................................... 25
RIGHTS OF DISSENTING SHAREHOLDERS.......................................................................... 25
Summary of Procedures To Be Followed By Dissenters..................................................... 25
Fair Market Value...................................................................................... 25
Initial Steps Required to Perfect Dissenters' Rights................................................... 26
Court Proceedings...................................................................................... 26
Loss of Dissenters' Rights............................................................................. 27
Further Information.................................................................................... 27
OWNERSHIP OF COMMON STOCK.................................................................................. 28
DIRECTORS AND EXECUTIVE OFFICERS........................................................................... 29
</TABLE>
i
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PAGE
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BUSINESS................................................................................................... 30
Metal Fireplace Systems and Related Products........................................................... 30
Customers and Marketing................................................................................ 30
Patent, Trademarks and Tradenames...................................................................... 31
Fabrication of Fireplaces.............................................................................. 31
Supplies and Raw Materials............................................................................. 31
Building Codes......................................................................................... 31
Research and Development............................................................................... 32
Competition............................................................................................ 32
Employees.............................................................................................. 32
Property............................................................................................... 32
Litigation............................................................................................. 32
General................................................................................................ 32
MARKET PRICES OF COMMON STOCK.............................................................................. 33
SELECTED FINANCIAL DATA.................................................................................... 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 34
Liquidity and Capital Resources........................................................................ 34
Results of Operations.................................................................................. 35
Year 2000 and the Euro................................................................................. 36
Forward-looking Statements............................................................................. 36
INDEPENDENT PUBLIC ACCOUNTANTS............................................................................. 36
DATES FOR SUBMISSION OF SHAREHOLDER PROPOSALS FOR THE NEXT ANNUAL MEETING.................................. 36
FORM 10-K.................................................................................................. 37
</TABLE>
<TABLE>
<S> <C> <C>
APPENDIX A (Agreement and Plan of Reorganization and Voting and Option A-1
Agreement)...........................................................
APPENDIX B (Opinion of Marshall & Stevens, Incorporated).......................... B-1
APPENDIX C (California Dissenter's Rights Law).................................... C-1
</TABLE>
ii
<PAGE>
PROXY STATEMENT
OF
FIREPLACE MANUFACTURERS, INC.
SPECIAL MEETING OF SHAREHOLDERS
AUGUST 18, 1998
GENERAL
This Proxy Statement is being furnished to the holders of Common Stock, par
value $.01 per share (the "FMI Shares"), of Fireplace Manufacturers, Inc., a
California corporation ("FMI"), in connection with the solicitation of proxies
by the Board of Directors of FMI for use at the Special Meeting of Shareholders
(including any postponements or adjournments thereof, the "Special Meeting") to
be held on August 18, 1998 at 10:00 am. at the Company's offices at 2701 South
Harbor Boulevard, Santa Ana, California 92704, and at any adjournments or
postponements thereof. The Board of Directors has fixed the close of business on
June 23, 1998 as the record date (the "Record Date") for the Special Meet ing
with respect to this solicitation.
At the Special Meeting the shareholders will consider and vote upon a
proposal to approve and adopt an Agreement and Plan of Reorganization, dated as
of May 13, 1998, by and among FMI, DESA International, Inc., a Delaware
corporation ("DESA"), FMI Acquisition Corporation, a Delaware corporation and
wholly owned subsidiary of DESA ("Merger Sub") and certain shareholders of FMI
(the "Merger Agreement"), a copy of which is attached to this Proxy Statement as
Appendix A. Pursuant to the Merger Agreement, and subject to satisfaction of the
conditions set forth therein, (i) FMI will be merged with and into DESA (the
"Merger"), with DESA continuing as the surviving corporation, and (ii) each
outstanding share of FMI (an "FMI Share") (other than shares owned by DESA,
which shares will be canceled) will be converted, upon the effectiveness of the
Merger, into the right to receive $7.14 in cash per share, without interest,
subject to reduction as provided below (the "Merger Consideration"). Further,
the members of the Board of Directors may have conflicts of interest in
proposing the Merger. See "THE MERGER-- Interests of Certain Persons in the
Merger." See also "THE MERGER" and "THE MERGER AGREEMENT."
The Merger Consideration will be reduced by any amount FMI owes for
"Indebtedness for Borrowed Money" (as defined in the Merger Agreement) at the
time of the Merger. There is no limit on the amount of the potential reduction
of the Merger Consideration. Based on currently available information as more
fully discussed under "THE MERGER--Merger Consideration," FMI believes that
there will be no reduction in the Merger Consideration.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. FOR CERTAIN POTENTIAL CONFLICTS
OF INTERESTS REGARDING APPROVAL OF THE MERGER, SEE "THE MERGER-- INTERESTS OF
CERTAIN PERSONS IN THE MERGER." MEMBERS OF THE BOARD OF DIRECTORS AND MEMBERS OF
THEIR FAMILIES OWN 45.8% OF FMI'S COMMON STOCK AND DESA OWNS 7.5% OF FMI'S
COMMON STOCK.
Shareholders are urged to read and consider carefully the information
contained in the Proxy Statement and to consult with their personal financial
and tax advisors.
This Proxy Statement, Notice of Special Meeting and the accompanying proxy
are first being mailed to shareholders on or about August 5, 1998.
1
<PAGE>
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT
YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN, AND RETURN
THE PROXY CARD IN THE ENCLOSED POSTAGE PAID ENVELOPE.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROXY STATEMENT AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THE DELIVERY OF THIS PROXY STATEMENT SHALL NOT IMPLY THAT THERE HAS
BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF FMI,
DESA OR MERGER SUB SINCE THE DATE HEREOF.
ADDITIONAL INFORMATION
FMI is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the rules and regulations
thereunder, and in accordance therewith files reports, proxy statements, and
other information with the Securities and Exchange Commission (the "SEC"). Such
reports, proxy statements and other information filed by FMI may be inspected
and copied at the public reference facilities maintained by the SEC at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and the SEC's regional
offices located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
and Suite 1300, Seven World Trade Center, New York, New York 10048. Copies of
such material can be obtained at prescribed rates from the Public Reference
Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549. The SEC also
maintains a Web site at http://www.sec.gov that contains such reports, proxy
statements and other information.
All information contained in this Proxy Statement concerning DESA and Merger
Sub has been supplied by DESA. Except as otherwise indicated, all other
information contained in this Proxy Statement has been supplied by FMI.
2
<PAGE>
SUMMARY
THE FOLLOWING INCLUDES A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE
IN THIS PROXY STATEMENT. REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED IN
ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED IN THIS PROXY STATEMENT
AND THE APPENDICES HERETO. UNLESS OTHERWISE DEFINED HEREIN, CAPITALIZED TERMS
USED IN THIS SUMMARY HAVE THE RESPECTIVE MEANINGS ASCRIBED TO THEM ELSEWHERE IN
THIS PROXY STATEMENT. SHAREHOLDERS ARE URGED TO READ THIS PROXY STATEMENT AND
THE APPENDICES HERETO IN THEIR ENTIRETY.
THE SPECIAL MEETING:
<TABLE>
<S> <C>
Time, Date, Place................. The Special Meeting will be held at 10:00 a.m., local
time, on August 18, 1998 at the Company's offices at
2701 South Harbor Boulevard, Santa Ana, California
92704.
Record Date, Shares Entitled to
Vote............................ Holders of record of FMI Shares at the close of business
on June 23, 1998 are entitled to notice of, and to vote
at the Special Meeting. At such date there were
outstanding 3,326,775 FMI Shares, each of which is
entitled to one vote on the matter to be acted upon.
Purpose of Special Meeting........ The purpose of the Special Meeting is to consider and
vote upon a proposal to approve and adopt the Merger
Agreement pursuant to which FMI will be merged with and
into DESA and each outstanding FMI Share will be
converted into the right to receive the Merger
Consideration.
Vote Required..................... Approval and adoption of the Merger Agreement will
require the affirmative vote of the holders of a
majority of the outstanding FMI Shares.
Dissenters' Rights................ Under California law, shareholders have dissenters'
(appraisal) rights in connection with the Merger
Agreement and the consummation of the transactions
contemplated thereby. To exercise dissenters' rights the
specific procedures outlined herein must be strictly
complied with.
PARTIES TO THE MERGER AGREEMENT:
Fireplace Manufacturers, Inc...... FMI designs, manufactures and sells wood-burning metal
fireplaces, gas fireplace systems, decorative gas logs,
and fireplace accessories. FMI's sales for fiscal 1998
were $29 million. FMI's mailing address is 2701 South
Harbor Boulevard, Santa Ana, California 92704; its
telephone number is (714) 549-7782.
DESA International, Inc........... DESA, based in Bowling Green, Kentucky, is a leading
manufacturer and marketer of indoor and outdoor heating
products, home security products and specialty tools.
DESA's annual sales are in excess of $200 million. Its
executive offices are located at 2701 Industrial Drive,
Bowling Green, Kentucky 42102; its telephone number is
(502) 761-9600.
</TABLE>
3
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<TABLE>
<S> <C>
THE MERGER:
General........................... At the Effective Time, pursuant to the Merger Agreement
(i) FMI will be merged with and into DESA, which will
continue as the surviving corporation, and (ii) each
issued and outstanding FMI Share (other than certain
shares owned by DESA, which shares will be canceled)
will be converted into the right to receive the Merger
Consideration.
Effective Time.................... The Merger will become effective when certificates of
merger and officers certificates are filed with the
Secretaries of State of California and Delaware (the
"Effective Time"). It is anticipated that this filing
will occur as promptly as practicable after shareholder
approval has been obtained, assuming all other
conditions to the consummation of the Merger have been
satisfied or waived.
Merger Consideration.............. The Merger Consideration will be $7.14 cash per share,
which amount may be reduced as of the Effective Time to
the extent there are outstanding amounts that FMI then
owes for "Indebtedness for Borrowed Money" (as defined
in the Merger Agreement). While there is no contractual
limitation on the amount of any downward adjustment, the
Management of FMI believes no adjustment of the $7.14
will be made as of the Effective Time. See "THE
MERGER--Merger Consideration."
Recommendation of the Board of
Directors....................... The Board of Directors of FMI has determined that the
Merger is fair and in the best interests of FMI and its
shareholders. The Board of Directors unanimously
approved the Merger Agreement and recommends that the
shareholders vote in favor of the approval and adoption
of the Merger Agreement. In determining the approval of
the Merger Agreement and the recommendation the
shareholders approve the Merger Agreement, the Board of
Directors considered a number of factors, as more fully
described under "THE MERGER--Background of the Merger"
and "THE MERGER--Recommendation of the Board of
Directors and Reasons Therefor." Members of the Board of
Directors and their families beneficially own 45.8% of
the FMI Shares.
Interests of Certain Persons in
the Merger...................... In considering the recommendation of the Board of
Directors with respect to the Merger Agreement,
shareholders should be aware that the directors and
executive officers of FMI will receive economic and
other benefits as a result of the Merger beyond their
FMI Shares, including non-competition agreements,
employment agreements and indemnification arrangements.
See "THE MERGER--Interests of Certain Persons in the
Merger."
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Opinion of Financial Advisor...... On April 20, 1998, Marshall & Stevens, Incorporated,
financial advisor to FMI, delivered its Opinion and
related report to the Board of Directors that, as of the
date of such Opinion, the consideration to be received
by the holders of FMI Shares pursuant to the Merger
Agreement is fair to the holders of such securities from
a financial point of view. The full text of the Opinion,
which sets forth the assumptions made, matters
considered, and limitations on the review undertaken in
connection with the Opinion, is attached hereto as
Appendix B and is incorporated herein by reference.
Shareholders should read such Opinion in its entirety.
See "THE MERGER--Opinion of Financial Advisor."
No Solicitation................... FMI has agreed that, without the prior written consent
of DESA, prior to the Effective Time, FMI will not
initiate the direct and active solicitation of any other
party (other than DESA and Merger Sub) for a proposal
that such other party merge with, consolidate, or
acquire the capital stock or substantially all of the
assets of FMI or any of its subsidiaries (an
"Acquisition Transaction"); provided, however, that if
FMI, without direct and active solicitation, receives
from any other party (other than DESA of Merger Sub) a
proposal with respect to an Acquisition Transaction,
then FMI shall be entitled, under certain conditions, to
respond thereto in all appropriate ways consistent with
the fiduciary duties of the directors of FMI after
consulting with FMI's financial advisor and legal
counsel. FMI has also agreed to advise DESA of the
receipt by it of any proposal from any other party
concerning an Acquisition Transaction.
Termination....................... The Merger Agreement may be terminated at any time prior
to the closing of the Merger (the "Closing Date") by the
mutual consent of DESA and FMI. The Merger Agreement may
also be terminated by action of either FMI or DESA if,
among other reasons set forth in the Merger Agreement
(i) the approval of FMI's shareholders is not obtained;
(ii) a permanent injunction or other order prohibiting
the Merger has become final and nonappealable; (iii) any
of the conditions to such party's obligations under the
Merger Agreement have not been met prior to September
30, 1998; or (iv) a breach of the Merger Agreement by
the other party.
The Merger Agreement may be terminated by DESA in
certain circumstances in connection with a proposed
Acquisition Transaction between FMI and a third party or
if FMI's Board of Directors withdraws, modifies or
changes its approval or recommendation of the Merger
Agreement in a manner adverse to DESA or Merger Sub.
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5
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<TABLE>
<S> <C>
Voting and Option Agreement....... The principal executive officers of FMI, including all
members of the Board of Directors and a principal
shareholder of FMI, have entered into agreements to vote
all their shares for the Merger and have granted an
option to DESA to sell their FMI Shares, constituting
48.8% of the FMI Shares, at the same price as provided
for in the Merger and their outstanding stock options
for the same price less the exercise price of the stock
options, if the Merger is not consummated for certain
reasons. See "THE MERGER--Interests of Certain Persons
in the Merger."
Certain Federal Income Tax
Consequences.................... The Merger will be a taxable transaction to FMI's
shareholders. Shareholders will recognize gain or loss
in the Merger in an amount equal to the difference
between the cash received and their tax basis in the FMI
Shares exchanged therefor. See "THE MERGER--Certain
Federal Income Tax Consequences of the Merger."
Security Ownership By Directors
and Executive Officers.......... As of the Record Date, FMI's directors and executive
officers and other shareholders related to two directors
beneficially owned, in the aggregate FMI Shares
(excluding shares issuable upon the exercise of options
which will be canceled immediately prior to the Merger)
representing approximately 48.8% of the outstanding FMI
Shares. DESA also owned 7.5% of the FMI Shares as of the
Record Date. See "OWNERSHIP OF COMMON STOCK."
Market Prices of FMI Shares....... The FMI Shares are traded on the Electronic Bulletin
Board under the symbol: "FPMI." On March 19, 1998, the
last trading day before the public announcement of the
execution of a letter of intent between FMI and DESA
with respect to the proposed Merger, the reported
closing bid and ask prices per FMI Share were $3.87 and
$4.35, respectively. On July 31, 1998,, the reported bid
and ask prices per FMI Share were $6 3/8 and $6 1/2,
respectively. For additional information concerning
historical market prices of the FMI Shares, see "MARKET
PRICES OF COMMON STOCK."
Accounting Treatment.............. The Merger will be treated as a "purchase" for
accounting purposes.
</TABLE>
6
<PAGE>
SELECTED FINANCIAL DATA:
The following table sets forth certain historical consolidated financial
information and per share data of FMI. The following information should be read
in conjunction with the Consolidated Financial Statements and notes thereto of
FMI appearing elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT
FOR PER SHARE AMOUNTS)
<S> <C> <C> <C>
SUMMARY OF OPERATIONS:
Net sales......................................................................... $ 28,999 $ 31,844 $ 28,729
Cost of sales..................................................................... 21,783 25,186 23,903
Gross margin...................................................................... 7,216 6,658 4,826
Selling, general and administrative expenses...................................... 5,179 5,223 4,450
Net income........................................................................ 1,321 994 44
BALANCE SHEET DATA:
Working capital................................................................... 2,208 1,318 746
Total assets...................................................................... 6,647 6,937 8,832
Long-term debt obligations (excluding current portion)............................ -0- 235 904
Shareholders' equity.............................................................. 3,584 2,713 1,780
COMMON STOCK DATA:
Net income per share--basic....................................................... 0.39 0.30 0.01
Diluted net income per share...................................................... 0.38 0.30 0.01
Cash dividends per share.......................................................... -0- -0- -0-
Book value per share.............................................................. 1.08 0.79 0.51
Weighted average number of shares outstanding--basic.............................. 3,400 3,323 3,536
</TABLE>
7
<PAGE>
THE SPECIAL MEETING
PURPOSE OF THE MEETING
At the Special Meeting, the shareholders of FMI will be asked to consider
and vote upon a proposal to approve and adopt the Merger Agreement pursuant to
which FMI will be merged with and into DESA and each outstanding FMI Share
(other than the shares owned by DESA, which FMI Shares will be canceled) will be
converted into the right to receive the Merger Consideration. See "THE MERGER."
FMI's Board of Directors has unanimously approved the Merger Agreement and
recommends a vote FOR approval and adoption of the Merger Agreement. See "THE
MERGER--Recommendation of the Board of Directors and Reasons Therefor." The
members of the Board of Directors may have conflicts of interest in proposing
the Merger. See "THE MERGER--Interests of Certain Persons in the Merger."
SHAREHOLDERS SHOULD NOT FORWARD ANY FMI SHARE CERTIFICATES WITH THEIR PROXY
CARDS. IF THE MERGER IS APPROVED, SHAREHOLDERS WILL BE SENT A LETTER OF
TRANSMITTAL FOR THAT PURPOSE PROMPTLY AFTER THE MERGER IS CONSUMMATED. SEE "THE
MERGER--EXCHANGE OF CERTIFICATES FOR MERGER CONSIDERATION."
Except for the vote on the Merger Agreement, under California law no other
matter may be brought before the Special Meeting.
VOTING RIGHTS; RECORD DATE
The Board of Directors has established June 23, 1998 as the Record Date to
determine those holders of FMI Shares entitled to notice of and to vote at the
Special Meeting. On that date, there were 3,326,775 FMI Shares outstanding, with
each FMI Share entitled to one vote.
The presence, in person or by proxy, of the holders of a majority of the
outstanding FMI Shares at the Special Meeting is necessary to constitute a
quorum. Abstentions and broker non-voter will be treated as present with respect
to the determination of a quorum, but will be the equivalent of a no vote for
the Merger Agreement since approval of holders of a majority of the outstanding
FMI Shares is required to approve the Merger Agreement.
FMI Shares represented by properly executed proxies received in time for the
Special Meeting will be voted in the manner specified by the holders thereof.
Proxies that do not contain voting instructions will be voted FOR approval of
the Merger Agreement. The persons named as proxies will have authority to vote
for the approval of one or more adjournments of the Special Meeting to allow
additional time for the solicitation of proxies to obtain a quorum or to obtain
sufficient votes to approve and adopt the Merger Agreement.
Any shareholder has the right to revoke his or her proxy at any time prior
to the voting thereof at the Special Meeting by filing a written revocation with
the Secretary of FMI prior to the voting of such proxy, or giving a duly
executed proxy bearing a later date. Neither attendance by a shareholder at the
Special Meeting nor voting at the Special Meeting will, by itself, revoke a
proxy.
SOLICITATION OF PROXIES
FMI will bear the cost of the solicitation of proxies from its shareholders.
In addition to solicitation by mail, the directors, officers and employees of
FMI, without additional compensation, may solicit proxies by telephone,
telecopy, e-mail, telegram or in person. FMI has requested banking institutions,
brokerage firms, custodians, trustees, nominees and fiduciaries to forward
solicitation materials to the beneficial owners of FMI Shares held of record by
such entities, and FMI will, upon the request of such record holders, reimburse
reasonable forwarding expenses.
8
<PAGE>
THE MERGER
The following information, insofar as it relates to matters contained in the
Merger Agreement, is qualified in its entirety by reference to the Merger
Agreement, which is incorporated herein by reference and attached hereto as
Appendix A. Shareholders are urged to read the Merger Agreement in its entirety.
GENERAL
The Merger Agreement provides that, subject to the approval and adoption of
the Merger Agreement by FMI's shareholders, approval by certain regulatory
authorities, and compliance with certain other covenants and conditions, Merger
Sub, a wholly owned subsidiary of DESA, will be merged with and into FMI, at
which time the separate corporate existence of Merger Sub will cease and FMI
will continue as the surviving corporation or FMI will be merged with and into
DESA, at which time the separate corporate existence of FMI will cease and DESA
will continue as the surviving corporation. DESA has notified FMI that the
Merger will result in FMI merging with and into DESA. Therefore, following
consummation of the Merger, FMI's corporate existence will cease.
The closing of the transactions contemplated by the Merger Agreement (the
"Closing") will occur no later than five business days after satisfaction or
waiver of all conditions to the consummation of the Merger, including
shareholder approval thereof (the "Closing Date"). The Effective Time of the
Merger will occur upon the filing of certificates of merger and officers'
certificates with the Secretaries of State of California and Delaware.
At the Effective Time, each issued and outstanding FMI Share (other than FMI
Shares owned by DESA, which will be canceled without the payment of any Merger
Consideration) will be converted into the right to receive the Merger
Consideration. As of the Effective Time, all FMI Shares will no longer be
outstanding and will be automatically canceled and retired and will cease to
exist, and each holder of a certificate previously representing any FMI Shares
shall cease to have any rights with respect thereto, except the right to receive
the Merger Consideration, without interest. See "THE MERGER--Exchange of
Certificates for Merger Consideration."
MERGER CONSIDERATION
Pursuant to the Merger Agreement, the Merger Consideration will be an amount
equal to $7.14 in cash, subject to unlimited reduction for any outstanding
balance owed by FMI for "Indebtedness for Borrowed Money" (as defined in Article
11 of the Merger Agreement) as of the Effective Time. As of the date of this
Proxy Statement, there is no such outstanding "Indebtedness for Borrowed Money",
Management of FMI believes it currently has sufficient cash on hand to pay all
outstanding costs of the Merger and FMI expects that there will be no
"Indebtedness for Borrowed Money" outstanding at the Effective Time.
"Indebtedness for Borrowed Money" is defined in Article 11 of the Merger
Agreement as follows (capitalized terms in such definition are also defined in
such Article 11):
" 'INDEBTEDNESS FOR BORROWED MONEY' shall mean, without duplication on a
consolidated basis with its Subsidiaries, all indebtedness of the Company
(without regard to the above definition of Indebtedness) for or under any of
the following: (i) borrowed money, whether current, short-term, or long-
term, secured or unsecured, (ii) the deferred purchase price for purchases
of property (other than trade payables which are not overdue by more than 90
days), (iii) any conditional sale or other title retention agreement with
respect to property acquired, (iv) all off-balance sheet financings
including, without limitation, synthetic leases and other similar financing
arrangements, and excluding the operating leases described in Note 9 to the
most recent audited financial statements forming part of the Company
Financial Statements, (v) any payment obligations in respect of banker's
acceptances or letters of credit (other than stand-by letters of credit in
support of ordinary course trade payables), (vi) any liability with respect
to interest rate swaps, collars, caps and similar obligation, (vii) any debt
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<PAGE>
paid or prepaid since the date of this Agreement, which payment or
prepayment is a breach of the representations and warranties set forth in
SECTION 3.18(A)(III)(d), (viii) any accrued and unpaid interest or other
charges (including any contractual prepayment premiums, penalties or similar
charges resulting from the transactions contemplated hereby or the discharge
of such obligations) with respect to any of the foregoing, and (ix) all
costs or expenses incurred by the Company in connection with the
transactions contemplated hereby, including legal fees and disbursements,
and any other payments to any broker, finders, agents or similar
intermediary, which have not been paid on or before the Closing, to the
extent that the Company at the Effective Time does not have on hand cash or
cash equivalents in an amount sufficient to pay such costs and expenses."
With regard to item (i) above, while FMI has a line of credit, it has not
borrowed any sums under such line for over a year and does not expect to borrow
any funds prior to the Effective Time of the Merger. With regard to items (ii)
through (vi) above, FMI has not and does not have any such liabilities or
obligations and does not expect to have such liabilities or obligations prior to
the Effective Time. FMI also does not expect to enter into any transactions set
forth in items (vii) and (viii) above. Finally, with regard to item (ix) above,
FMI expects to pay all known unpaid costs and expenses of the Merger at the
Effective Time out of currently available cash and has been paying such costs on
an ongoing basis. If there are unknown costs and expenses as of the Effective
Time which exceed the cash or cash equivalents on hand at the Effective Time,
the Merger Agreement provides that the principal shareholders who have signed
the Merger Agreement will absorb such costs and expenses under their indemnity
provisions of the Merger Agreement to the extent such costs and expenses are not
deducted from the Merger Consideration. Payment of the Merger Consideration will
occur on the Effective Time. Also as of the Effective Time, FMI intends to pay
any known cost and expenses which have not previously been paid. The Management
of FMI believes that if there are any unpaid cost and expenses in excess of the
cash and cash equivalents on hand at the Effective Time, such amounts will not
be deducted from the Merger Consideration since such unpaid amounts will not be
known when the Merger Consideration is paid. Therefore, it is anticipated that
any unpaid cost and expenses in excess of the cash and cash equivalents as of
the Effective Time, will be paid through the indemnity arrangement. See "THE
MERGER AGREEMENT--Indemnification By and of Directors and Officers."
As a consequence, while there is no stated limits to a potential downward
adjustment of the Merger Consideration, the Management of FMI believes no
downward adjustment will occur. FMI would have to incur "Indebtedness for
Borrowed Money" of $33,267.75 for each $0.01 reduction in the Merger
Consideration or $332,677.50 per each ten cents. FMI does not intend to borrow
any funds through the Effective Time.
BACKGROUND OF THE MERGER
DESA has made purchases of FMI Shares for investment purposes since November
of 1992. Total DESA purchases of FMI Shares for 1992, 1993, 1994, 1995, 1996 and
1997 were 300 shares, 0 shares, 70,000 shares, 130,000 shares, 49,000 shares and
15,000 shares, respectively.
In 1997, FMI received unsolicited inquires as to whether or not FMI would be
for sale. After consideration, the Board of Directors on August 25, 1997
retained Management Resource Center, Inc. to assist it in the preparation of
materials to explore the possibility of the sale of FMI and the price third
parties may offer, if any, and to negotiate with potential buyers on behalf of
FMI. There is no affiliation between Management Research Center, Inc. and FMI or
its officers, directors or principal shareholders.
Management Resource Center, Inc., on behalf of FMI sent out inquires to
approximately 168 entities and then sent out information to approximately 12
entities who expressed an interest in FMI's inquiries. FMI, with the assistance
of Management Resource Center, Inc., conducted meetings with approximately six
entities and entered into preliminary negotiations with approximately four
entities. One non-binding
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<PAGE>
written offer and three non-binding oral offers, including one from DESA, were
received from December 1997 through February 1998, but all these non-binding
offers were below the Merger Consideration and below the offer being discussed
with DESA. As these efforts continued, the negotiation finally settled down with
DESA with regard to the current proposed transaction and after negotiations
between FMI and DESA, the Merger Consideration was agreed to. No other offers
equaled or exceeded the Merger Consideration.
In February 1998, FMI, DESA and the principal shareholders of FMI entered
into negotiation for a letter of intent and after several drafts and several
days of negotiations, a Letter of Intent was entered into on March 18, 1998,
which reflected the basic terms of the Merger Agreement. On March 18, 1998, the
Board of Directors approved the Letter of Intent after consulting with legal
counsel, Jeffer, Mangels, Butler & Marmaro LLP, and Management Resource Center,
Inc. In reaching such decision the Board considered the matters discussed under
"Recommendation of the Board of Directors and the Reasons Therefore," except
that Marshall & Stevens, Incorporated had not been retained to render a fairness
opinion.
The Board of Directors of FMI, Willard V. Harris, Jr., Chairman of the Board
of Directors, Willard P. Harris, President and the son of Willard V. Harris,
Jr., and John D. Hornsby, Chief Operating Officer, who are the principal
shareholders of FMI, one other principal shareholder of FMI, Benjamin C. Harris,
who is the brother if Willard V. Harris, Jr., and one other officer of FMI,
James L. Behrens, Vice President of Sales, also entered into the Letter of
Intent and agreed to vote their FMI Shares in favor of the Merger. They also
granted to DESA an option to buy their FMI Shares at $7.14 per share, subject to
the same adjustment as in the Merger Agreement. Upon execution of the Merger
Agreement, all such individuals entered into the Voting and Option Agreement
which replaced the option contained in the Letter of Intent.
The Letter of Intent provided for a cash merger at $7.14 cash per share,
subject to reduction, which was subject to certain conditions, including the
execution of a definitive merger agreement, approval by FMI's shareholders, and
receipt of requisite regulatory approvals. The Letter of Intent prohibited FMI
from continuing to solicit or engage in discussions or negotiations with third
parties concerning an acquisition of FMI. FMI issued a public announcement
following the execution of the Letter of Intent.
Following the execution of the Letter of Intent, DESA conducted a due
diligence investigation of FMI, FMI retained Marshall & Stevens, Incorporated
("Marshall & Stevens") to render an Opinion with respect to the Merger
Consideration (see "Opinion of Financial Advisor" below), and the parties
negotiated the terms of the definitive Merger Agreement. On May 13, 1998, FMI's
Board of Directors unanimously approved the Merger Agreement, which terms
reflect the Letter of Intent. This approval was given after the Board received
Marshall & Stevens' Opinion as to the fairness of the $7.14 per share to be paid
in the Merger and after a review of previous discussions concerning the matter,
consideration of alternatives to the Merger, consultation with FMI's legal
counsel, and consideration of the proposed terms and conditions of the Merger
Agreement. See "Recommendation of the Board of Directors and Reasons Therefore"
below. The Merger Agreement was executed on May 13, 1998 and FMI issued a public
announcement concerning the execution of the Merger Agreement on May 18, 1998.
The recommendation of FMI's Board of Directors with respect to the Merger
Agreement and a description of the factors considered in reaching such
recommendation, are described below under "Recommendation of the Board of
Directors and Reasons Therefor." The members of the Board of Directors may have
conflicts of interest in proposing the Merger. See "THE MERGER--Interests of
Certain Persons in the Merger."
Besides the sale of FMI, the Board of Directors also considered the
alternative of remaining a small independent public company and the possibility
of acquiring other entities.
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<PAGE>
RECOMMENDATION OF THE BOARD OF DIRECTORS AND REASONS THEREFOR
The Board of Directors has determined that the Merger and the Merger
Agreement are advisable and in the best interests of FMI and its shareholders
and has unanimously approved the Merger and the Merger Agreement. Accordingly,
the Board of Directors unanimously recommends that the shareholders vote "FOR"
approval and adoption of the Merger Agreement. FMI's directors and certain
executive officers are obligated to vote their FMI Shares for the approval and
adoption of the Merger Agreement pursuant to the Voting and Option Agreement
with DESA. As of the Record Date, FMI's directors and executive officers and
several other shareholders, all of whom have entered into or agreed to be bound
by the Voting and Option Agreement with DESA, have agreed to vote their FMI
shares (approximately 48.8% of the outstanding FMI Shares) for the Merger. See
"OWNERSHIP OF COMMON STOCK."
In reaching its conclusion to approve the Merger Agreement and recommend its
approval to the shareholders, the Board of Directors based its decision on all
of the following material reasons and considered the following factors:
(i) The Merger Consideration is substantially higher than recent market
prices for FMI Shares. The last bid and asked prices before the March 19, 1998
announcement of the Letter of Intent were $3.87 and $4.35 per FMI Share,
respectively. Accordingly, since the Board of Directors does not anticipate a
reduction of the Merger Consideration, the Board of Directors considered the
fact that the Merger Consideration of $7.14 per share represents a 84% premium
over the last bid price on March 19, 1998. At the date the Merger Agreement was
signed, the market price of the Common Stock was still below the Merger
Consideration. See "MARKET PRICES OF COMMON STOCK."
(ii) The Opinion, dated April 20, 1998, of Marshall & Stevens is that the
Merger Consideration to be received by holders of FMI Shares pursuant to the
Merger Agreement is fair to such holders from a financial point of view. The
Opinion of Marshall & Stevens assumed that the Merger Consideration was $7.14
per share. The Board of Directors has relied on such Opinion since the Opinion
valued FMI on a controlling interest basis between $21,300,000 to $21,500,000 .
The Merger Consideration is $23,750,000 less any Indebtedness for Borrowed Money
as of the Effective Time. In order to reduce the Merger Consideration by ten
cents per share FMI would have to incur $332,677.50 of Indebtedness for Borrowed
Money. Further, FMI does not intend to borrow any funds through the Effective
Time and the Board of Directors believes no adjustment of the Merger
Consideration will occur. The Board of Directors considered the Opinion as a
whole and did not weigh each individual component of the Opinion, including the
accompanying report. See "Opinion of Financial Advisor" below.
(iii) The terms and conditions of the Merger Agreement, including the fact
that it is not conditioned on the receipt of financing, and there is no set
break-up fee.
(iv) During the approximately nine-week period between the public
announcement of signing the Letter of Intent with DESA on March 19, 1998, and
entering into the Merger Agreement on May 13, 1998, FMI had received no
unsolicited third party offers to acquire FMI. Prior to entering into the Letter
of Intent with DESA, FMI actively solicited third party bids for the purchase of
FMI, entered into limited negotiations with others and made clear that it would
consider alternative offers. Nevertheless, no third party has offered a price
equal to or greater than $7.14 per share.
(v) The alternative of remaining an independent company or acquiring other
companies. In this regard, the Board of Directors considered FMI's business
prospects as an independent company in a very competitive market, including the
capital and management resources necessary to accomplish long-term growth, and
concluded that the Merger would be preferable to remaining independent, given
the limited financial resources of FMI. Further, since the Common Stock of FMI
is only thinly traded on the Electronic Bulletin Board, a viable market for said
Common Stock really does not exist. Therefore, the yearly cost of being a
publicly-traded company has not produced a viable market for the Common Stock, a
principal reason for remaining a public company. Finally, the Board of Directors
also considered that FMI,
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<PAGE>
as an independent entity, has never paid and is unlikely in the future to pay
cash dividends. With regard to the possible acquisition of other entities, the
limited financial resources of FMI and the lack of an active trading market for
the Common Stock greatly reduced the ability of the Company to acquire larger
entities for cash, notes or Common Stock or any combination thereof.
Members of the Board of Directors have interests in connection with the
Merger which are in addition to those of other stockholders which could result
in conflicts of interest in the Board of Directors' approval of the Merger. See
"THE MERGER--Interests of Certain Persons in the Merger" and "THE MERGER
AGREEMENT--Indemnification by and of Directors and Officers."
OPINION OF FINANCIAL ADVISOR
FMI engaged Marshall & Stevens in April, 1998, after the Merger
Consideration was determined and the Letter of Intent was signed, to render an
Opinion as to the fairness, from a financial point of view, to the holders of
FMI Shares of the consideration to be received by them pursuant to the Merger
Agreement. Marshall & Stevens was retained on the basis of its qualifications,
expertise and reputation. Marshall & Stevens is a nationally recognized
professional appraisal and valuation consulting firm engaged in providing
appraisal and valuation services in connection with business entities, land and
improvements thereon, leasehold interests, intangible assets, equipment and
other assets. Marshall & Stevens has no material prior relationship with FMI,
DESA or any of the parties to this transaction.
As compensation for its services, FMI has agreed to pay Marshall & Stevens a
fee of $34,500 plus out-of-pocket expenses of $1,800. No portion of Marshall &
Stevens' fees were contingent upon the successful completion of the Merger or
any related transaction.
Marshall & Stevens used several methodologies to assess the fairness of the
Merger Consideration from a financial point of view. Using these methodologies
Marshall & Stevens arrived at an estimate as to the value of the FMI Shares
which provided a basis of comparison to the Merger Consideration. The following
is a summary of the financial analyses utilized by Marshall & Stevens, and does
not purport to be a complete description of the analyses performed by Marshall &
Stevens.
The summary set forth below describes the material points of the analyses
performed by Marshall & Stevens in arriving at its fairness Opinion. The
preparation of a fairness Opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and application of those methods to the particular
circumstances and is therefore not readily susceptible to summary description.
Accordingly, Marshall & Stevens believes that its analyses and the summary set
forth herein must be considered as a whole and that selecting only portions of
its analyses could create a misleading view of the Opinion. Marshall & Stevens
has advised FMI that in its analyses, Marshall & Stevens made numerous
assumptions with respect to FMI, including industry performance, general
business, economic, market and financial conditions and other matters, many of
which are beyond the control of FMI. The estimates contained in such analyses
are not necessarily indicative of actual values or predictive of future results
or values, which may be more or less favorable than suggested by such analyses.
Additionally, analyses relating to the value of businesses or securities are not
appraisals. Accordingly, such analyses and estimates are inherently subject to
substantial uncertainty.
The analyses made in conjunction with Marshall & Stevens's Opinion included
those factors and considerations specified in IRS Revenue Ruling 59-60. This
Ruling is most commonly prescribed as a guide for the valuation of closely held
businesses and securities. For all analyses, all multiples and data used was
available for each company or transaction.
SELECTED COMPARABLE COMPANY ANALYSIS. The comparable company analysis
requires that an analysis be made of publicly traded companies considered
comparable to the appraised company with regard to industry, performance, and/or
markets exploited. This analysis is predicated on the theory that the market
value of a closely held (thinly traded) company, as set forth below, can be
estimated by deriving market
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multiples from publicly traded companies that relate their stock prices to
earnings, cash flows, or other measures and then applying these market multiples
to the respective earnings, cash flows, or other measures of a closely held
(thinly traded) company.
Marshall & Stevens conducted a search of Moody's database of over 15,000
publicly traded companies to determine if any could be utilized in its analysis
and also considered the competitors listed in the confidential memorandum,
prepared by Management Resource Center, Inc. After screening applicable SIC
codes and other relevant criteria, Marshall & Stevens selected public companies
that most closely resembled FMI in terms of lines of business and markets
served. While this screening process did not provide any public companies that
were identical in all respects to FMI, it did provide the following companies
that were sufficiently comparable to be considered alternative investment
possibilities making them useful benchmarks for valuation purposes as follows:
- HON Industries
- Martin Industries, Inc.
- Mestek, Inc.
- Modine Manufacturing Company
- Temtex Industries, Inc.
Marshall & Stevens computed market value of multiples of invested
capital-to-revenue and earnings before interest taxes, depreciation and
amortization ("EBITDA") of the above public companies and applied these
multiples to the corresponding revenue and earnings measures for FMI based on
the latest fiscal year (March 31, 1997) and 3-year weighted average. Marshall &
Stevens utilized these invested capital multiples (also referred to as debt-free
multiples) because they permitted it to value FMI irrespective of the variations
inherent in its capital structure and income tax rates as compared to the public
companies.
The ranges and median of the multiples from such analysis are as follows:
<TABLE>
<CAPTION>
HIGH LOW MEDIAN
--------- --------- -----------
<S> <C> <C> <C>
Invested capital to revenue
--last fiscal year................................................. 2.09 0.43 0.78
--three-year weighted average...................................... 2.23 0.42 0.85
Invested capital to EBITDA
--last fiscal year................................................. 16.30 8.00 8.20
--three-year weighted average...................................... 18.40 8.40 6.40
</TABLE>
Marshall & Stevens further considered the difference in multiples paid for
public companies versus private companies. Historically, publicly traded
companies tend to be larger, more sophisticated with solid market shares and
often strong public identities, so they are more likely to command
correspondingly higher multiples. Since the Common Stock of FMI is thinly
traded, it shares some characteristics with private companies with regard to
limited identity and market shares. Marshall & Stevens therefore chose multiples
near or below the median range to apply to the corresponding financial measures
for FMI. These multiples were chosen after giving consideration to FMI's size,
diversification, financial condition and performance relative to Temtex
Industries, Inc. and Martin Industries, Inc., companies which more closely
resemble the characteristics of FMI than the other companies set forth above,
with regards to line of business (limited diversification), size of assets and
revenue bases, cost of sales margins, EBITDA margins and the fact that both
exhibited negative revenue growth. The other companies had asset and revenue
bases in excess of $100,000,000 ($1.0 billion in case of HON Industries and
Modine Manufacturing Company), positive revenue growth and better margins (due
mainly to diversified operations).
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<PAGE>
After multiplying the respective revenue and earnings measures of FMI by the
selected multiples and then subtracting any interest-bearing debt, Marshall &
Stevens generated a preliminary indicated equity value, which represents the
aggregate minority value (minority interests traded in the public marketplace)
of FMI before estimated closing costs.
Because Marshall & Stevens was valuing FMI on a controlling basis, the
preceding preliminary minority value was adjusted to reflect control. Market
data demonstrated that investors who seek to acquire controlling interests in
publicly traded companies in order to set company policies and direct operations
pay prices higher than investors trading minority shareholdings in the public
marketplace.
In order to derive the appropriate control premium, Marshall & Stevens
reviewed recent tender offers for acquisitions of either controlling interests
in or total ownership of public companies considered comparable to FMI with
regard to such factors as industry classification and the dollar value of the
tender offers as reported in MERGERSTAT REVIEW. This publication compiles, on an
annual basis, extensive statistics on publicly announced transactions based upon
the size of tender offers, industry classifications and total annual disclosed
transactions. Marshall & Stevens did not review specific individual tender
offers of the selected comparable companies, but instead relied upon the
aggregate statistics as presented in MERGERSTAT REVIEW.
In Marshall & Stevens's selection of the control premium, it also considered
that its adjustments to normalize FMI's historical earnings were not made to the
aforementioned public companies. Based on the above-mentioned factors and
additional information contained in its report accompanying the Opinion,
Marshall & Stevens selected 15% as the appropriate control premium.
The estimated closing costs consider the cost associated with selling either
the entire company or a significant percentage thereof. These costs include
attorney's fees, filing fees, accounting fees, and brokerage commissions. A
reasonable range for this cost is 5% to 15%, depending on the size and
desirability of the subject company and/or the underlying interest. Business
brokers, who typically sell businesses, usually charge 10% to 12% or a modified
Lehman scale. With regards to FMI, Marshall & Stevens was supplied with the
actual anticipated costs of $602,500 by Management.
After considering estimated closing costs, the indicated market value of the
shareholders' equity of FMI on a controlling interest basis, as of April 20,
1998 was determined to be $22,600,000.
COMPARABLE TRANSACTION ANALYSIS. The comparable transaction analysis is
predicated on the theory that the market value of a privately held company can
be estimated by mathematically relating the sale price for acquisitions of
comparable publicly traded companies to ratios of their earnings, revenues,
and/or other measures. Marshall & Stevens researched acquisitions of comparable
publicly traded United States companies, selected on the criteria set forth
above for the selected comparable company analysis, for which information was
available and analyzed the implied transaction and purchase price multiple paid
or proposed to be paid in the following transactions and/or speculative
transactions from 1995 to April 20, 1998:
- Heat-N-Glo Fireplace Products, Inc./HON Industries, Inc.
- Ohmstede, Inc./Sir Cure Technologies, Inc.
- Majestic Products Company/CFM
Such compared transaction occurred between September 1995 and October 1996
and involved transactions from approximately $52,000,000 to $76,000,000 and
price/revenue multiples from $0.581 to $0.968, or an average of $0.80. These
transactions represent all those comparable companies that actually engaged in
an acquisition transaction.
After considering estimated closing costs, the indicated market value of the
shareholders' equity of FMI, on a controlling interest basis, as of April 20,
1998, was determined to be $22,500,000.
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<PAGE>
DISCOUNTED CASH FLOW ANALYSIS. Marshall & Stevens performed a discounted
cash flow analysis of projected net debt-free cash flow ("EBIT" less taxes,
capital expenditures, changes in working capital and plus noncash charges) of
FMI (normalized by Management) for the fiscal years 1999 through 2003 based on
certain operating and financial assumptions provided by Management. This cash
flow was discounted and summed at a discount rate assumption of 15% based on the
weighted average cost of capital for FMI--the cost of debt and equity, the
capital structure and the cumulative federal and state tax rates. Marshall &
Stevens then added the residual year (year beyond the discrete projection time
period to reflect the going concern value of FMI into perpetuity) to derive a
present value. From this present value, Marshall & Stevens subtracted the
interest-bearing debt, if any, to arrive at an equity value.
The operating projections, which are based on FMI remaining independent, are
summarized as follows:
NET DEBT FREE CASH FLOW PROJECTIONS
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------------------------------
($000S) 1999 2000 2001 2002 2003
- --------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues............................... $ 31,612 $ 36,515 $ 40,167 $ 44,184 $ 46,393
--------- --------- --------- --------- ---------
EBIT................................... 3,082 3,775 4,046 4,481 4,725
--------- --------- --------- --------- ---------
Net debt-free cash flow................ 1,597 1,922 2,172 2,407 2,680
--------- --------- --------- --------- ---------
</TABLE>
The above projections are forward-looking information developed by the
Management of FMI. Therefore, the projections and the Opinion are heavily
dependent upon future events with respect to industry performance, economic
conditions, and the ability of FMI to meet such operating projections. The
projections incorporate various assumptions including, but not limited to, net
sales, net sales growth, profit margins, income taxes, depreciation, capital
expenditures, working capital levels, and discount rates, all of which are
critical to the Opinion. Further, the projections reflects an overall
significant increase in earnings when compared to historical operations. While
Management of FMI and Marshall & Stevens deemed such projections to be
reasonable and valid at the date of the Opinion, there is no assurance or
implied guarantee that the assumed facts will be validated or that the
circumstances will actually occur.
After considering estimated closing costs, the indicated market value of the
shareholders' equity of FMI, on a controlling interest basis, as of April 20,
1998 was determined to be $20,400,000.
RECAPITULATION.
<TABLE>
<CAPTION>
ANALYSIS MARKET VALUE
- ------------------------------------------------------------------------------- -------------
<S> <C>
Selected Comparable Company.................................................... $ 22,600,000
Comparable Transaction......................................................... 22,500,000
Discounted Cash Flow........................................................... 20,400,000
</TABLE>
In deriving a final conclusion, Marshall & Stevens reconciled the value
indications by weighting their relative significance depending upon the
circumstances and the quantity of reliable market data. The selected comparable
company analysis reflects the consensus of many investors relative to the
historical profitability of public companies considered comparable to FMI. The
comparable transaction analysis reflects actual market transactions within the
industry in the merger and acquisition marketplace, but reflected transactions
from 1995 to 1996, which were not proximate to the Opinion date. The discounted
cash flow analysis considers the future profit potential coupled with the
riskiness of that return, and avoids the difficulty in identifying public
companies considered comparable to FMI. In Marshall & Stevens's analyses, it
applied various sensitivity weightings to the analyses with the least weight
applied to the
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<PAGE>
comparable transaction analysis since the transactions involved date back to
1995 and 1996 and the multiples derived from this analysis may have included
synergistic and strategic motivations to the buyers.
The weight given by Marshall & Stevens to the analysis is as follows:
<TABLE>
<CAPTION>
RANGE OF VALUES
DETERMINED BY SELECTED COMPARABLE COMPARABLE DISCOUNTED CASH
MARSHALL & STEVENS COMPANY ANALYSIS TRANSACTION ANALYSIS FLOW ANALYSIS
- ------------------ ----------------------- ----------------------- ---------------------
<S> <C> <C> <C>
$ 21,500,000 40% 10% 50%
21,300,000 30% 10% 60%
</TABLE>
The trading price analysis discussed below was not used since Marshall &
Stevens viewed such analysis as a reasonableness check on the other analyses.
TRADING STOCK PRICE ANALYSIS. Marshall & Stevens also considered the stock
trading price of $5.75 as of April 17, 1998 (the most currently available
trading price as of the Opinion date) which represents the aggregate minority
interest in FMI. Because Marshall & Stevens was valuing FMI on a controlling
basis, the preceding preliminary aggregate minority value must be adjusted to
reflect control as discussed in the previous "Selected Comparable Company
Analysis." In Marshall & Stevens's selection of the control premium, it also
considered the announcement of the potential sale of FMI as resulting in an
upward intrinsic adjustment to value, when noting that the Common Stock of FMI
was trading within a range of $4.00 to a low $3.50 per share for the 30-day
trading period prior to the public announcement date (March 19, 1998).
Based on these factors, Marshall & Stevens selected 15% as the appropriate
control premium. After considering estimated closing costs, the indicated market
value of the shareholders' equity of FMI, on a controlling interest basis, as of
April 20, 1998, was determined to be $21,400,000.
SUMMARY. Based on the information and analyses summarized in Marshall &
Stevens's Opinion and its various sensitivity weightings Marshall & Stevens
determined, the market value of the shareholders' equity of Fireplace
Manufacturers, Inc., on a controlling interest basis, as of April 20, 1998,
ranged from $21,300,000 to $21,500,000.
Marshall & Stevens delivered a written Opinion to FMI's Board of Directors
on April 20, 1998, to the effect that, as of such date, and based upon the
assumptions made, general procedures followed, factors considered and
limitations on the review undertaken as set forth in such Opinion, the Merger
Consideration is fair to such shareholders from a financial point of view.
References herein to the "Opinion" refer to the written Opinion of Marshall &
Stevens dated April 20, 1998. Marshall & Stevens also accompanied the Opinion
with a detailed report, which is summarized above. The Opinion and the other
information regarding Marshall & Stevens have been included herein with the
consent of Marshall & Stevens.
The full text of the Opinion, which sets forth the assumptions made, general
procedures followed, factors considered and limitations on the review undertaken
by Marshall & Stevens in rendering its Opinion is attached as Appendix B and is
incorporated herein by reference. The Opinion is directed only to the fairness
from a financial point of view of the Merger Consideration to be received by the
FMI shareholders pursuant to the Merger Agreement and does not constitute a
recommendation to any shareholder as to how such shareholder should vote with
respect to the Merger Agreement and the transactions contemplated thereby. The
summary of the Opinion and the report set forth in this Proxy Statement is
qualified in its entirety by reference to the full text of the Opinion and
accompanying report. Shareholders are urged to, and should read the Opinion and
the report in their entirety. For copies of the entire Opinion and report,
please contact Corporate Secretary, Fireplace Manufacturers, Inc., 2701 South
Harbor Boulevard, Santa Ana, California 92704.
OTHER INFORMATION. In connection with the Opinion, Marshall & Stevens made
such reviews, analyses and inquiries as it deemed necessary and appropriate
under the circumstances. Among other things,
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<PAGE>
Marshall & Stevens: (i) inspected the audited financial statements for the four
fiscal years ended between March 31, 1994 and 1997 and internally prepared
financial statements for the year ended March 31, 1998, which FMI's management
identified as being the most current financial statements available(1); (ii)
inspected copies of the following documents and agreements: Letter of Intent
between DESA and FMI dated March 19, 1998, a draft Agreement and Plan of Merger
between DESA and FMI dated March 27, 1998, drafts of the Non-Competition
Agreement for Willard V. Harris, Jr., Willard P. Harris, John D. Hornsby and
James L. Behrens, dated April 2, 1998, drafts of Employment Agreements with
Willard P. Harris and John D. Hornsby, dated April 2, 1998 in the form provided
to Marshall & Stevens and assumed that the final executed form of such
agreements would not vary in any regard that is material to their analysis;
(iii) met with certain members of the senior management of FMI to discuss the
operations, financial condition, future prospects and projected operations and
performance of FMI, and talked with representatives of FMI's independent
accounting firm and counsel to discuss certain matters; (iv) visited the
facilities and business offices of FMI; (v) reviewed internal, non-public
financial and operating data provided by FMI, including forecasts and
projections prepared by FMI's management with respect to FMI for the year ended
March 31, 1998; (vi) reviewed the historical market prices and trading volume
for FMI's publicly traded securities; (vii) reviewed certain other publicly
available financial data for certain companies that Marshall & Stevens deemed
comparable to FMI, and publicly available prices and premiums paid in other
transactions that Marshall & Stevens considered similar to the Merger; (viii)
reviewed one written(2) offer for FMI; and (ix) conducted such other studies,
analyses and inquiries as Marshall & Stevens deemed appropriate, including those
described above.
Marshall & Stevens did not and was not engaged or requested to initiate any
discussions with third parties or to solicit any third-party indications with
respect to a possible acquisition of FMI. Furthermore, Marshall & Stevens did
not and was not requested to negotiate the terms of the Merger Agreement or to
advise FMI with respect to alternatives with respect to the Merger, and Marshall
& Stevens did not make any recommendations as to the form or amount of
consideration to be paid. The terms of the Merger and Merger Agreement,
including the form and amount of consideration, were determined on the basis of
arm's-length negotiations between FMI and DESA.
In arriving at its Opinion, Marshall & Stevens made its determination as to
the fairness, from a financial point of view, of the Merger Consideration on the
basis of the analyses described above. No restrictions or limitations were
imposed by FMI upon Marshall & Stevens with respect to the investigation made or
the procedures followed in rendering its Opinion. Marshall & Stevens' Opinion is
not intended to be and does not constitute a recommendation to any shareholder
as to whether to accept the consideration to be received by such FMI shareholder
in connection with the Merger Agreement.
The Opinion of Marshall & Stevens assumes that the Merger Consideration is
$7.14 per share. The Board of Directors of FMI relied on such Opinion since the
Opinion valued FMI on a controlling interest basis between $21,300,000 to
$21,500,000 while the Merger Consideration is $23,750,000 less any Indebtedness
for Borrowed Money as of the Effective Time. Therefore, to reduce the Merger
Consideration by ten cents per share. FMI would have to incur $332,677.50 of
"Indebtedness for Borrowed Money." Further, FMI does not intend to borrow and
funds through the Effective Time and the Board of Directors believes no
adjustment of the Merger Consideration will occur as of the Effective Time.
Finally, unless the Merger Consideration was reduced to less than $21,300,000,
the Opinion would consider the Merger Consideration fair.
- ------------------------
(1) Management of FMI believes that there were no material differences between
these internally prepared projected financial statements for the year ended
March 31, 1998 and the actual financial statements for such fiscal year
included herein.
(2) The written offer was from Lennox Industries, Inc. and is referred to in the
Opinion.
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<PAGE>
EXCHANGE OF CERTIFICATES FOR MERGER CONSIDERATION
On the Closing Date, DESA will deposit with The Bank of New York (the
"Paying Agent") a cash amount equal to the aggregate of the Merger Consideration
for the FMI Shares pursuant to the Merger Agreement. As soon as practicable
after the Effective Time, the Paying Agent will mail to each holder of record of
FMI Shares entitled to receive the Merger Consideration a letter of transmittal
with instructions for the surrender of certificates representing such securities
in exchange for the Merger Consideration. Upon surrender of such certificates
together with the duly completed and executed letter of transmittal and such
other documents as the Paying Agent may reasonably require, the Paying Agent
will deliver the Merger Consideration payable with respect to such FMI shares in
accordance with the instructions in the letter of transmittal. No interest will
be paid or will accrue on the cash payable upon the surrender of any
certificates for FMI Shares.
In order to avoid "backup withholding" of Federal income tax on payments of
cash pursuant to the Merger, a shareholder surrendering FMI Shares in the Merger
must, unless an exemption applies, provide the Paying Agent with such
shareholder's correct taxpayer identification number ("TIN") on a Substitute
Form W-9 and certify under penalty of perjury that such TIN is correct and that
such shareholder is not subject to backup withholding. If a shareholder does not
provide its correct TIN or fails to provide the certifications described above,
the Internal Revenue Service ("IRS") may impose a penalty on such shareholder
and payment of cash to such shareholder pursuant to the Merger may be subject to
backup withholding of 31%. All shareholders surrendering FMI Shares pursuant to
the Merger should complete and sign the main signature form and the Substitute
Form W-9 included as part of the letter or transmittal to be sent after the
Merger to provide the information and certification necessary to avoid backup
withholding (unless an applicable exemption exists and is proven in a manner
satisfactory to FMI and the Paying Agent). Certain shareholders (including,
among others, all corporations and certain foreign individuals and entities) are
not subject to backup withholding. After the Merger, noncorporate foreign
shareholders should complete and sign a Form W-8, Certificate of Foreign Status,
a copy of which may be obtained from the Paying Agent, in order to avoid backup
withholding.
There will be no further transfers of FMI Shares on the transfer books of
FMI after the Effective Time.
Any portion of the Merger Consideration which remains undistributed six
months after the Payment Date will be returned to DESA as the surviving
corporation and holders of FMI Shares may thereafter look only to DESA for the
payment of the Merger Consideration. If any certificates for FMI Shares have not
been surrendered prior to six years after the Payment Date (or immediately prior
to such earlier date on which any payment in respect thereof would otherwise
escheat to or become the property of any governmental entity), the Merger
Consideration payable in respect of such certificates will, to the extent
permitted by applicable law, become the property of the surviving corporation,
free and clear of all claims or interests of any person previously entitled
thereto.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board of Directors with respect to
the approval and adoption of the Merger Agreement and the transactions
contemplated thereby, FMI shareholders should be aware that certain directors
and executive officers of FMI have certain interests in the Merger that are
different from, or in addition to, the interests of FMI's shareholders
generally.
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<PAGE>
As contemplated by the Merger Agreement, FMI's Board of Directors has taken
action to cause all outstanding stock options to purchase FMI Shares to be
canceled as of the Effective Time, as detailed herein:
<TABLE>
<CAPTION>
NAME(1) NUMBER OF OPTIONS EXERCISE PRICE
- ----------------------------------------------------------- ------------------ ---------------
<S> <C> <C>
Willard V. Harris, Jr.(2).................................. 250,000 $ 2.88
Willard P. Harris(2)....................................... 250,000 2.88
John D. Hornsby(2)......................................... 250,000 2.88
James L. Behrens(2)........................................ 50,000 2.88
Jane Iovine(3)............................................. 25,000 2.88
Gerrardo Lozano(3)......................................... 10,000 2.88
</TABLE>
- ------------------------
(1) For positions with FMI, see "DIRECTORS AND EXECUTIVE OFFICERS."
(2) All the options held by such individuals will be canceled for $1.00 in the
aggregate per person.
(3) Each of the options held by such individual will be canceled for the Merger
Consideration per share less $2.88 per share for each vested share
underlying the options (5,000 shares for Ms. Iovine and 2,000 shares for Mr.
Lozano).
The Merger Agreement, as amended by Amendment No. 2, provides that at the
Effective Time, Willard V. Harris, Jr., Benjamin C. Harris, Willard P. Harris,
John D. Hornsby and James L. Behrens will enter into three year non-competition
agreements with DESA and will receive at the Effective Time pursuant to such
agreements $517,500, $382,500, $950,000, $950,000 and $250,000, respectively.
Further, Willard P. Harris and John D. Hornsby will enter into new three year
employment agreements with DESA effective on the Effective Time that provide
yearly compensation of $200,000 for the first year and $250,000 thereafter.
James Behrens and the other officers of FMI will be employed by FMI as a
division of DESA, the surviving corporation. Immediately prior to the Merger,
all existing employment agreements of the executive officers of FMI will
terminate.
In connection with the Merger Agreement, Willard V. Harris, Jr., Benjamin C.
Harris, Willard P. Harris, John D. Hornsby and James L. Behrens and certain
affiliates entered into a Voting and Option Agreement with DESA which provides
that such persons will vote their FMI Shares for the Merger Agreement and
against any competing transaction and grants DESA an irrevocable proxy to vote
such shares for such purposes. The Voting and Option Agreement also granted DESA
an option to purchase the FMI Shares and stock options held by such persons
exercisable at the same price as provided in the Merger Agreement for the FMI
Shares and such price less the exercise price for the stock options if (i) in
the event of a material breach of the Merger Agreement by FMI or any
shareholders of FMI who is a party to the Merger Agreement that has not been
cured, or if any representation or warranty of FMI or such shareholders shall
have become untrue in a material respect, which in either case prevents the
Merger or delays the Merger beyond September 30, 1998: (ii) the Board of
Directors of FMI withdraws or modifies its recommendation regarding the Merger
in a manner adverse to DESA; (iii) FMI, the Board of Directors of FMI or such
shareholders take any action regarding an Acquisition Transaction in
contravention of the Merger Agreement; (iv) FMI or its Board of Directors
supplies any non-public information or enters into discussion or negotiations
with a third party in connection with an unsolicited proposal regarding an
Acquisition Transaction; or (v) any shareholder of FMI who is a party to the
Voting and Option Agreement does not vote for the Merger. If DESA exercises such
option it must also enter into the non-competition agreements discussed above.
The Voting and Option Agreement terminates automatically if not exercised within
120 days after the date of such Voting and Option Agreement (May 13, 1998) and
the expiration of the requisite governmental waiting period under the
Hart-Scott-Rodino Antitrust Improvement Act of 1976 has expired (which waiting
period has expired), and in any event will terminate if not exercised within 180
days of May 13, 1998.
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<PAGE>
The Merger Agreement provides that for a period of at least three years from
the Effective Time, DESA will indemnify FMI's directors and officers in
accordance with and subject to the provisions of FMI's Articles of Incorporation
and Bylaws as in effect prior to execution of the Merger Agreement. See "THE
MERGER AGREEMENT--Indemnification of Directors and Officers."
Finally, Willard V. Harris, Jr. and Benjamin C. Harris will purchase from
FMI at the Effective Time for $25,000, FMI's limited partnership interests in
California Real Estates Partners, a California Limited Partnership in which
Benjamin C. Harris is the general partner. Such partnership interest is carried
on the books of the Company at no value and owns an apartment complex in Orange
County, California in which it is estimated that the mortgages exceed the fair
market value of such apartment complex.
See "The MERGER--Indemnification by and of Directors and Executive Officers"
for the indemnification obligations to DESA of the principal shareholders of
FMI.
No officer or director of FMI will receive any equity interest in DESA as of
the Effective Time and there are no arrangements for any such persons to acquire
any such equity interests after the Effective Time.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a summary of material United States federal income tax
consequences of the Merger. EACH HOLDER OF FMI SHARES IS URGED TO CONSULT A TAX
ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES OF THE MERGER, INCLUDING THE
EFFECTS OF APPLICABLE STATE, LOCAL OR OTHER TAX LAWS.
The receipt of cash in exchange for FMI Shares pursuant to the Merger will
constitute a taxable transaction for Federal income tax purposes under the
Internal Revenue Code of 1986, as amended (the "Code"), and may also constitute
a taxable transaction under applicable state, local, foreign and other tax laws.
As a result, a holder of FMI Shares will generally recognize gain or loss for
Federal income tax purposes in an amount equal to the difference between the
amount of cash received by the shareholder pursuant to the Merger and such
shareholder's aggregate adjusted tax basis in the FMI Shares. Gain or loss will
be calculated separately for each block of FMI Shares exchanged pursuant to the
Merger. If the FMI Shares are held as capital assets (within the meaning of
Section 1221 of the Code), any gain or loss recognized by the holder of such FMI
Shares will constitute capital gain or loss, and will constitute long-term
capital gain or loss if the securities were held for more than 12 months as of
the date of disposition.
For noncorporate shareholders, long-term capital gain generally will be
subject to Federal income tax at a maximum rate of 28% if the underlying
securities have been held for more than 12 months but not more than 18 months as
of the date of disposition. If the underlying securities have been held for more
than 18 months as of the date of disposition, however, any long-term capital
gain recognized by a noncorporate shareholder generally will be subject to
Federal income tax at a maximum rate of 20%. There are limits on the
deductibility of losses.
A shareholder (other than certain exempt shareholders including, among
others, all corporations and certain foreign individuals) that exchanges
securities may be subject to backup withholding at a rate of 31% unless the
shareholder provides its correct TIN (or certifies that it is awaiting a TIN)
and certifies as to no loss of exemption from backup withholding and otherwise
complies with the applicable requirements of the backup withholding rules. A
shareholder that does not furnish its correct TIN in the prescribed manner or
that does not otherwise establish a basis for an exemption from backup
withholding may be subject to a penalty imposed by the IRS, and gross proceeds
of the Merger payable to such shareholder may be subject to backup withholding
at a rate of 31%. Each shareholder should complete and sign the Substitute Form
W-9 to be included as part of the letter of transmittal which will be sent after
the Merger so as to provide the information and certification necessary to avoid
backup withholding.
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<PAGE>
If backup withholding applies to a shareholder, the Paying Agent is required
to withhold 31% from payments to such shareholder. Backup withholding is not an
additional tax. Rather, the amount of the backup withholding can be credited
against the Federal income tax liability of the person subject to the backup
withholding, provided that the required information is given to the IRS. If
backup withholding results in an overpayment of tax, a refund can be obtained by
the shareholder upon filing an income tax return.
THE FOREGOING DISCUSSION MAY NOT BE APPLICABLE WITH RESPECT TO HOLDERS WHO
RECEIVED THEIR FMI SHARES PURSUANT TO THE EXERCISE OF EMPLOYEE STOCK OPTIONS OR
OTHERWISE AS COMPENSATION OR WITH RESPECT TO HOLDERS OF SHARES WHO ARE SUBJECT
TO SPECIAL TAX TREATMENT UNDER THE CODE, SUCH AS NON-U.S. PERSONS, LIFE
INSURANCE COMPANIES, TAX-EXEMPT ORGANIZATIONS AND FINANCIAL INSTITUTIONS, AND
MAY NOT APPLY TO A HOLDER OF SHARES IN LIGHT OF ITS INDIVIDUAL CIRCUMSTANCES.
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE
PARTICULAR TAX CONSEQUENCES TO THEM (INCLUDING THE APPLICATION AND EFFECT OF ANY
STATE, LOCAL OR FOREIGN INCOME AND OTHER TAX LAWS) OF THE MERGER.
THE MERGER AGREEMENT
The following summary of the Merger Agreement does not purport to be
complete and is qualified in its entirety by reference to the Merger Agreement,
which is incorporated herein by reference and attached hereto as Appendix A, but
is intended to summarize the material terms thereof. The Merger Agreement was
entered into by and among FMI, DESA, Merger Sub, Willard V. Harris, Jr.,
Benjamin C. Harris, Willard P. Harris and John D. Hornsby. Shareholders are
urged to read the Merger Agreement in its entirety.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of the
parties thereto, including representations and warranties by each of FMI, DESA
and Merger Sub as to, among other things: (i) their corporate organization,
standing and power; (ii) the authorization, execution, delivery, performance and
enforceability of the Merger Agreement and related matters; and (iii) the Merger
Agreement's non-contravention of any agreement, law, charter or bylaw provision
of such party and the absence of the need (except as specified) for governmental
or third party consents to the Merger. In addition, the Merger Agreement
includes representations and warranties by FMI Shares as to, among other things:
(i) the capitalization of FMI; (ii) the interest of FMI in other entities; (iii)
the accuracy of FMI's financial statements; (iv) the absence of certain
undisclosed liabilities; (v) the conduct of the business of FMI in the ordinary
and usual course and the absence of any material adverse change in the financial
condition, assets, liabilities or business of FMI since March 31, 1997 or
December 31, 1997; (vi) certain tax matters; (vii) the terms, existence,
operations, liabilities and compliance with applicable laws of FMI's benefit
plans and certain other matters relating to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"); (viii) the absence of pending or
threatened litigation, except as disclosed; (ix) certain contracts and
commitments; (x) ownership of and rights to use certain intellectual property;
(xi) the nature and existence of liens, insurance, personal property and real
property of FMI; (xii) possession of required governmental permits and
compliance with applicable laws, including environmental laws and related
matters; (xiii) product warranty and safety matters; and (xiv) the accuracy of
information supplied by FMI for inclusion in this proxy statement.
EFFECT ON STOCK OPTIONS
As of the Record Date, FMI had outstanding options to purchase an aggregate
of 835,000 FMI Shares, all of which will be canceled on the Effective Time. FMI
has obtained from each holder of such
22
<PAGE>
options an agreement to cancel his or her options immediately prior to the
Effective Time for the aggregate consideration of $28,823 as explained in "THE
MERGER--Interests of Certain Persons in the Merger."
NO SOLICITATION
FMI has agreed that, without the prior written consent of DESA, prior to the
Effective Time, FMI will not initiate the direct and active solicitation of any
other party (other than DESA and Merger Sub) for a proposal that such other
party merge with, consolidate, or acquire the capital stock or substantially all
of the assets of FMI or any of its subsidiaries (an "Acquisition Transaction");
provided, however, that if FMI, without direct and active solicitation, receives
from any other party (other than DESA or Merger Sub) a proposal with respect to
an Acquisition Transaction, then FMI shall be entitled to respond thereto in all
appropriate ways consistent with the fiduciary duties of the directors of FMI if
a majority of the Board of Directors determines in good faith by a majority
vote, after consultation with its financial advisor, that such proposal results
in a transaction more favorable than the Merger and if counsel has advised in
writing that the failing to take such action would likely result in a breach of
the Board of Directors' fiduciary duties under applicable law. FMI has also
agreed to advise DESA of the receipt by it of any proposal from any other party
concerning an unsolicited proposal.
INDEMNIFICATION BY AND OF DIRECTORS AND OFFICERS
Willard V. Harris, Jr., Benjamin C. Harris, Willard P. Harris and John D.
Hornsby have each agreed to jointly and severally indemnify DESA (except with
respect to representations and warranties as each individual's ownership of FMI
Shares which indemnity is several) for breaches of the representations and
warranties of the Company in the Merger Agreement for any losses above $200,000
and with a maximum liability of $1,750,000 in the aggregate, plus an additional
$750,000 for environmental matters. Such individuals have agreed to indemnify
and hold harmless DESA for their respective representations and warranties in
the Merger Agreement and, along with James Behrens, the Voting and Option
Agreement. In general under the Merger Agreement the Company's representations
and warranties survive for one year from the Effective Time, except for certain
provisions such as capitalization, taxes and ERISA, which survive until the
applicable statute of limitations expires and environmental matters which
survive for three years from the Effective Time but the additional $750,000
liability for environmental matters will expire, in general, no later than two
years after the Effective Time. The individual representations and warranties
regarding ownership of their respective FMI Shares survive forever.
Willard V. Harris, Jr., Benjamin C. Harris, Willard P. Harris and John D.
Hornsby have also agreed to indemnify DESA for any "Indebtedness for Borrowed
Money" which results from unpaid costs and expenses of the Merger incurred by
FMI which were not paid as of the Effective Time and for which unpaid costs and
expenses as of the Effective Time exceeded FMI's cash or cash equivalents on
hand as of the Effective Time to the extent such costs and expenses are not
deducted from the Merger Consideration. Payment of the Merger Consideration will
occur on the Effective Time. Also as of the Effective Time, FMI intends to pay
any known cost and expenses which have not previously been paid. The Management
of FMI believes that if there are any unpaid cost and expenses in excess of the
cash and cash equivalents on hand at the Effective Time, such amounts will not
be deducted from the Merger Consideration since such unpaid amounts will not be
known when the Merger Consideration is paid. Therefore, it is anticipated that
any unpaid cost and expenses in excess of the cash and cash equivalents as of
the Effective Time, will be paid through the indemnity arrangement.
DESA has agreed to indemnify persons who served as directors, officers and
agents of FMI on or before the Effective Time in accordance with and subject to
the provisions of FMI's Articles of Incorporation and Bylaws as in effect prior
to the execution of the Merger Agreement for a period of three years with
respect to matters occurring on or prior to the Effective Time.
23
<PAGE>
CONDITIONS TO THE MERGER
It is a condition to the obligations of FMI, on the one hand, and DESA and
Merger Sub, on the other hand, under the Merger Agreement that the following
conditions be satisfied or waived: (i) the shareholders of FMI approve the
Merger Agreement, (ii) the representations and warranties of each party to the
other shall be true and correct in all material respects as of the Closing Date;
(iii) all governmental consents shall have been obtained; (iv) no injunctions or
other action prohibiting the Merger shall be in effect; (v) each party shall
have performed and complied in all material respects with all covenants,
agreements and conditions contained in the Merger Agreement required to be
performed by or complied with by it on or prior to the Closing Date; and (vi)
the expiration of the waiting period required by the Hart-Scott-Rodino Antitrust
Improvement Act of 1976, as amended, shall have expired (which waiting period
has expired). The obligations of DESA and Merger Sub are also subject to the
conditions that (i) there have been no material adverse changes in FMI since
December 31, 1997; (ii) all third party consents required by FMI to consummate
the Merger have been obtained; (iii) none of the governmental regulatory
approvals shall have contained any burdensome conditions; (iv) there is no new
litigation adverse to FMI; (v) holders of no more than 10% of the outstanding
FMI Shares shall have exercised their dissenters rights: (vi) the Voting and
Option Agreement, employment agreements, severance agreements, and
non-competition agreements shall have been entered into and all outstanding
employment agreements and stock options of FMI shall have been canceled and
pursuant to Amendment No. 1 to the Merger Agreement, Willard V. Harris, Jr. and
Benjamin C Harris shall relinquish any future employment or consulting rights
after the Merger; (vii) a certificate regarding the absence or amount of
indebtedness for borrowed money shall have been delivered; and (viii) DESA shall
have received from FMI's counsel a written opinion as to certain matters,
including the authority of FMI to enter into the Merger Agreement and the
binding nature of the Merger Agreement.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Closing Date
by the mutual consent of DESA and FMI or by either FMI or DESA if the Merger has
been enjoined. The Merger Agreement may also be terminated by action of either
FMI or DESA if (i) there has been a material breach of the Agreement by the
other party which has not been cured or if any representation of warranty of the
other party has become untrue in a material respect and which can not be cured
by the Closing Date or will prevent the Closing Date from occurring beyond
September 30, 1998 or (ii) if the Merger shall have not closed by September 30,
1998 by reason of the failure to occur of any joint condition precedent or a
condition precedent required of such party to close (unless the failure was due
to action of the party seeking to terminate the Agreement).
The Merger Agreement may be terminated by DESA if at any time prior to the
Effective Time, (i) FMI shall have withdrawn its recommendation in favor of the
Merger in a manner materially adverse to DESA or has resolved to do so; (ii)
FMI, its Board of Directors or its major shareholders solicit others to purchase
FMI or the FMI Shares; (iii) FMI furnishes non-public information to or enters
into discussions or negotiations with any other person or the Board of Directors
recommends an unsolicited bona fide written proposal concerning a corporate
reorganization other than the Merger; or (iv) any shareholder of the Company who
signed the Voting and Option Agreement, shall breach such agreement.
In the event of the termination of the Merger Agreement, no party (or any of
its directors or officers) will have any liability or further obligation to any
other party, except with respect to certain confidentiality requirements as
provided in the Merger Agreement and the payment of fees and expenses.
Nevertheless, each party to the Merger Agreement will remain liable for any
breach or violation thereof prior to such termination.
24
<PAGE>
FEES AND EXPENSES
FMI and DESA will each pay their own expenses in connection with the Merger
Agreement whether or not the Merger is consummated. Management Resource Centers,
Inc. will receive a $407,500 fee from FMI if the Merger is consummated for its
services in connection with the Merger.
RIGHTS OF DISSENTING SHAREHOLDERS
Shareholders of FMI who object to the terms of the Merger are entitled to
certain rights under Chapter 13 of Division 1 of Title 1 of the California
General Corporation Law, which is reprinted in its entirety as Appendix C
attached hereto. (In reviewing those provisions, it will be helpful for
shareholders to know that the Merger is NOT a "short-form merger" and that the
FMI Shares do not come within clauses (A) or (B) of Section 1300(b)(1)). In
addition, please note that all references in Appendix C and in this summary to a
"shareholder" are to the RECORD HOLDER of the dissenting shares and to any
transferee of those shares.)
The following discussion does not purport to be a complete statement of the
law relating to dissenters' rights, and is qualified in its entirety by Appendix
C. THIS DISCUSSION AND APPENDIX C SHOULD BE REVIEWED CAREFULLY BY ANY
SHAREHOLDER WHO OBJECTS TO THE TERMS OF THE MERGER OR WHO WISHES TO PRESERVE HIS
RIGHT TO DO SO, SINCE FAILURE TO STRICTLY COMPLY WITH THE PROCEDURES SET FORTH
WILL RESULT IN THE LOSS OF AN APPRAISAL REMEDY.
SUMMARY OF PROCEDURES TO BE FOLLOWED BY DISSENTERS
Any shareholder who desires to exercise his statutory dissenters' rights
must take the following steps:
1. Not vote in favor of the Merger. (If the FMI Shares are voted in favor
of the Merger, they will not become dissenter shares).
2. Submit a written demand to FMI or its transfer agent, which must be
RECEIVED within 30 days after a notice of approval of the Merger by the
shareholders is mailed by FMI (the "Notice of Approval"). For the requirements
of such written demand, see "Initial Steps Required to Perfect Dissenters'
Rights" below. FMI's transfer agent is The Bank of New York, 101 Barclay Street,
New York, New York 10286.
3. Submit his share certificates for endorsement to FMI or its transfer
agent within the same 30-day period.
4. If no satisfactory resolution is arrived at with FMI, file suit against
FMI within six months after the date that the Notice of Approval is mailed.
5. A PERSON ("BENEFICIAL SHAREHOLDER") HAVING A BENEFICIAL INTEREST IN THE
FMI SHARES WHICH, HOWEVER, ARE HELD OF RECORD IN THE NAME OF ANOTHER PERSON,
SUCH AS A BROKER OR NOMINEE, MUST ACT PROMPTLY TO CAUSE THE RECORD SHAREHOLDER
TO TIMELY AND PROPERLY FOLLOW THE ABOVE STEPS. ONLY THE RECORD SHAREHOLDER CAN
CLAIM DISSENTERS' RIGHTS.
Important details concerning these requirements are set forth below; failure
to take these actions in a proper and timely manner will result in the loss of
an appraisal remedy.
FAIR MARKET VALUE
If the Merger is consummated, FMI's shareholders who elect to exercise their
statutory dissenters' rights and who properly and timely perfect them are
entitled to receive, instead of the Merger Price of $7.14 per share (subject to
adjustment), the "fair market value" of their FMI Shares. Pursuant to Section
1300(a) of the California General Corporation Law, such "fair market value" is
to be determined as of the day before the first announcement of the terms of the
Merger, excluding any appreciation in consequence of the proposed transaction.
25
<PAGE>
For the purpose of dissenters' rights, the Board of Directors has determined
the "fair market value" of any dissenting shares to be the same as the Merger
Consideration, namely $7.14 per share, subject to adjustment. Section 1301(a)
requires FMI to make such a determination. This statement constitutes an offer
by FMI, assuming the Merger is consummated, to purchase at such fair market
value of $7.14 per share, subject to adjustment, any FMI Shares which become
dissenting shares. However, FMI's determination is not binding on shareholders,
and if that offer is not accepted, a dissenting shareholder has the right to
commence a lawsuit to have the "fair market value," as described in Section
1300(a), determined by a court. The fair market value as determined by the court
in those circumstances could be higher or lower than $7.14 per share, subject to
adjustment.
INITIAL STEPS REQUIRED TO PERFECT DISSENTERS' RIGHTS
Any holder of record of FMI's Shares who objects to the Merger may dissent
from the Merger by not voting for the Merger and then making a written demand
upon FMI (or its transfer agent) that FMI purchase his FMI Shares for cash and
pay to such shareholder the fair market value, as defined above. Such written
demand must state the number and class of shares held of record by such
shareholder and which such shareholder demands FMI to purchase for cash, and
must also contain a statement of the purchase price which such shareholder
claims to be the fair market value of the shares, as defined above. That
statement will constitute a legal offer by such shareholder to sell such FMI
Shares to FMI at that price. Such shareholder's share certificate(s) must also
be submitted to FMI or its transfer agent, and will be stamped or endorsed with
a statement that the FMI Shares are dissenting shares.
If FMI or its transfer agent does not receive the written demand and share
certificates of a dissenting shareholder within 30 days after FMI mails a notice
that its shareholders have approved the Merger to the shareholder (the "Notice
of Approval"), such shareholder shall be bound by the Merger and shall lose his
right to receive the fair market value (as defined above) of his FMI Shares, as
opposed to the Merger Consideration.
Assuming a dissenting shareholder makes the above-mentioned demand in a
timely and proper manner, and submits his FMI Share certificates for
endorsement, FMI has no present intention to offer any price higher than $7.14
per share, subject to adjustment. However, under the statute, if FMI and the
dissenting shareholder agree that the shares are dissenting shares and agree
upon the price of the shares, the dissenting shareholder would be entitled to
the agreed price, with interest thereon at 10% per annum from the date of the
agreement. Payment for the shares would then be made within 30 days after a
price had been agreed upon, or within 30 days after any statutory or contractual
conditions to the Merger are satisfied, whichever is later, upon surrender of
the certificates representing the FMI Shares, unless FMI and the dissenting
shareholder agree otherwise. Upon payment of the agreed price with interest, the
dissenting shareholder would cease to have any interest in such FMI Shares or in
FMI.
COURT PROCEEDINGS
If FMI and a dissenting shareholder do not agree that the FMI Shares are
dissenting shares or as to their fair market value, then the shareholder or FMI
may, within six months after Notice of Approval was mailed to the shareholder,
file a suit in the Superior Court of Orange County, California, or any other
proper county, asking for a determination whether the shares are dissenting
shares and/or of the fair market value of the shares, or, may intervene in any
other action raising the same issues. Two or more dissenting shareholders may
join as plaintiffs or may be joined as defendants in any such suit, and two or
more such suits may be consolidated and determined in a single proceeding by the
court. FMI has no present intention to initiate such a suit, and if a dissenting
shareholder fails to file suit (or otherwise to become a party to such a suit)
within such six-month period, his shares lose their status as dissenting shares.
26
<PAGE>
At the trial of the action, if the status of the FMI Shares as dissenting
shares is disputed, the court will first determine that issue. If the fair
market value of the FMI Shares is disputed, the court shall determine (or shall
appoint one or more impartial appraisers to determine) the fair market value of
such shares. If the court appoints appraisers and they make and file a report as
to the fair market value of such shares, after considering such evidence as the
court considers relevant, it may confirm their report if the court finds it
reasonable. Otherwise, the court shall determine the fair market value of the
FMI Shares and enter a judgment accordingly. Any party to the suit may appeal
from the judgment in such action.
A dissenting shareholder shall be entitled to the fair market value of the
hereinabove described FMI Shares as set forth in such a judgment upon the
endorsement and delivery to FMI of the certificate(s) for such shares. The costs
of the action, including reasonable compensation to the appraisers as fixed by
the court, may be assessed or apportioned as the court considers fair, but if
the appraisal exceeds the price offered by FMI, FMI shall pay the costs. If the
price awarded by the court is more than 25% greater than the price offered by
FMI, the court has further discretion to require FMI to pay the shareholder's
attorneys' fees, the fees of the shareholder's expert witnesses and interest at
10% per annum from the date on which the shareholder made his written demand on
FMI and submitted his share certificates for endorsement.
LOSS OF DISSENTERS' RIGHTS
Dissenting shares lose their status as such if any of the following occur:
the Merger proposal is abandoned; the shares are voted in favor of the Merger;
the shares are transferred before being submitted to FMI for endorsement; the
shareholder withdraws his demand with the consent of FMI; or, in the absence of
agreement between the shareholders and FMI as to the price of his shares, the
shareholder fails to file suit against FMI or otherwise become a party to such a
suit within six months following the mailing of a Notice of Approval.
FURTHER INFORMATION
The foregoing summarizes the provisions of Sections 1300 through 1305 and
Section 1309 of the California Corporations Code, but shareholders considering
exercising their rights under those Sections should also read Section 1306
through 1308 and Sections 1310 through 1312, contained in Appendix C. Among
other things, those provisions state that a dissenting shareholder may not
withdraw a demand for payment unless FMI consents, that any cash dividend
declared by FMI after the date of the Merger will be credited against the amount
ultimately paid by FMI for dissenting FMI Shares and will not be in addition to
the price ultimately fixed for such shares.
The receipt of payment for dissenting shares will result in recognition of
gain or loss for Federal income tax purposes by such dissenting shareholders, in
general as of the date of the payment for the dissenting shares rather than as
of the effective date of the Merger. Otherwise, the Federal income tax
consequences to shareholders pursuing their dissenters' rights will be similar
to those of other shareholders, as described in "THE MERGER--Certain Federal
Income Tax Consequences of the Merger."
27
<PAGE>
OWNERSHIP OF COMMON STOCK
The following table sets forth, as of the Record Date, the information with
respect to Common Stock ownership of each person known by FMI to beneficially
own more than five percent of the outstanding Common Stock, by each director who
beneficially owns any Common Stock and by any executive officer named in FMI's
Summary Compensation Table for the year ended March 31, 1998 and by all
directors and officers as a group.
<TABLE>
<CAPTION>
AMOUNT
NAME AND ADDRESS BENEFICIALLY PERCENT
OF BENEFICIAL OWNER OWNED(1) OF CLASS
- -------------------------------------------------------------- -------------------- -----------
<S> <C> <C>
DESA International Inc. ...................................... 1,922,075(2) 57.8%
2701 Industrial Drive
Bowling Green, KY 41702
Benjamin C. Harris ........................................... 259,250(3) 7.8%
2701 S. Harbor Blvd.
Santa Ana, CA 92407
Willard V. Harris, Jr. ....................................... 368,780(4) 11.1%
2701 S. Harbor Blvd.
Santa Ana, CA 92407
Willard P. Harris ............................................ 413,392(5) 12.4%
2701 S. Harbor Blvd.
Santa Ana, CA 92407
John D. Hornsby .............................................. 480,748(6) 14.5%
2701 S. Harbor Blvd.
Santa Ana, CA 92407
James L. Behrens ............................................. 101,252 3.0%
Vice President of Sales & Marketing
2701 S. Harbor Blvd.
Santa Ana, CA 92407
All Directors & Officers as a group (6 persons)............... 1,380,172 41.5%
</TABLE>
- ------------------------
(1) The above amounts exclude any options which will be canceled at the
Effective Time of the Merger as described in "THE MERGER--Interest of
Certain Persons in the Merger."
(2) Includes the 1,657,775 shares underlying the Voting and Option Agreement.
Excluding such shares, DESA owns 249,300 shares or 7.5% of the outstanding
FMI Shares.
(3) Includes 34,000 shares held by the Burton-Harris Family Trust in which Mr.
Harris is a trustee.
(4) Includes 34,000 shares held by the Harris-Taylor Family Trust in which Mr.
Harris is a trustee.
(5) Includes 50,000 shares held by Mr. Harris' wife and 10,400 shares Mr. Harris
holds as custodian under the California Uniform Gifts to Minors Act for the
benefit of his two children.
(6) Includes 50,000 shares held by Mr. Hornsby's wife and 50,000 shares held by
the Hornsby Family Trust in which Mr. Hornsby is a trustee.
28
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of FMI are as follows:
<TABLE>
<CAPTION>
NAME POSITION AGE
- -------------------------------------- ------------------------------------------------ ---
<S> <C> <C>
Willard V. Harris, Jr................. Chairman of the Board of Directors 64
Willard P. Harris..................... President, Chief Executive Officer and Director 42
John D. Hornsby....................... Chief Operating Officer, Secretary and Director 44
James L. Behrens...................... Vice President of Sales and Marketing 43
Jane Ann Iovine....................... Vice President of Finance 36
Gerardo C. Lozano..................... Vice President of Manufacturing 37
</TABLE>
Willard V. Harris, Jr., has been Chairman of the Board of Directors since
March 1978. He was also President and Chief Executive Officer of FMI between
March 1978 and February 1983. Mr. Harris is a trustee of the University of
Whittier College.
Willard P. Harris has been President, Chief Executive Officer, and Director
of FMI since February 1983. From June 1980 to February 1983, he held positions
from Regional Sales Manager to General Sales Manager of FMI. Willard P. Harris
is the son of Willard V. Harris, Jr.
John D. Hornsby was named Chief Operating Officer in April 1987, and has
been Secretary and a Director of FMI since February 1983. He joined FMI in May
1978 as a manager trainee and became Operations Manager in 1979.
James L. Behrens was named Vice President of Sales and Marketing in February
1996. Mr. Behrens worked as a consultant for a fireplace distributor, Inland
Distributors, for four years prior to joining FMI in 1996. He has over 16 years
of experience in the fireplace industries.
Jane Iovine was named Vice President of Finance in July of 1995, and she has
been with FMI since March of 1994. Prior to joining FMI, Ms. Iovine was senior
accountant-consolidations with Calcomp, a manufacturer of computer peripherals,
for three years. She is a graduate of San Diego State University and has been a
CPA since May 1990.
Gerardo C. Lozano was named Vice President of Manufacturing in 1993. He
started at FMI as a trainee in 1983 and has served in various positions since
that time.
29
<PAGE>
BUSINESS
FMI designs, manufactures, and sells factory built, energy-efficient metal
fireplace systems. FMI also produces free standing stoves and a series of vented
and ventfree gas log sets.
METAL FIREPLACE SYSTEMS AND RELATED PRODUCTS
FIREPLACES. FMI currently produces wood-burning metal fireplaces,
decorative gas appliances with refractory-lined fireboxes, horizontal/vertical
gravity direct vent wall furnaces, and related chimney flues. Optional features
of the fireplaces include the ability to accept natural gas, glass doors,
decorative facings, outside air intakes, and electrical fans. The fireplaces are
used in single-family homes, condominiums, apartments, other multiple-family
dwellings, and in manufactured housing. They can be used as part of a wall, in a
corner, or as a room divider. Fireplaces are sold mainly to one and two-step
distributors who install the system for homebuilders in new construction and to
retail distributors.
Each fireplace consists of an inner sheet metal firebox, which is lined with
an insulating brick, textured refractory material and an outer sheet metal shell
separated from the heat-bearing box. Chimney components, which are attached to
the firebox in accordance to the height of the dwelling, are of double-wall
construction so that the outer wall may be installed within two inches of the
combustible building materials. The firebox has specifically designed vents,
which permits convection flow to recirculate warm air heated in that chamber
into the room where the fireplace is installed. All fireplaces are finished with
a durable powder coat spray finish which resists scuffing, scraping and fading.
FMI currently produces forty eight models of fireplaces, varying in size and
shape with slightly different grillwork styles. The fireplace units are
generally sold to distributors at competitive prices. The distributors sell the
fireplaces to builders at prices from $400 to $4,000. Twenty-nine of these
fireplaces are gas-only models.
FMI has developed a line of ventfree fireplaces and gas log heaters that
have grown in popularity over the last three (3) years. FMI expects the ventfree
products to continue to gain customer acceptance in the near future, although it
lacks approval in various states.
FREE STANDING STOVES. Free standing stoves have a powder coated spray
finish which resists scuffing, scraping and fading. They can be easily placed in
a corner or perpendicularly installed with no chimney or ductwork. The free
standing stoves use natural or propane fuel.
VENTED AND VENTFREE GAS LOG SETS. The vented gas log sets have the ambiance
of a wood fire with the convenience of simple ignition or the flip of a switch.
The log kits come complete in 16", 18", and 24" with logs, burner grate,
connector, volcanic rock, vermiculite and rockwool. Ventfree gas logs can be
installed in any FMI vented or ventfree fireplace, masonry fireplaces, as well
as other zero clearance manufactured boxes that have approval with FMI ventfree
log sets. The log sets can be produced as either round oak or split oak and
range in size from 18" to 24". For safety, the ODS (oxygen depletion sensor)
will shut the gas logs off if oxygen is depleted or fuel is interrupted in the
room.
CUSTOMERS AND MARKETING
FMI has developed three distribution markets for its products:
HOMEBUILDERS. This market is the largest and has been a focus for FMI
throughout its 20 year history. FMI sells directly to fireplace distributors or
"jobbers" who sell, service, and install the fireplaces.
RETAIL. FMI has turned its focus toward the two-step distribution process
in marketing to fireplace centers.
MANUFACTURED HOUSING. Growth in this market has been at approximately 10%
annually, and the competition is substantial. FMI sells to the Evcon Group, a
national distributor of furnaces and fireplaces
30
<PAGE>
to the manufactured housing industry. FMI's agreement with the Evcon Group
provides for the Evcon Group to be the distributor to the manufactured housing
industry for FMI's products. This agreement is renewable annually. Eighteen
percent of the manufactured housing produced each year have a fireplace.
FMI also sells in limited international markets: Japan, Canada, Norway,
Holland, England and Saudi Arabia. Total sales to all foreign markets are less
than 5%.
GENERAL. The sales and marketing functions are currently managed by FMI's
Vice President of Sales and Marketing. FMI employs three regional sales
managers. Each manager covers a multi-state region, selling through independent
representative agencies, FMI's regional sales managers are based in Campbell,
California; Poway, California; and Fredericksburg, Virginia.
For the fiscal year ended March 31, 1998, sales to the Evcon Group accounted
for 23% of FMI sales. Sales to Quality Insulation accounted for 12% of FMI
sales. Except for these customers, no other customer accounted for more than 10
percent of metal fireplace sales. The total number of customers is 220.
The loss of the relationship of any major distributor could have an adverse
effect on FMI, at least if FMI could not establish a new distributor for the
area.
As of March 31, 1998, the backlog of firm orders for the metal fireplace
systems was not significant. Backlogs typically only represent approximately one
or two weeks of sales since products are usually shipped within a few days of an
order.
PATENT, TRADEMARKS AND TRADENAMES
FMI does not own any material patents. The Company filed a trademark
application on October 3, 1997, with the U.S. Patent and Trademark Office and
anticipates final approval during 1998. The trademarked name is "Universal
Ventfree Fireplace."
FABRICATION OF FIREPLACES
The fireplaces are produced at FMI's plant in Santa Ana, California. Metal
forming presses and related equipment are utilized to cut, bend, weld, and rivet
a fireplace's component parts. After assembly, the fireboxes are lined with
refractory material and painted. As of March 31, 1998, FMI was producing over
400 fireplaces per day.
FMI's fireplaces go through approximately seven inspections before shipment.
In addition, prototype models and samples are periodically tested by independent
testing laboratories. FMI also has a fully equipped sealed room testing facility
for assessing various characteristics of the component parts of its metal
fireplace systems. The line of fireplaces manufactured by FMI has been
successfully listed to U.S., Canadian and European Standards by independent
agencies which include INCHSCAPE, American Gas Association and Underwriters
Laboratories.
SUPPLIES AND RAW MATERIALS
The major materials used in the production of the fireplaces are galvanized,
aluminized and stainless steel, refractory concrete and fiberglass insulation.
These materials are generally available at competitive prices and are purchased
from more than one supplier.
BUILDING CODES
The metal fireplaces are subject to the requirements of local building codes
and have been listed by Underwriters Laboratories. FMI's fireplace systems meet
the requirements of the Veterans Administration and Federal Housing
Administration programs, and certain models of FMI fireplaces are approved for
manufactured housing.
31
<PAGE>
Pending legislation in several states and major cities for clean air to meet
Environmental Protection Agency requirements has resulted in FMI developing
clean-burning appliances, the emphasis being on gas-burning appliances. While
continuing to manufacture wood burning fireplaces, FMI has added four gas-
burning appliances to the product line, making a total of twenty-nine
gas-burning models.
RESEARCH AND DEVELOPMENT
FMI incurs research and development costs on new product development,
improvement of existing products, and product line extension. During 1998, 1997
and 1996, FMI investment in research and development totaled $766,000, $607,000
and $586,000, respectively.
COMPETITION
There are eight well-established U.S. companies manufacturing metal
fireplaces, which are sold on a nationwide basis through a number of
distributors and dealers. Since these competitors are primarily privately-held
companies or divisions of larger companies, precise financial information as to
their competitive impact on FMI is not available. FMI competes, based on lower
cost of its units, design innovations, and ease of installation of its fireplace
systems. DESA has recently begun to manufacturer metal gas fireplace systems.
FMI also competes with masons who hand build fireplaces and with precast
concrete fireplaces. Hand built masonry fireplaces take longer to install and
require on-site preparation of the building. Metal fireplaces require no on-site
preparation.
EMPLOYEES
As of March 31, 1998, FMI employed approximately 200 persons, including
approximately 175 in fabrication and a staff of 25 sales, office, engineering,
and administrative personnel. None of these employees are covered by collective
bargaining agreements, and FMI considers its employee relations to be
satisfactory.
PROPERTY
FMI leases a facility in Santa Ana, California, comprising approximately
104,000 square feet. Effective May 1, 1994, FMI entered into a five-year lease
for such facility with monthly rentals of $29,000.
LITIGATION
A claim was asserted against FMI alleging infringement of a company's
patent. The U.S. District Court granted FMI's motion for summary judgement and
held that FMI's products do not infringe the patent at issue, either literally
or by operation of the doctrine of equivalents. The summary judgement has been
appealed. FMI's independent counsel is unable to express an opinion as to the
probable outcome of the action and therefore no estimate can be made of a range
of amount of loss, if any, that is reasonably possible. No amounts have been
accrued with regard to this matter and it is possible that a change in the
estimate will occur in the near future. The original claim was for $50 per unit
sold that infringed upon the patent and Management estimated that the potential
claim was approximately $1,000,000. (FIREPLACE MANUFACTURERS, INC. V. HEARTH
TECHNOLOGIES, INC., No. 4-96-1080 (D.Minn.) (ADJ/AJB) and HEARTH TECHNOLOGIES,
INC. V. FIREPLACE MANUFACTURERS, INC., No. 4-96-684 (D.Minn.) (ADJ/AJB)).
GENERAL
FMI was incorporated in California in 1976.
32
<PAGE>
MARKET PRICES OF COMMON STOCK
The FMI Shares are traded on the Electronic Bulletin Board under the symbol
FPMI. The following table shows the high and low closing bid prices of the FMI
Shares as quoted on the Electronic Bulletin Board for the periods indicated. The
quotations were obtained from the National Quotation Bureau Incorporated and
represent prices in the over-the-counter market between dealers in securities.
They do not include retail mark-ups, mark-down, or commissions, and do not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK BID
PRICES
--------------------
CALENDER QUARTER ENDED HIGH LOW
---------------------- --------- ---------
<S> <C> <C> <C>
1996 March 31 $ 0.78 $ 0.40
June 30 0.93 0.81
September 30 0.93 0.37
December 31 0.93 0.53
1997 March 31 1.12 0.75
June 30 1.69 1.12
September 30 2.88 1.56
December 31 3.25 2.75
1998 March 31 5.88 2.56
</TABLE>
In view of the limited market for and the sporadic trading of the Common
Stock, the above prices are not considered a reliable indicator of fair market
value. There are approximately 815 beneficial holders of the Common Stock.
On March 19, 1998, the last trading day before the public announcement of
the execution of a Letter of Intent between FMI and DESA with respect to the
proposed Merger, the reported closing bid and asked sale prices per FMI Share
were $3.87 and $4.35, respectively. On July 31 1998, the reported bid and asked
prices per FMI Share were $6 3/8 and $6 1/2, respectively.
FMI has never paid a cash dividend.
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements of FMI and the notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included herein.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C> <C>
Net sales.............................. $ 28,999 $ 31,844 $ 28,729 $ 26,705 $ 19,813
Net Income............................. 1,321 994 44 457 43
Average Shares Outstanding, Basic...... 3,400 3,323 3,536 3,553 3,553
Net Income per Common Share, Basic..... 0.39 .30 0.01 0.13 0.01
Total Assets........................... 6,647 6,937 8,832 8,988 6,379
Total long-term obligations (excluding
current portion)..................... -0- 235 904 998 732
Cash dividends per share............... -0- -0- -0- -0- -0-
</TABLE>
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
FMI has a line of credit with a bank for an aggregate $4,000,000 with an
interest rate of 0.50% above prime, payable monthly. At March 31, 1998, there
were no amounts outstanding under the line of credit. The net availability
remaining under this revolving line of credit is $1,663,000 at March 31, 1998.
The line of credit agreements contain restrictive covenants which require
maintenance of working capital and other financial ratios, prohibit the payment
of dividends and has certain other limitations. The line of credit is subject to
renewal on August 3, 1998. FMI does not anticipate the need to renew this line
of credit.
FMI also has available a $500,000 equipment line of credit which converts to
a forty-eight month term loan on August 1, 1998. The borrowing under the line
bear interest at the bank's prime rate plus 0.75%. The equipment line is subject
to the same covenants as the line of credit. At March 31, 1998, there were no
amounts outstanding under this agreement.
Accounts receivable (before allowance for doubtful accounts) at March 31,
1998 were $2,063,000 compared to $2,579,000 at March 31, 1997. This 20% decrease
is primarily attributed to improved credit collections. Days sales outstanding
at March 31, 1998 was 25 compared to 28 at March 31, 1997. FMI began to utilize
an agreement with a finance company whereby the finance company, with the
approval of the customer, will purchase receivables from FMI. Under the first
program the invoice is paid within 15 days at a discount of 1.75%. Under the
second program the invoice is paid within 30 days at a discount of 2.25%. The
agreement contains a clause whereby if the finance company repossesses any
inventory of the customer, FMI is obligated to buy back the repossessed
inventory. There have not been and the Company does not anticipate any material
repurchase of inventory. FMI accounts for this arrangement as a sale of
receivables. During 1998 and 1997, FMI sold receivables of approximately
$4,267,000 and $2,400,000, respectively. The balance sheet at March 31, 1998
includes approximately $150,000 due from the finance company. At March 31, 1998
and 1997 the amount of receivables sold to but not collected by the finance
company was approximately $720,000 and $610,000, respectively. The impact of the
sales of receivables on the days sales outstanding was to reduce the days sales
outstanding by 10 and 9 days at March 31, 1998 and 1997, respectively. The
allowance for doubtful accounts decreased for the year by $11,000 from $272,000
to $261,000 at March 31, 1998. The decreased reserve is related to the lower
accounts receivable balance.
The current ratio has increased 29.4% as of March 31, 1998 to 1.76:1 from
1.36:1 at March 31, 1997. FMI benefited from higher margins and decreased
accounts payable.
Inventories decreased $276,000 to $1,571,000 at March 31, 1998 from
$1,847,000 at March 31, 1997. The purchased parts inventory was responsible for
the majority of this decrease due to an improved purchasing approach that allows
for shorter lead time and smaller quantity purchased per transaction.
FMI has made equipment additions of $243,000 and $345,000 for fiscal 1998
and 1997 respectively. Purchases of fixed assets are anticipated to increase for
the fiscal year ended March 31, 1999 although no specific budget has been
established at this time. If required, financing for equipment purchases are
available from financial institutions.
FMI's Board of Directors approved the repurchase of up to 500,000 shares of
Common Stock from time to time. At various times throughout fiscal 1998, 240,275
shares were repurchased for $644,000. As required by California law, these
shares were retired. FMI has suspended the repurchase of stock due to the
pending Merger.
On July 21, 1997, the Company issued 119,100 shares valued at $194,133 as
compensation to the Board of Directors and executive officers.
See also "BUSINESS--Litigation".
34
<PAGE>
RESULTS OF OPERATIONS
FISCAL YEARS 1998 AND 1997. Sales for the year ended March 31, 1998
decreased by 8.9% from the year ended March 31, 1997. The decrease is attributed
to a 12.0% decrease in unit sales offset by a 3.6% increase in average selling
price. Decreased unit sales are primarily attributable to a decrease in the
manufactured housing industry unit sales during fiscal year 1998. Based on
present market conditions, FMI believes sales will remain constant for fiscal
year 1999 although there can be no assurances in that regard.
Costs of sales for fiscal year 1998 were 75.1% of sales as compared with
79.1% of sales in fiscal year 1997. This decrease is attributed to the 3.6%
increase in average selling price along with savings on materials costs through
improved purchasing techniques. Management's goal is to continue to improve this
percentage in fiscal year 1999 although there can be no assurances in this
regard.
Selling, general and administrative expenses increased as a percent of sales
by 1.5% to 17.9% of sales in fiscal 1998 compared to 16.4% in fiscal 1997. This
increase is attributed to higher bonus expense calculated on the higher 1998 net
profit. FMI anticipates a decrease in this percentage in fiscal year 1999 due to
the lower bonus rates which were announced for the new year.
Interest expense decreased in 1998 by 0.7% as a percent of sales over the
fiscal year 1997 expense. This decrease is due to interest calculated on lower
borrowings. FMI expects interest expense to continue to decrease for 1999
although there can be no assurances in this regard.
During fiscal year 1998, FMI generated $241,000 in tax credits that can be
used to offset State of California income taxes. FMI had $155,000 of tax credit
carryforwards available at March 31, 1997. FMI was able to realize only $92,000
of these credits on its March 31, 1998 income tax returns resulting in $292,000
carryforward to future years. FMI's policy is to record valuation allowances on
tax credits that are not expected to be realized within two years even though
the statuatory expiration date may be longer. Accordingly, FMI has recorded a
valuation allowance of $100,000 at March 31, 1998 on the deferred tax assets
relating to tax credit carryforwards. FMI did not record a valuation allowance
at March 31, 1997 because the tax credit carryforwards of $155,000 were expected
to be utilized in two years.
FMI's 1998 net income as a percent of sales increased 1.5% from 1997.
Management believes that continued cost cutting efforts, lower bonuses and
better market penetration will allow FMI to remain profitable in 1999 although
there can be no assurances in this regard.
FISCAL YEARS 1997 AND 1996. Sales for the fiscal year 1997 increased 10.8%
from fiscal year 1996. The increase in sales is attributed to a 5.5% increase in
selling price. The remaining increase is attributable to an increase in the
number of units sold. A number of factors affected the selling price, FMI
decreased the number of special discounts available to customers, raised the
price of the product and increased sales of non fireplace items such as pipe,
accessories and log sets. The increase in units sold is explained by a surge in
the manufactured housing industry.
Cost of sales for fiscal year 1997 were 79.1% of sales as compared with
83.2% of sales in fiscal year 1996. This decrease is attributed to the 5.5%
increase in average selling price along with a 1.5% increase in plant variable
costs.
Selling, general and administrative expenses increased by 0.9% to 16.4% of
sales in fiscal 1997 compared to 15.5% in fiscal 1996. This slight increase is
attributable to higher bonuses expense which reflects the higher 1997 net
profit. FMI analyzes all costs in these areas on an individual basis for
necessity and impact on the overall profitability of FMI.
Interest expense decreased in 1997 by 0.5% as a percent of sales over the
fiscal year 1996 expense. This decrease is due to interest calculated on lower
borrowing. Management estimates no valuation allowance on deferred tax assets is
needed because expected future taxable income will be adequate to realize the
deferred tax assets.
35
<PAGE>
YEAR 2000 AND THE EURO
FMI's computer systems are not compliant with the year 2000 requirements. At
this time Management is considering several options to gain compliance with
prices ranging from $150,000 to $250,000. Price differences would allow for
other system upgrades to be implemented simultaneously with the year 2000
solution.
Management of the Company does not believe that the adoption on January 1,
1999 of the Euro as the new currency for most members of the European Union will
have any material effect on the Company.
FORWARD-LOOKING STATEMENTS
Statements regarding FMI's expectations as to demand for its products in
fiscal 1999, the operating efficiencies from operation of the fireplace
business, and revenue generation from existing or future contracts and certain
other information presented in this Proxy Statement constitute forward looking
statements within the meaning of the Federal Private Securities Litigation
Reform Act of 1995. Although FMI believes that its expectations with respect to
future prospects are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. In addition to matters
affecting the economy and FMI's industry generally, factors which could cause
actual results to differ from expectations include the following:
- Loss of one or more significant customers.
- Reduction in gross profit margins due to competitive pricing pressures.
- Changes in governmental regulation or failure to comply with existing
regulation.
- Changes in the cost or availability of purchased parts.
- Inability to obtain needed additional capital on terms acceptable to FMI.
- Inability to reduce costs while maintaining customer service.
- Potential default under line of credit or other material contracts.
INDEPENDENT PUBLIC ACCOUNTANTS
McGladrey & Pullen, LLP has been selected as independent public accountants
for FMI for the fiscal years ended March 31, 1998, 1997 and 1996. McGladrey &
Pullen, LLP do not have and have not had at any time any direct or indirect
financial interest in FMI or any of its subsidiaries and do not have and has not
had at any time any connection with FMI or any of its subsidiaries in the
capacity of promoter, underwriter, voting trustee, director, officer, or
employee. Neither FMI nor any officer or director of FMI has or has had any
interest in McGladrey & Pullen, LLP.
The Board of Directors of FMI have approved McGladrey & Pullen, LLP as its
independent public accountants. Prior thereto, they have questioned partners of
that firm about its methods of operation and have received assurances that any
litigation or other matters involving it do not affect its ability to perform as
FMI's independent auditors.
Representatives of McGladrey & Pullen, LLP will not be present at the
Special Meeting.
DATES FOR SUBMISSION OF SHAREHOLDER PROPOSALS
FOR THE NEXT ANNUAL MEETING
If the Merger is consummated, FMI will be merged with and into DESA and will
not hold any more public meetings of shareholders. If the Merger is not
consummated, FMI will promptly schedule the 1998 Annual Meeting of Shareholders.
Any proposal relating to a proper subject which a shareholder may
36
<PAGE>
intend to be presented for action at the next Annual Meeting of Shareholders, if
any, and which such shareholder desires to have included in FMI's proxy
statement for such meeting, must be received by the Company no later than the
tenth business day after FMI publicly announces that it has scheduled its 1998
Annual Meeting of Shareholders in order to be considered for inclusion in the
proxy statement to be disseminated by the Board of Directors in accordance with
the provisions of Rule 14a-8(a)(3)(i) promulgated under the Securities Exchange
Act of 1934 (the "Exchange Act"). Copies of such proposals should be sent to the
Corporate Secretary at the Company's principal executive offices. To be eligible
for inclusion in such proxy materials, such proposals must conform to the
requirements set forth in Regulation 14A under the Exchange Act.
If the Merger is not consummated, the deadline for the receipt of written
notifications to FMI of shareholder proposals or nominees for directors
submitted outside of Rule 14a-8 for the 1998 Annual Meeting of Shareholders for
which holders of the accompanying proxy may not exercise discretionary
authority, is no later than the tenth business day after FMI publicly announces
that it has scheduled its 1998 Annual Meeting of Shareholders.
FORM 10-K
COPIES OF FMI'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED MARCH
31, 1998, (INCLUDING FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES) AS
FILED WITH THE SEC ARE AVAILABLE UPON WRITTEN REQUEST FROM FIREPLACE
MANUFACTURERS, INC., 2701 SOUTH HARBOR BOULEVARD, SANTA ANA, CALIFORNIA 92704;
ATTENTION CORPORATE SECRETARY
By Order of the Board of Directors,
/s/ JOHN D. HORNSBY
--------------------------------------
John D. Hornsby
SECRETARY
Los Angeles, California
Dated: August 3, 1998
37
<PAGE>
FIREPLACE MANUFACTURERS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Fireplace Manufacturers, Inc.
Santa Ana, California
We have audited the accompanying consolidated balance sheets of Fireplace
Manufacturers, Inc. and Subsidiary as of March 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended March 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Fireplace
Manufacturers, Inc. and Subsidiary as of March 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1998 in conformity with generally accepted accounting
principles.
MCGLADREY & PULLEN, LLP
Anaheim, California
May 7, 1998
F-2
<PAGE>
FIREPLACE MANUFACTURERS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents........................................................... $ 1,232,000 $ 333,000
Trade accounts receivable, less allowance for doubtful accounts of $261,000 in 1998
and $272,000 in 1997.............................................................. 1,802,000 2,307,000
Inventories......................................................................... 1,571,000 1,847,000
Prepaid expenses and other.......................................................... 74,000 118,000
Deferred taxes...................................................................... 411,000 421,000
------------ ------------
TOTAL CURRENT ASSETS.............................................................. 5,090,000 5,026,000
Equipment and Leasehold Improvements, net............................................. 1,339,000 1,761,000
Other Assets.......................................................................... 218,000 150,000
------------ ------------
$ 6,647,000 $ 6,937,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.................................................................... $ 1,163,000 $ 2,042,000
Accrued liabilities................................................................. 1,719,000 1,454,000
Current portion of long-term debt................................................... -- 212,000
------------ ------------
TOTAL CURRENT LIABILITIES......................................................... 2,882,000 3,708,000
------------ ------------
Long-Term Debt, less current portion.................................................. -- 235,000
------------ ------------
Deferred Taxes........................................................................ 181,000 281,000
------------ ------------
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $1 par value; authorized shares 1,000,000; issued and outstanding
shares--none...................................................................... -- --
Common stock, $.01 par value; authorized shares 10,000,000; issued and outstanding
shares 1998 3,326,775 and 1997 3,447,950.......................................... 33,000 35,000
Additional paid-in capital.......................................................... -- 248,000
Retained earnings................................................................... 3,551,000 2,430,000
------------ ------------
3,584,000 2,713,000
------------ ------------
$ 6,647,000 $ 6,937,000
------------ ------------
------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
FIREPLACE MANUFACTURERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net Sales........................................................... $ 28,999,000 $ 31,844,000 $ 28,729,000
Cost of Sales (including $85,000, $63,000 and $31,000 of rent to
officers)......................................................... 21,783,000 25,186,000 23,903,000
------------- ------------- -------------
GROSS MARGIN.................................................... 7,216,000 6,658,000 4,826,000
Selling, General and Administrative Expenses........................ 5,179,000 5,223,000 4,450,000
------------- ------------- -------------
OPERATING INCOME................................................ 2,037,000 1,435,000 376,000
Interest Expense.................................................... (37,000) (269,000) (375,000)
Other Income........................................................ -- 29,000 44,000
------------- ------------- -------------
INCOME BEFORE INCOME TAXES...................................... 2,000,000 1,195,000 45,000
Provision for Income Taxes.......................................... 679,000 201,000 1,000
------------- ------------- -------------
NET INCOME...................................................... $ 1,321,000 $ 994,000 $ 44,000
------------- ------------- -------------
------------- ------------- -------------
Earnings per share
Basic............................................................. $ 0.39 $ 0.30 $ 0.01
------------- ------------- -------------
------------- ------------- -------------
Diluted........................................................... $ 0.38 $ 0.30 $ 0.01
------------- ------------- -------------
------------- ------------- -------------
Weighted-average number of common shares outstanding
Basic............................................................. 3,399,632 3,323,173 3,536,287
------------- ------------- -------------
------------- ------------- -------------
Diluted........................................................... 3,456,545 3,323,173 3,536,287
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
FIREPLACE MANUFACTURERS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1995.......................... 3,552,500 $ 36,000 $ 353,000 $ 1,392,000 $ 1,781,000
Issuance of stock for services................... 10,000 -- 5,000 -- 5,000
Repurchase of common stock for retirement........ (87,050) (1,000) (49,000) -- (50,000)
Net income....................................... -- -- -- 44,000 44,000
---------- --------- ----------- ------------ ------------
Balance, March 31, 1996.......................... 3,475,450 35,000 309,000 1,436,000 1,780,000
Issuance of stock for services................... 193,252 2,000 145,000 -- 147,000
Repurchase of common stock for retirement........ (220,752) (2,000) (206,000) -- (208,000)
Net income....................................... -- -- -- 994,000 994,000
---------- --------- ----------- ------------ ------------
Balance, March 31, 1997.......................... 3,447,950 35,000 248,000 2,430,000 2,713,000
Issuance of stock for services................... 119,100 1,000 193,000 -- 194,000
Repurchase of common stock for retirement........ (240,275) (3,000) (441,000) (200,000) (644,000)
Net income....................................... -- -- -- 1,321,000 1,321,000
---------- --------- ----------- ------------ ------------
Balance, March 31, 1998.......................... 3,326,775 $ 33,000 $ -- $ 3,551,000 $ 3,584,000
---------- --------- ----------- ------------ ------------
---------- --------- ----------- ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
FIREPLACE MANUFACTURERS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities.....................................
Net income............................................................. $ 1,321,000 $ 994,000 $ 44,000
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization........................................ 583,000 618,000 558,000
Deferred income taxes (90,000) (195,000) (11,000)
Compensation applied to notes receivable............................. -- 132,000 56,000
Other................................................................ 29,000 47,000 --
Bad debt expense..................................................... 39,000 142,000 272,000
Issuance of common stock for services................................ 194,000 147,000 5,000
Changes in working capital components:
(Increase) decrease in:
Trade accounts receivable........................................ 464,000 824,000 (1,084,000)
Inventories...................................................... 276,000 888,000 767,000
Prepaid expenses and other assets................................ 46,000 (33,000) 41,000
Increase (decrease) in accounts payable and accrued liabilities.... (614,000) 132,000 (775,000)
----------- ----------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............ 2,248,000 3,696,000 (127,000)
----------- ----------- ------------
Cash Flows From Investing Activities
Purchases of equipment and leasehold improvements...................... (243,000) (345,000) (479,000)
Other.................................................................. 53,000 23,000 --
Increase in other assets............................................... (68,000) (14,000) (86,000)
Payments on notes receivable from officers/stockholders................ -- -- 16,000
----------- ----------- ------------
NET CASH (USED IN) INVESTING ACTIVITIES........................ (258,000) (336,000) (549,000)
----------- ----------- ------------
Cash Flows From Financing Activities
Proceeds from long-term debt........................................... -- -- 146,000
Payments on long-term debt............................................. (447,000) (692,000) (121,000)
Net proceeds from (payments on) revolving line of credit............... -- (2,263,000) 720,000
Repurchase of common stock for retirement.............................. (644,000) (208,000) (50,000)
----------- ----------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............ (1,091,000) (3,163,000) 695,000
----------- ----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS...................... 899,000 197,000 19,000
Cash and Cash Equivalents
Beginning of year...................................................... 333,000 136,000 117,000
----------- ----------- ------------
End of year............................................................ $ 1,232,000 $ 333,000 $ 136,000
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
FIREPLACE MANUFACTURERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS:
Fireplace Manufacturers, Inc. (the Company) designs, manufactures and sells
factory-built, energy-efficient metal fireplace systems to customers throughout
the United States and Canada on terms established by the Company. The fireplaces
are used in single-family homes, condominiums, apartments, other multiple-family
dwellings and in manufactured housing. They can be used as part of a wall, in a
corner or as a room divider. Fireplaces are sold mainly to homebuilders who
install the system in new construction, and to retail distributors. Pending
legislation in several states and major cities for clean air to meet
Environmental Protection Agency requirements has resulted in the Company
developing clean-burning appliances, the emphasis being on gas-burning
appliances. While continuing to manufacture wood burning fireplaces, the Company
has added gas-burning appliances to the product line. Also added to the product
line are decorative gas log sets to retro-fit existing fireplaces in communities
that have restricted the burning of wood.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES IS AS FOLLOWS:
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 assets and 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.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its inactive, wholly-owned subsidiary, Fireplace Industries of California,
Inc. There have been no material intercompany transactions.
CREDIT RISK AND SIGNIFICANT CUSTOMERS:
The Company sells its products to customers throughout the United States and
Canada. Management performs regular evaluations concerning the ability of its
customers to satisfy their obligations and records a provision for doubtful
accounts based upon these evaluations. The Company's credit losses for the
periods presented have not exceeded management's estimates.
One major customer represented 23% of total net sales for 1998, 1997, and
1996. Accounts receivable from this customer totaled approximately $450,000 and
$503,000 at March 31, 1998 and 1997, respectively. In addition, another customer
represented 12% of total net sales for both 1998 and 1997 and 11% for 1996.
Accounts receivable from this customer were approximately $348,000 and $279,000
at March 31, 1998 and 1997, respectively. There were no other customers who
represented greater than 10% of net sales.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
F-7
<PAGE>
FIREPLACE MANUFACTURERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company periodically throughout the year has amounts on deposit at a
financial institution that exceed the Federal Deposit Insurance Corporation
limit.
INVENTORIES:
Inventories are generally valued at the lower of cost (first-in, first-out
method) or market.
ADVERTISING:
The Company expenses the production costs of advertising the first time the
advertising takes place. Advertising expense was approximately $279,000,
$464,000 and $396,000 during 1998, 1997 and 1996, respectively.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements are recorded at cost and are
depreciated using the straight-line method over useful lives ranging from 3 to
15 years for machinery and equipment, transportation equipment and furniture and
fixtures, and 8 years or the term of the lease, whichever is shorter, for
leasehold improvements.
INCOME TAXES:
Deferred income taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
RESEARCH AND DEVELOPMENT:
The Company incurs research and development costs in developing new
products. During 1998, 1997 and 1996, the Company expensed approximately
$766,000, $607,000 and $586,000, respectively.
EARNINGS PER SHARE:
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128 EARNINGS PER SHARE
(EPS). SFAS No. 128 requires dual presentation of basic EPS and diluted EPS on
the face of all income statements issued after December 15, 1997 for all
entities with complex capital structures. Basic EPS is computed as net income
divided by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock options (56,913 shares in the year ended March 31,
1998 and none in the fiscal years ended March 31, 1997 and 1996). The adoption
of SFAS No. 128 had no effect on the prior years presentation.
F-8
<PAGE>
FIREPLACE MANUFACTURERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash, accounts receivable,
accounts payable and notes payable. The book value of these instruments are
considered to be representative of their fair value.
The fair value estimates presented herein are based on pertinent information
available to management as of March 31, 1998 and 1997. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since that date.
STOCK-BASED COMPENSATION:
The Company accounts for stock-based employee compensation under the
requirements of Accounting Principles Board (APB) Opinion No. 25, which does not
require compensation to be recorded if the consideration to be received is at
least equal to the intrinsic value at the measurement date. Nonemployee
stock-based transactions are accounted for under the requirements of SFAS No.
123 ACCOUNTING FOR STOCK BASED COMPENSATION which requires compensation to be
recorded based on the fair value of the securities issued or the services
received, whichever is more reliably measurable.
NOTE 2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Raw materials..................................................... $ 1,032,000 $ 1,254,000
Work-in-process................................................... 239,000 265,000
Finished goods.................................................... 300,000 328,000
------------ ------------
$ 1,571,000 $ 1,847,000
------------ ------------
------------ ------------
</TABLE>
NOTE 3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Machinery and equipment........................................... $ 2,889,000 $ 2,982,000
Tools, dies and molds............................................. 1,389,000 1,322,000
Furniture, fixtures and vehicles.................................. 352,000 629,000
Leasehold improvements............................................ 60,000 64,000
Research and development equipment................................ 256,000 279,000
------------ ------------
4,946,000 5,276,000
Less accumulated depreciation and amortization.................... 3,607,000 3,515,000
------------ ------------
$ 1,339,000 $ 1,761,000
------------ ------------
------------ ------------
</TABLE>
F-9
<PAGE>
FIREPLACE MANUFACTURERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Compensation...................................................... $ 1,344,000 $ 841,000
Income taxes payable.............................................. 10,000 136,000
Warranty.......................................................... 138,000 148,000
Other............................................................. 227,000 329,000
------------ ------------
$ 1,719,000 $ 1,454,000
------------ ------------
------------ ------------
</TABLE>
NOTE 5. LINE OF CREDIT
The Company may borrow up to $4,000,000 against eligible accounts receivable
and inventories under terms of an accounts receivable and inventory line of
credit agreement with a bank. Borrowings under this line of credit bear interest
at the bank's prime rate (8.5% at March 31, 1998) plus .5%, with interest
payable monthly. Advances are limited to 80% of eligible accounts receivable;
plus 40% of eligible inventories (inventory advances are not to exceed
$500,000). The line of credit expires on August 3, 1998. Borrowings under this
line of credit agreement are collateralized by substantially all of the
Company's assets. The line of credit contains restrictive covenants that require
maintenance of working capital and other financial ratios, prohibit payment of
dividends and have certain other limitations. At March 31, 1998, there were no
amounts outstanding under this agreement and approximately $1,663,000 of
availability.
The Company also has available a $500,000 equipment line of credit which
converts to a forty-eight month term loan on August 1, 1998. The line bears
interest at the bank's prime rate plus .75%. The line is subject to the same
covenants as the line of credit. At March 31, 1998, there were no amounts
outstanding under this agreement.
NOTE 6. LONG-TERM DEBT
As of March 31, 1998, the Company has no long-term debt outstanding. The
long-term debt outstanding as of March 31, 1997 totaled $447,000, consisted
primarily of equipment loans and was paid-off during 1998.
NOTE 7. STOCK OPTIONS
The Company has reserved 835,000 shares for issuance under the Company's
1997 Stock Option Plan. In the year ended March 31, 1998, the Company granted
options to acquire 835,000 shares at a price of $2.88 per share. The options
vest 20% on the date of grant and 20% on the anniversary of the date of grant
thereafter. The options expire five years after the date of grant.
As permitted under generally accepted accounting principles, grants under
these plans are accounted for following APB Opinion No. 25 and related
interpretations. Accordingly, no compensation cost has been recognized for
grants under the stock option plan. Had compensation cost been determined based
on the fair value method prescribed in SFAS No. 123, reported net income and
basic and diluted earnings per share would have been reduced to $992,000, $0.29
and $0.28, respectively. In determining the amounts above, the value of each
grant is estimated at the grant date using the Black-Scholes option-pricing
model with the following weighted-average assumptions for grants in fiscal year
1998: no dividends, risk-free
F-10
<PAGE>
FIREPLACE MANUFACTURERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. STOCK OPTIONS (CONTINUED)
interest rate of 5.86%, price volatility of 79%, expected lives of five years
and expected exercise rate of 100%. The weighted-average fair value of the
options granted in fiscal year 1998 was $1.94 per share.
The above options, vested and unvested, will terminate upon consummation of
the anticipated sale of the Company disclosed in Note 15.
NOTE 8. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Current.................................................. $ 769,000 $ 396,000 $ 12,000
Deferred................................................. (90,000) (195,000) (11,000)
---------- ----------- ----------
$ 679,000 $ 201,000 $ 1,000
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
A reconciliation of income tax expense to the amount computed by applying
statutory income tax rates to income before income taxes:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Federal income tax...................................... $ 700,000 $ 418,000 $ 16,000
State income tax, net of federal benefit................ 106,000 72,000 3,000
Federal and state income tax credits generated.......... (241,000) (114,000) (15,000)
Change in valuation allowance........................... 100,000 (192,000) 15,000
Officers' life insurance................................ -- 11,000 (30,000)
Prior year state taxes assessment....................... -- -- 13,000
Other................................................... 14,000 6,000 (1,000)
----------- ----------- ----------
$ 679,000 $ 201,000 $ 1,000
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
as of March 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred Tax Assets
Tax credit carryforward........................................... $ 292,000 $ 155,000
Bad debt reserve.................................................. 102,000 109,000
Accrued expenses.................................................. -- 33,000
Warranty reserve.................................................. 54,000 59,000
Other reserves.................................................... 63,000 65,000
Valuation allowance for deferred tax assets....................... (100,000) --
----------- -----------
TOTAL DEFERRED TAX ASSETS, NET.................................. 411,000 421,000
Deferred Tax Liability, accumulated depreciation.................... (181,000) (281,000)
----------- -----------
$ 230,000 $ 140,000
----------- -----------
----------- -----------
</TABLE>
Management has recorded a valuation allowance on deferred tax assets
relating to tax credit carryforwards which are not expected to be realized
within two years.
F-11
<PAGE>
FIREPLACE MANUFACTURERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. INCOME TAXES
The components giving rise to the net deferred assets (liabilities)
described above have been included in the accompanying consolidated balance
sheets as of March 31, 1998 and 1997 as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Current assets...................................................... $ 411,000 $ 421,000
Noncurrent (liabilities)............................................ (181,000) (281,000)
----------- -----------
$ 230,000 $ 140,000
----------- -----------
----------- -----------
</TABLE>
Business enterprise zone credit carryforwards as of March 31, 1998 expire as
follows: 2012 $85,000; 2013 $207,000 (total $292,000).
NOTE 9. RELATED PARTY TRANSACTIONS
At March 31, 1996, advances to officers/stockholders totaled $132,000. These
amounts originated by cash advances which were to be repaid in 1992 and 1994. On
March 31, 1992, terms related to the repayment of these advances were modified.
Under the terms of the revised agreements, principal payments on the advances
were due in semiannual installments over the next five years, with the notes
bearing interest at rates ranging from 8% to 10%. In the event that the required
cash payments were not made, the principal and interest due were to be offset
against compensation otherwise due these individuals. The compensation used to
repay these notes was determined annually based on merit, Company profits and
reasonable business practices. In 1996, the Company determined the most likely
method of collection was through future compensation or bonuses and,
accordingly, reclassified the receivables as a reduction of stockholders'
equity.
Prior to March 31, 1994, the Company had sales to Rampart General Inc.
(Rampart), a company partially owned by the Chairman of the Board of Directors
and a stockholder of the Company, Willard V. Harris, Jr. The unpaid balance due
the Company at March 31, 1993 of approximately $645,000 was determined to be
uncollectible and was written off as a charge to bad debt expense in 1993. In
1993, Willard V. Harris, Jr. transferred a 26.25% limited partnership interest
in California Real Estate Partners with a capital account of approximately
$500,000 at that time to the Company as partial payment of the indebtedness
leaving a balance due from Rampart at March 31, 1993 of approximately $145,000.
Because of the uncertainty of the value of this interest in the partnership, no
recovery of the amount written off has been recorded in the financial
statements. During fiscal 1997, a four year repayment schedule was established
for the remaining balance of approximately $163,000, which included accrued
interest. During fiscal year 1998, the Company paid a cash bonus to Willard V.
Harris which he directed that the Company apply a portion of the remaining
unpaid balance due from Rampart. This bonus was recorded as compensation
expense. Since the original amount due from Rampart was charged to bad debt
expense, the recovery of this amount was recorded as a reduction of bad debt
expense.
NOTE 10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES:
The Company's operations are conducted at facilities under an operating
lease expiring April 30, 1999 and requiring monthly payments of approximately
$29,000.
F-12
<PAGE>
FIREPLACE MANUFACTURERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company also leases equipment under three long-term agreements. Two of
the long-term agreements are with a company which is wholly-owned by two
officers/stockholders of the Company. These agreements require monthly payments
of approximately $7,000 and expire in July 2000 and November 2000 with a total
commitment of approximately $212,000.
The future rental commitments on all leases at March 31, 1998 are as
follows: 1999 $433,000; 2000 $124,000; 2001 $52,000; 2002 $6,000 (total
$615,000).
Rent expense was $438,000, $382,000 and $294,000 during 1998, 1997 and 1996,
respectively.
ROYALTY AGREEMENTS:
The Company has an agreement which expires in the year 2009, to pay
royalties on the sale of certain ceramic fiber log sets. The agreement requires
a royalty payment of $2.25 per log set sold for the first five years and $1.50
per log set sold in years six through fifteen with a minimum of $1,500 per month
in years six through fifteen. Total royalty expense under the agreement was
approximately $77,000 during 1998.
The Company entered into a nonexclusive license agreement which expired in
March 1996. Total royalty expense under the agreement was approximately $207,000
during 1996.
SEVERANCE COMPENSATION AGREEMENT:
The Company has entered into a severance compensation agreement with three
of the Company's officers which expires on the earliest of the following dates:
five years expiring in May 2001; termination of the executive's employment based
on death, disability, retirement or cause or by the executive other than for
good reason; one year from the date of a change in control if the executive has
not terminated his employment for good reason. The terms of the agreement
require severance compensation equal to 299% of the executive's average
annualized compensation includable in his gross income for the five taxable
years immediately preceding the date of the change in control. The severance
compensation agreement will be terminated upon consummation of the anticipated
sale of the Company disclosed in Note 15.
SALE OF TRADE RECEIVABLES:
The Company began to utilize an agreement with a finance company whereby the
finance company, with the approval of the customer, will purchase receivables
from the Company. The finance company then pays the Company for the invoiced
purchase under two programs. Under the first program the invoice is paid within
15 days at a discount of 1.75%. Under the second program the invoice is paid
within 30 days at a discount of 2.25%. The agreement contains a clause whereby
if the finance company repossesses any inventory, the Company is obligated to
buy back the repossessed inventory. During 1998 and 1997, the Company sold
receivables of approximately $4,267,000 and $2,400,000. The balance sheets at
March 31, 1998 and 1997 include approximately $151,000 and $150,000 due from the
finance company. At March 31, 1998 and 1997, the amount of receivables sold to,
but not collected by, the finance company was approximately $722,000 and
$610,000, respectively. Management estimates that there will be no amounts of
inventory repurchased under this agreement and, accordingly, no reserve has been
recorded for the recourse provision.
F-13
<PAGE>
FIREPLACE MANUFACTURERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
YEAR 2000:
Based on a preliminary study by management, the Company expects to incur
approximately $150,000 to $250,000 to modify its information systems to
accurately process information in the year 2000 and beyond. The Company
continues to evaluate appropriate courses of corrective action, including
replacement of certain systems whose associated costs would be recorded as
assets and amortized.
CONTINGENCY:
A claim was asserted against the Company alleging infringement of a
company's patent. The original claim was for $50 per unit sold that infringed
upon the patent (management estimated the potential claim at approximately
$1,000,000). The district court granted the Company's motion for summary
judgment and held that the Company's products do not infringe the patent at
issue, either literally or by operation of the doctrine of equivalents. The
summary judgment has been appealed. The Company's independent counsel is unable
to express an opinion as to the probable outcome of the action and therefore no
estimate can be made of a range of amount of loss, if any, that is reasonably
possible. No amounts have been accrued in regards to this matter and it is
reasonably possible that a change in the estimate will occur in the near term.
NOTE 11. RETIREMENT SAVINGS PLAN
The Company has a defined contribution 401(k) savings plan (Plan) which
covers all employees meeting minimum age and service requirements. The Company
provides a matching contribution of 25% of the first 3% saved by the employee.
Total contributions to the Plan were $11,000, $13,000 and $11,000 during 1998,
1997 and 1996, respectively.
NOTE 12. DISCRETIONARY BONUSES
The Company pays discretionary bonuses to its officers and key employees.
The amounts of these bonuses charged to expense were as follows:
<TABLE>
<CAPTION>
PAID OR REDUCTION
PAYABLE IN OF NOTES COMMON
CASH RECEIVABLE STOCK AUTOMOBILES TOTAL
---------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
1998
Officers................... $ 779,000 $ 138,000 $ 194,000 $ 58,000 $ 1,169,000
Key employees.............. 540,000 -- -- -- 540,000
1997
Officers................... $ 260,000 $ 149,000 $ 147,000 $ -- $ 556,000
Key employees.............. 281,000 -- -- -- 281,000
1996
Officers................... $ 64,000 $ 56,000 $ -- $ -- 120,000
Key employees.............. 10,000 -- -- -- 10,000
</TABLE>
F-14
<PAGE>
FIREPLACE MANUFACTURERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash payments for:
Interest............................................... $ 37,000 $ 290,000 $ 370,000
---------- ---------- ----------
---------- ---------- ----------
Income taxes........................................... $ 895,000 $ 189,000 $ 85,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
NOTE 14. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130 REPORTING COMPREHENSIVE INCOME
and SFAS No. 131 DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. SFAS No. 130 requires an enterprise to report, by major components
and as a single total, the change in its net assets during the period from
nonowner sources; and SFAS No. 131 establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas and major customers. Adoption of these
statements will not impact the Company's financial position, results of
operations or cash flows and any effect will be limited to the form and content
of its disclosures. Both statements are effective for fiscal years beginning
after December 15, 1997, with earlier application permitted.
NOTE 15. SUBSEQUENT EVENTS
ANTICIPATED SALE OF THE COMPANY:
The Company has signed a letter of intent to merge with another company. The
Company's common stock will be exchanged for $7.14 per share, not to exceed
$23,750,000. Upon consummation of the merger, all outstanding stock options will
be canceled and all existing employment agreements will be terminated. Upon
closing, three members of the executive management team will enter into three
year noncompete agreements with the buyer, each providing for one-time payments
of $1,000,000. In addition, one additional member of the executive team will
enter into a three year noncompete agreement providing for a one-time payment of
$250,000. The financial statements do not reflect any adjustment which may be
necessary as a result of this transaction.
1999 PROFIT SHARING PLAN:
The Company has adopted the 1999 profit sharing plan for all employees which
provides for the following profit sharing rates: 0% on the first $1,000,000 of
pre-tax income, approximately 22% of pre-tax income over $1,000,000 and up to
$2,000,000, approximately 33% of pre-tax income over $2,000,000 and up to
$3,000,000 and approximately 44% of pre-tax income over $3,000,000.
F-15
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
DESA INTERNATIONAL, INC.,
FMI ACQUISITION, INC.,
FIREPLACE MANUFACTURERS, INC.
AND
CERTAIN
STOCKHOLDERS OF
FIREPLACE MANUFACTURERS, INC.
DATED AS OF MAY 13, 1998
(AS AMENDED ON JULY 8 AND 29, 1998)
A-1
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION, dated as of May 13, 1998 by and among
Desa International, Inc., a Delaware corporation (the "PARENT"), FMI
Acquisition, Inc., a Delaware corporation (the "BUYER" or the "MERGER
SUBSIDIARY"), Fireplace Manufacturers, Inc., a California corporation (the
"COMPANY"), and the stockholders of the Company who have executed this Agreement
(collectively, the "STOCKHOLDERS").
W I T N E S S E T H:
WHEREAS, the Parties hereto deem it advisable and in their respective best
interests to consummate the business combination provided for herein.
NOW, THEREFORE, in consideration of the respective representations,
warranties, covenants and agreements set forth in this Agreement, the Parties
hereto, intending to be legally bound, agree as follows:
ARTICLE 1
THE CLOSING
SECTION 1.1 CLOSING. Unless this Agreement shall have been terminated
pursuant to ARTICLE 8 hereof, and subject to the satisfaction or, if
permissible, waiver of the conditions set forth in ARTICLE 7, the closing of the
Acquisition Merger (the "CLOSING") will take place on the Closing Date at the
offices of Sullivan & Worcester LLP, One Post Office Square, Boston,
Massachusetts, unless another date, time or place is agreed to in writing by the
Parties.
SECTION 1.2 DELIVERIES AT CLOSING. Subject to the provisions of ARTICLES 7
and 8, at the Closing there shall be delivered by the Parent and the Company the
opinions, certificates and other documents and instruments required then to be
delivered pursuant to ARTICLES 2 and 7 hereof.
ARTICLE 2
THE ACQUISITION MERGER
SECTION 2.1 SURVIVING CORPORATION. Unless the Parent shall have duly
elected the Alternative Merger Structure pursuant to Section 2.9, in accordance
with this Agreement, Section 252 of the DGCL and Section 1108 of the CGCL, at
the Effective Time, (i) the Merger Subsidiary shall be merged with and into the
Company and the separate corporate existence of the Merger Subsidiary shall
cease; (ii) the Company shall be the surviving corporation in such merger and
shall continue its corporate existence under the laws of the State of
California; and (iii) the name of the Surviving Corporation shall be "Fireplace
Manufacturers, Inc." If the Parent shall have duly elected the Alternative
Merger Structure pursuant to Section 2.9, in accordance with this Agreement,
Section 252 of the DGCL and Section 1108 of the CGCL, at the Effective Time, (i)
the Company shall be merged with and into the Parent and the separate corporate
existence of the Company shall cease; (ii) the Parent shall be the surviving
corporation in such merger and shall continue its corporate existence under the
laws of the State of Delaware; and (iii) the name of the Surviving Corporation
shall be "DESA International, Inc." The two merging corporations pursuant to
this Section 2.1, pursuant to the Alternative Merger Structure or not as the
case may be, are sometimes collectively referred to herein as the "CONSTITUENT
CORPORATIONS". The merger transaction referred to in this Section 2.1, pursuant
to the Alternative Merger Structure or not as the case may be, is referred
herein to as the "ACQUISITION MERGER". The corporation which survives in the
Acquisition Merger, pursuant to the Alternative Merger Structure or not as the
case may be, is referred to herein as the "SURVIVING CORPORATION".
SECTION 2.2 EFFECTIVE TIME; CONDITIONS. If all of the conditions precedent
set forth in ARTICLE 7 hereof have been satisfied or waived (to the extent
permitted hereby and by law), and this Agreement has
A-2
<PAGE>
not otherwise been properly terminated under ARTICLE 8 hereof, (a) the
appropriate form of certificate of merger with respect to the Acquisition Merger
shall be prepared by the Constituent Corporations (as applicable to the form of
Acquisition Merger) and filed and recorded pursuant to Section 252 of the DGCL
with the Delaware Secretary of State (as so filed and recorded, the "CERTIFICATE
OF MERGER") and (b) a certified copy or counterpart of this Agreement and the
officers' certificates of the Constituent Corporations (as applicable to the
form of Acquisition Merger) as required by Section 1108 of the CGCL shall be
prepared and filed pursuant to said Section 1108 with the California Secretary
of State (as so filed and recorded, the "ARTICLES OF MERGER"). The Acquisition
Merger shall become effective at, and the Effective Time shall be, the time
specified in the Certificate of Merger and the Articles of Merger.
SECTION 2.3 CERTIFICATE OF INCORPORATION AND BY-LAWS. Except in the case
of the Alternative Merger Structure, the Articles of Incorporation and the
By-Laws of the Company as in effect on the date hereof shall be the Articles of
Incorporation and the By-laws of the Surviving Corporation and shall thereafter
continue to be the Surviving Corporation's Articles of Incorporation and By-Laws
until amended as provided therein or by applicable law. In the case of the
Alternative Merger Structure, the Certificate of Incorporation and the By-Laws
of the Parent as in effect on the date hereof shall be the Certificate of
Incorporation and the By-laws of the Surviving Corporation and shall thereafter
continue to be the Surviving Corporation's Certificate of Incorporation and
By-Laws until amended as provided therein or by applicable law.
SECTION 2.4 DIRECTORS AND OFFICERS. Except in the case of the Alternative
Merger Structure, the directors and officers of the Surviving Corporation shall
be the directors and officers of the Merger Subsidiary immediately prior to the
Effective Time and each such director and officer shall hold office in
accordance with the Certificate of Incorporation and By-Laws of the Surviving
Corporation. In the case of the Alternative Merger Structure, the directors and
officers of the Surviving Corporation shall be the directors and officers of the
Parent immediately prior to the Effective Time and each such director and
officer shall hold office in accordance with the Certificate of Incorporation
and By-Laws of the Surviving Corporation.
SECTION 2.5 EFFECT ON OUTSTANDING SHARES.
A. COMPANY COMMON STOCK. By virtue of the Acquisition Merger, whether
or not consummated pursuant to the Alternative Merger Structure,
automatically and without any action on the part of the holder thereof, each
share of the Company Common Stock issued and outstanding immediately prior
to the Effective Time (other than (i) any such shares held as treasury stock
by the Company, and (ii) shares as to which dissenters' rights have been
demanded and not forfeited under Chapter 13 of the CGCL, and (iii) shares
owned by the Parent as provided in SECTION 2.5(C) below) shall become and be
converted into the right to receive the Consideration Per Share. Each such
share of Company Common Stock, when so converted, shall no longer be
outstanding and shall be automatically retired and shall cease to exist, and
each holder of a certificate representing any such shares shall cease to
have any rights with respect thereto, except the right to receive the
Consideration Per Share for each such share pursuant to this SECTION 2.5(A)
upon the surrender of such certificate.
B. THE MERGER SUBSIDIARY COMMON STOCK. Except in the case of Parent's
election of the Alternative Merger Structure, each share of the Merger
Subsidiary Common Stock issued and outstanding immediately prior to the
Effective Time shall be converted as of the Effective Time into one share of
common stock, $1.00 par value per share, of the Surviving Corporation. In
the case of Parent's election of the Alternative Merger Structure, each
share of Parent's Common Stock, $.01 par value per share, immediately prior
to the Effective Time shall continue to be one share of the Surviving
Corporation's Common Stock.
C. CANCELLATION OF COMPANY COMMON STOCK OWNED BY PARENT. At the
Effective Time, all shares of the Company Common Stock that are owned by
Parent will be canceled and retired and shall cease to exist, and no
consideration shall be delivered in exchange therefor.
A-3
<PAGE>
D. DISSENTING SHARES. Notwithstanding anything in this Agreement to
the contrary, shares of Company Common Stock outstanding immediately prior
to the Effective Time and held by a holder who has not voted in favor of the
Acquisition Merger or consented thereto in writing and who has demanded
appraisal for such shares of Company Common Stock in accordance with Chapter
13 of the CGCL, if such Chapter provides for appraisal rights for such
shares in the Acquisition Merger ("Dissenting Shares"), shall not be
converted into the right to receive the Consideration Per Share as provided
in SECTION 2.5(A), unless and until such holder fails to perfect or
withdraws or otherwise loses such holder's right to appraisal and payment
under the CGCL. If, after the Effective Time, any such holder fails to
perfect or withdraws or loses such holder's right to appraisal, such
Dissenting Shares shall thereupon be treated as if they had been converted
into the right to receive the Consideration Per Share to which such holder
is entitled, without interest or dividends thereon. The Company shall give
Parent prompt notice of any demands received by the Company for appraisal of
shares of Company Common Stock, and Parent shall have the right to
participate in all negotiations and proceedings with respect to such
demands. The Company shall not, except with the prior written consent of
Parent, make any voluntary payment with respect to, or settle or offer to
settle, any such demands.
SECTION 2.6 EXCHANGE OF CERTIFICATES.
A. EXCHANGE AGENT. At the Closing, Parent will enter into an Exchange
Agreement (the "Exchange Agreement") with a bank or trust company mutually
acceptable to Parent and the Company (the "Exchange Agent"). As of the
Effective Time, Parent will deposit with the Exchange Agent pursuant to the
Exchange Agreement, for the benefit of the shareholders of the Company
Common Stock, for exchange in accordance with this Article 2 and the
Exchange Agreement, the Merger Consideration to be disbursed pursuant to
this Article 2 and the Exchange Agreement in exchange for outstanding shares
of the Company Common Stock. All deposits with the Exchange Agent pursuant
to this SECTION 2.6(A) are referred to herein as the "Exchange Fund."
B. EXCHANGE PROCEDURES. As soon as reasonably 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 outstanding shares of Company Common Stock (individually, a
"Certificate" and collectively, the "Certificates") whose shares were each
converted pursuant to SECTION 2.5 into the right to receive the
Consideration Per Share for each such share (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and
title to the Certificates shall pass, only upon delivery of the Certificates
to the Exchange Agent and shall be in such form and have such other
provisions as Parent and the Company may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Certificates in
exchange for any of the Merger Consideration. Upon surrender of a
Certificate for cancellation to the Exchange Agent, together with such
letter of transmittal, duly executed, the holder of such Certificate shall
be entitled to receive in exchange therefor, promptly upon surrender of such
Certificate, the Consideration Per Share in cash for each share of Company
Common Stock represented by such Certificate. In no event will the holder of
any such Certificate be entitled to receive interest on the Merger
Consideration. Until surrendered as contemplated by this SECTION 2.6(B),
each Certificate shall be deemed at any time after the Effective Time to
represent only the right to receive upon surrender the Consideration Per
Share in cash for each share of Company Common Stock represented by such
Certificate.
In the event that any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed and, if Parent shall reasonably
conclude that such affidavit does not adequately protect Parent or the Surviving
Corporation, upon the posting by such person of a bond in such amount as Parent
or the Surviving Corporation may reasonably direct as indemnity against any
claim that may be made against either of them with respect to such Certificate,
the Exchange Agent will distribute, as provided in this SECTION 2.6(B), in
respect of such
A-4
<PAGE>
lost, stolen or destroyed Certificate the Consideration Per Share for each share
of Company Common Stock represented by such lost, stolen or destroyed
Certificate.
C. TERMINATION OF EXCHANGE FUND. Upon the expiration of the term of
the Exchange Agreement, any potion of the Exchange Fund which remains
undistributed to the holders of Company Common Stock shall be delivered to
Parent, upon demand, and any holders of Company Common Stock who have not
previously complied with this Section 2.6 shall thereafter look only to
Parent for payment of their claim for any of the Merger Consideration.
D. CLOSING OF STOCK TRANSFER BOOKS. The stock transfer books of the
Company shall be closed as of the close of business on the first business
day immediately preceding the Closing Date, and thereafter there shall be no
further registration of transfers on the stock transfer books of the Company
or the Surviving Corporation of the shares of Company Common Stock which
were outstanding immediately prior to such time. If, after such time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this SECTION 2.6(D).
E. NO LIABILITY. Neither Parent nor the Company shall be liable to any
holder of shares of Company Common Stock for such shares (or dividends or
distributions with respect thereto) delivered to a public official pursuant
to any applicable abandoned property, escheat or similar law.
SECTION 2.7 EFFECT OF THE ACQUISITION MERGER.
A. At the Effective Time, all of the estate, property, rights,
privileges, powers and franchises of the Constituent Corporations and all of
their property, real, personal and mixed, and all the debts due on whatever
account to any of them, as well as all stock subscriptions and other choses
in action belonging to any of them, shall be transferred to and vested in
the Surviving Corporation, without further act or deed, and all claims,
demands, property and other interest shall be the property of the Surviving
Corporation, and the title to all real estate vested in any of the
Constituent Corporations shall not revert or be in any way impaired by
reason of the Acquisition Merger, but shall be vested in the Surviving
Corporation.
B. From and after the Effective Time, the rights of creditors of any
Constituent Corporation shall not in any manner be impaired, nor shall any
liability or obligation, including taxes due or to become due, or any claim
or demand in any cause existing against such corporation, or any
stockholder, director, or officer thereof, be released or impaired by the
Acquisition Merger, but the Surviving Corporation shall be deemed to have
assumed, and shall be liable for, all liabilities and obligations of each of
the Constituent Corporations in the same manner and to the same extent as if
the Surviving Corporation had itself incurred such liabilities or
obligations. The stockholders, directors, and officers of the Constituent
Corporations shall continue to be subject to all liabilities, claims and
demands existing against them as such at or before the Acquisition Merger.
No action or proceeding then pending before any court or tribunal in which
any Constituent Corporation is a party, or in which any such stockholder,
director, or officer is a party, shall abate or be discontinued by reason of
the Acquisition Merger, but any such action or proceeding may be prosecuted
to final judgment as though no merger had taken place, or the Surviving
Corporation may be substituted as a party in place of any Constituent
Corporation by the court in which such action or proceeding is pending.
SECTION 2.8 ADDITIONAL ACTIONS. If, at any time after the Effective Time,
the Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of either of the
Constituent Corporations acquired or to be acquired by the Surviving Corporation
as a result of, or in connection with, the Acquisition Merger or to otherwise
carry out this Agreement, the officers and
A-5
<PAGE>
directors of the Surviving Corporation shall and will be authorized to execute
and deliver, in the name and on behalf of the Constituent Corporations or
otherwise, all such deeds, bills of sale, assignments and assurances and to take
and do, in the name and on behalf of the Constituent Corporations or otherwise,
all such other actions and things as may be necessary or desirable to vest,
perfect or confirm any and all right, title and interest in, to and under such
rights, properties or assets in the Surviving Corporation or to otherwise carry
out the purposes and intent of this Agreement.
SECTION 2.9 ALTERNATIVE MERGER STRUCTURE. Parent may, at its election,
designate an alternative structure for the Acquisition Merger whereby the
Company will be merged with and into the Parent, with the parent to be the
Surviving Corporation (the "Alternative Merger Structure"). Notice of Parent's
election to use the Alternative Merger Structure shall be given to the Company
and the Stockholders not less than ten (10) days before the Closing Date.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents, warrants and covenants to, and agrees with,
the Parent and the Merger Subsidiary as set forth hereinbelow.
SECTION 3.1 ORGANIZATION AND BUSINESS; POWER AND AUTHORITY; EFFECT OF
TRANSACTION.
A. The Company and each Subsidiary:
(i) is a corporation duly organized, validly existing and in good
standing under the laws of the State of California;
(ii) has all requisite corporate power and authority to own or hold
under lease its properties and to conduct its business as now conducted
and has in full force and effect all Governmental Authorizations and
Private Authorizations and has made all Governmental Filings, to the
extent required for such ownership and lease of its property and conduct
of its business, except to the extent that the failure to have obtained
any such Governmental Authorization or Private Authorization or to have
made any such Governmental Filing would not have an Adverse Effect; and
(iii) has duly qualified and is authorized to do business and is in
good standing as a foreign corporation in each jurisdiction set forth in
SECTION 3.1(A)(III) of the Company Disclosure Schedule and, except as
otherwise set forth in SECTION 3.1(A)(III) of the Company Disclosure
Schedule, in each jurisdiction which the character of its property or the
nature of its business or operations requires such qualification or
authorization, except to the extent the failure so to qualify or to
maintain such authorizations would not have an Adverse Effect.
B. The Company and each Subsidiary has all requisite power and
authority (corporate and other) and, other than the filing and termination
of the waiting period pursuant to the HSR Act, has in full force and effect
all Governmental Authorizations and Private Authorizations in order to
enable it to execute and deliver, and to perform its obligations under, this
Agreement and each Collateral Document executed or required to be executed
by it pursuant hereto or thereto and to consummate the Acquisition Merger
and the Transactions, and the execution, delivery and performance of this
Agreement and each Collateral Document executed or required to be executed
pursuant hereto or thereto have been duly authorized by all requisite
corporate or other action (other than that of the Company's stockholders).
This Agreement has been duly executed and delivered by the Company and
constitutes, and each Collateral Document executed or required to be
executed pursuant hereto or thereto or to consummate the Acquisition Merger
and the Transactions, when executed and delivered by the Company will
constitute, legal, valid and binding obligations of the Company, enforceable
in accordance with their respective terms, except as such enforceability may
be subject to bankruptcy,
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moratorium, insolvency, reorganization, arrangement, voidable preference,
fraudulent conveyance or other similar laws relating to or affecting the
rights of creditors, and except as the same may be subject to the effect of
general principles of equity. Approval by the affirmative vote of a majority
of the outstanding shares of Company Common Stock entitled to vote is the
only action by the holders of any class or series of the capital stock of
the Company necessary to approve this Agreement, the Acquisition Merger and
the Transactions under Applicable Law and the Company's Organic Documents.
C. Except as set forth in SECTION 3.1(C) of the Company Disclosure
Schedule, neither the execution and delivery of this Agreement or any
Collateral Document executed or required to be executed pursuant hereto or
thereto, nor the consummation of the Acquisition Merger or the Transactions,
nor compliance with the terms, conditions and provisions hereof or thereof
by the Company or any of the other parties hereto or thereto which is
Affiliated with the Company:
(i) will conflict with, or result in a breach or violation of, or
constitute a default under, any Applicable Law on the part of the Company
or any Subsidiary or will conflict with, or result in a breach or
violation of, or constitute a default under, or permit the acceleration
of any obligation or liability in, or but for any requirement of giving
of notice or passage of time or both would constitute such a conflict
with, breach or violation of, or default under, or permit any such
acceleration in, any Contractual Obligation of the Company or any
Subsidiary,
(ii) will result in or permit the creation or imposition of any Lien
(except to the extent set forth in SECTION 3.1(C) of the Company
Disclosure Schedule) upon any property now owned or leased by the Company
or any Subsidiary or any such other party, or
(iii) will require any Governmental Authorization or Governmental
Filing or Private Authorization, except for filing requirements under
Applicable Law in connection with the Acquisition Merger and the
Transactions and except pursuant to the HSR Act.
SECTION 3.2 FINANCIAL AND OTHER INFORMATION.
A. The Company has heretofore furnished to the Parent copies of the
consolidated financial statements of the Company listed in SECTION 3.2(A) of
the Company Disclosure Schedule (the "COMPANY FINANCIAL STATEMENTS"). The
Company Financial Statements, including in each case the notes thereto, have
been prepared in accordance with GAAP (or, with regard to interim period
financial statements, in accordance with SEC rules) applied on a consistent
basis with the Company's past practice throughout the periods covered
thereby, are true and correct in all material respects and, except as
otherwise noted therein, fairly and completely present the consolidated
financial condition and results of operations of the Company and its
Subsidiaries on the bases therein stated, as of the respective dates
thereof, and for the respective periods covered thereby subject, in the case
of unaudited Company Financial Statements to normal nonmaterial year-end
audit adjustments and accruals.
B. The Company does not own any capital stock or equity or proprietary
interest in any Entity or enterprise and has no Subsidiaries, however
organized and however such interest may be denominated or evidenced, except
as set forth in SECTION 3.2(B) of the Company Disclosure Schedule. With
respect to any Subsidiary disclosed in such SECTION 3.2(B), the Company
owns, and at the Closing will own, 100% of the issued and outstanding
capital stock and all Convertible Securities and Option Securities of such
Subsidiary, and all of such securities are, and at the Closing will be, duly
authorized, validly issued, fully paid and non-assessable and free of
preemptive rights and Liens.
SECTION 3.3 AUTHORIZED AND OUTSTANDING CAPITAL STOCK. The authorized
capital stock of the Company consists of 1,000,000 shares of Preferred Stock,
$1.00 par value, of which no shares are outstanding and 10,000,000 shares of
Common Stock, $.01 par value (the "Company Common Stock"), of which 3,326,775
shares are issued and outstanding. All of such outstanding capital stock has
been duly
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authorized and validly issued, is fully paid and nonassessable and is not
subject to any preemptive or similar rights. Except as set forth in SECTION 3.3
of the Company Disclosure Schedule, there is neither outstanding nor has the
Company agreed to grant or issue any additional equity securities or any Option
Security or Convertible Security. Neither the Company nor any Subsidiary is a
party to or bound by any agreement, put or commitment pursuant to which it is
obligated to purchase, redeem or otherwise acquire any equity securities or any
Option Security or Convertible Security. Except as contemplated by this
Agreement, between the date hereof and the Closing, the Company will not, and
will cause its Subsidiaries not to, issue, sell or purchase or agree to issue,
sell or purchase any equity securities or any Option Security or Convertible
Security of the Company or any Subsidiary. All of the issued and outstanding
shares of capital stock of the Company and its Subsidiaries have been issued in
compliance with applicable Federal and state securities laws.
SECTION 3.4 CHANGES IN CONDITION. Since the date of the most recent
audited financial statements forming part of the Company Financial Statements,
except to the extent specifically described in SECTION 3.4 of the Company
Disclosure Schedule or disclosed in the Company's periodic reports under the
Securities Exchange Act of 1934, as amended, there has been no Adverse Change in
the Company. There is no Event known to the Company which Adversely Affects the
Company, or the ability of the Company to perform any of the obligations set
forth in this Agreement or any Collateral Document executed or required to be
executed pursuant hereto or thereto except for changes in general economic
conditions and to the extent set forth in SECTION 3.4 of the Company Disclosure
Schedule.
SECTION 3.5 LIABILITIES. At the date of the most recent balance sheet
forming part of the Company Financial Statements, the Company and its
Subsidiaries had no obligations or liabilities, past, present or deferred,
accrued or unaccrued, fixed, absolute, contingent or other, except as disclosed
in SECTION 3.5 of the Company Disclosure Schedule (or immaterial items not
required to be disclosed thereon), in such balance sheet, or the notes thereto,
and since such date no such obligations or liabilities have been incurred, other
than obligations and liabilities incurred in the ordinary course of business
consistent with past practice, which do not, in the aggregate, Adversely Affect
the Company except to the extent set forth in SECTION 3.5 of the Company
Disclosure Schedule.
Neither the Company nor any Subsidiary has Guaranteed, and is not otherwise
primarily or secondarily liable in respect of, any obligation or liability of
any other Person material to the Company, except for endorsements of negotiable
instruments for deposit in the ordinary course of business, consistent with
prior practice, or as disclosed in the most recent audited balance sheet, or the
notes thereto, forming part of the Company Financial Statements or in SECTION
3.5 of the Company Disclosure Schedule.
SECTION 3.6 TITLE TO PROPERTIES; LEASES.
A. The Company (or a Subsidiary) has good, legal and insurable title,
with respect to all real property owned or leased (in fee simple if owned
and leasehold if leased) and good, clear, record and marketable title if
owned (in fee simple), if any, reflected as an asset on the most recent
audited balance sheet forming part of the Company Financial Statements, or
held by the Company (or a Subsidiary) for use in its business if not so
reflected, and good and clear indefeasible and merchantable title to all
other assets, tangible and intangible, reflected on such balance sheet, or
(excluding leased property) held by the Company (or a Subsidiary) for use in
its business if not so reflected, or purported to have been acquired by the
Company (or a Subsidiary) since such date, except inventory sold or
depleted, or property, plant and other equipment used up or retired, since
such date, in each case in the ordinary course of business consistent with
past practice, free and clear of all Liens, except (x) such as are reflected
in the most recent audited balance sheet, or the notes thereto, forming part
of the Company Financial Statements, (y) Liens securing taxes, assessments,
governmental charges or levies, or the claims of materialmen, carriers,
landlords and like persons, which are not yet due or payable, or (z) as set
forth in SECTION 3.6(A) of the Company Disclosure Schedule. Each Lease or
other occupancy or other agreement under which the Company (or a Subsidiary)
holds real or
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personal property has been duly authorized, executed and delivered by the
Company (or a Subsidiary); each such Lease is a legal and valid obligation
of the Company (or a Subsidiary). The Company (or a Subsidiary) has a valid
leasehold interest in and enjoys peaceful and undisturbed possession under
all Leases pursuant to which it holds any real property or tangible personal
property. All of such Leases are valid and subsisting and in full force and
effect; and neither the Company nor any Subsidiary, nor to the knowledge of
the Company any other party thereto, is in default in the performance,
observance or fulfillment of any obligation, covenant or condition contained
in any such Lease.
B. SECTION 3.6(B) of the Company Disclosure Schedule contains a true,
correct and complete description of all real estate owned or leased by the
Company (or a Subsidiary) and all Leases and an identification of all
material items of fixed assets and machinery and equipment. The real
property (other than land), fixtures, fixed assets and machinery and
equipment of the Company (or a Subsidiary) are in a state of good repair and
maintenance and are in good operating condition, reasonable wear and tear
excepted. The Company (or a Subsidiary) owns, rents or leases all tangible
assets necessary for the conduct of the combined business of the Company and
its Subsidiaries as presently conducted and as presently proposed to be
conducted until the Closing.
C. With respect to each parcel of such real property owned by the
Company (or a Subsidiary), except as set forth in SECTION 3.6(C) of the
Company Disclosure Schedule:
(i) there are no pending or, to the knowledge of the Company,
threatened condemnation proceedings relating to such parcel, and
there are no pending or, to the knowledge of the Company,
threatened litigation or administrative actions relating to such
parcel or other matters Adversely Affecting the use, occupancy or
value thereof;
(ii) the buildings and improvements may be used as of right under
applicable zoning and land use laws for the operation of the
business of the Company (or a Subsidiary) as now conducted (the
"CURRENT USES") and such buildings and improvements are located
within the boundary lines of the described parcels of land, are
not in violation of Applicable Laws and do not encroach on any
easement which may burden the land; the land does not serve any
adjoining property for any purpose inconsistent with the use of
the land; and such parcel is not located within any flood plain or
subject to any similar type restriction for which any permits or
licenses necessary to the use thereof have not been obtained;
(iii) there are no outstanding options or rights of first refusal to
purchase such parcel, or any portion thereof or interest therein;
(iv) all facilities located on such parcel are supplied with utilities
and other services necessary for the operation of such facilities,
including gas, electricity, water, telephone, sanitary sewer and
storm sewer, all of which services are adequate for the Current
Uses and in accordance with all material Applicable Laws, and are
provided via public roads or via permanent, irrevocable,
appurtenant easements benefiting such parcel;
(v) such parcel abuts on and has direct vehicular access to a public
road or access to a public road via a permanent, irrevocable,
appurtenant easement benefiting such parcel;
(vi) the Company (or a Subsidiary) has received no written notice of
any proposed or pending proceeding to change or redefine the
zoning classification of all or any portion of the parcels; and
(vii) each parcel is an independent unit which does not rely on any
facilities (other than the facilities of public utility and water
companies) located on any other property (a) to fulfill any
zoning, building code, or other municipal or governmental
requirement, (b) for structural support or the furnishing of any
essential building systems or utilities, including,
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but not limited to electric, plumbing, mechanical, heating,
ventilating, and air conditioning systems, or (c) to fulfill the
requirements of any lease. No building or other improvement not
included in the parcels relies on any part of the parcels to
fulfill any requirement of Applicable Laws or for structural
support or the furnishing of any essential building systems or
utilities. Each of the parcels is assessed by local property
assessors as a tax parcel or parcels separate from all other tax
parcels.
D. With respect to each Lease, except as set forth in SECTION 3.6(D) of
the Company Disclosure Schedule:
(i) there are no disputes, oral agreements or forbearance programs in
effect as to any Lease;
(ii) all facilities occupied under each Lease are supplied with
utilities and other services necessary for the operation of said
facilities;
(iii) to the knowledge of the Company, the owner of the facility
occupied under each Lease has good and clear record and marketable
title to the parcel of real property, free and clear of any Lien,
except for recorded easements, covenants, and other restrictions
which do not impair the Current Uses, occupancy or value of the
property subject thereto; and
(iv) no Event has occurred which, with notice or lapse of time, would
constitute a breach or default or permit termination, modification
or acceleration of any Lease.
Section 3.7 INVENTORY. The inventory of the Company and its Subsidiaries
as set forth on the most recent balance sheet in the Company Financial
Statements, was, and the inventory of the Company and its Subsidiaries on the
date hereof is and on the Closing Date will be, in good and merchantable
condition, and in reasonably useable or saleable condition in the ordinary
course of business, except for obsolete or defective materials and any excess
stock items which alone and in the aggregate are not material. Such inventory
does not include any material amounts of any item that was at any prior time
written off or written down by the Company. To the knowledge of the Company,
there is no Adverse condition currently affecting the supply of materials or
inventory available to the Company.
Section 3.8 ACCOUNTS AND NOTES RECEIVABLE. All accounts and notes
receivable reflected on the most recent balance sheet in the Company Financial
Statements and all accounts and notes receivable arising subsequent to the date
of such balance sheet have or will have arisen in the ordinary course of
business, represent valid obligations to the Company (or a Subsidiary), and have
been collected or will be collected in the aggregate amounts thereof recorded on
the books of the Company, in each case net of the reserve for bad debts
reflected on such balance sheet.
Section 3.9 COMPLIANCE WITH PRIVATE AUTHORIZATIONS. SECTION 3.9 of the
Company Disclosure Schedule sets forth a true, correct and complete list and
description of each Private Authorization which individually is material to the
Company and its Subsidiaries taken as a whole, all of which are in full force
and effect. The Company (or a Subsidiary) has obtained all Private
Authorizations which are necessary for its ownership of its properties and the
conduct of its business as now conducted, except to the extent that the failure
to have obtained any such Private Authorization would not have an Adverse
Effect. Neither the Company nor any Subsidiary is in breach or violation of, or
in default in the performance, observance or fulfillment of, any Private
Authorization, except for such defaults, breaches or violations, as do not in
the aggregate have any Adverse Effect on the Company or the ability of the
Company (or a Subsidiary) to perform any of the obligations set forth in this
Agreement or any Collateral Document executed or required to be executed
pursuant hereto or thereto or to consummate the Acquisition Merger and the
Transactions. No Private Authorization is the subject of any pending or, to the
Company's knowledge, threatened attack, revocation or termination.
Section 3.10 COMPLIANCE WITH GOVERNMENTAL AUTHORIZATIONS AND APPLICABLE
LAW.
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A. SECTION 3.10(A) of the Company Disclosure Schedule contains a
description of:
(i) all Legal Actions which are pending or, to the Company's knowledge,
threatened or contemplated against, and which in any manner relate
Adversely to, the Company or the business, operations or
properties, or the officers or directors or any Subsidiary of the
Company in connection therewith; and
(ii) each material Governmental Authorization to which the Company (or
any Subsidiary) is subject and which relates to the business,
operations, properties, prospects, condition (financial or other),
or results of operations of the Company and its Subsidiaries, all
of which are in full force and effect.
B. The Company (or a Subsidiary) has obtained all Governmental
Authorizations which are necessary for the ownership or uses of its
properties and the conduct of its business as now conducted or as presently
proposed to be conducted by it or which, if not obtained and maintained,
could singly or in the aggregate, have any Adverse Effect on the Company,
except as otherwise described in SECTION 3.10(B) of the Company Disclosure
Schedule. No Governmental Authorization is the subject of any pending or, to
the Company's knowledge, threatened attack, revocation or termination.
Neither the Company nor any Subsidiary is, or at any time since January 1,
1994 has been, or is or has during such time been charged with, or to the
Company's knowledge, is threatened or under investigation with respect to
any material breach or violation of, or default in the performance,
observance or fulfillment of any Governmental Authorization or any
Applicable Law, except for such breaches, violations or defaults as do not
have in the aggregate any Adverse Effect on the Company or the ability of
the Company to perform any of the obligations set forth in this Agreement or
any Collateral Document executed or required to be executed pursuant hereto
or thereto, or to consummate the Acquisition Merger and the Transaction,
except as otherwise described in SECTION 3.10(B) of the Company Disclosure
Schedule.
C. Except as set forth in SECTION 3.10(C) of the Company Disclosure
Schedule, the Company and each Subsidiary, and the conduct and operations of
its business, is in compliance with all Applicable Laws which (i) affect or
relate to this Agreement or the Transactions or (ii) are applicable to it or
its business, except for any violation of, or default under, any Applicable
Law which reasonably may be expected not to have an Adverse Effect on the
Company.
Section 3.11 INTANGIBLE ASSETS; INTELLECTUAL PROPERTY.
A. SECTION 3.11 of the Company Disclosure Schedule sets forth a true,
correct and complete description of all Governmental Authorizations relating
to Intangible Assets or Intellectual Property or rights with respect
thereto, that are necessary for the present conduct of the Company's
consolidated business, including without limitation the nature of the
Company's (or a Subsidiary's) interest in each and the extent to which the
same have been duly registered in the offices as indicated therein. The
Company (or a Subsidiary) owns or possesses or otherwise has the right to
use all material Governmental Authorizations, Intangible Assets and
Intellectual Property necessary for the conduct of the Company's business
free and clear of all Liens and without any conflict with the rights of
others. Except as otherwise described in SECTION 3.11 of the Company
Disclosure Schedule, no Governmental Authorization, Intangible Asset or
Intellectual Property has been or is now involved in any opposition,
invalidation, or cancellation, and no Intellectual Property materially
infringes any trade name, trademark or service mark of any third party. Each
of the Company and its Subsidiaries has taken all necessary or desirable
action to protect each item of Intellectual Property that it owns or uses.
None of the Company and its Subsidiaries has interfered with, infringed
upon, misappropriated, or otherwise come into conflict with any Intellectual
Property rights of third parties, and none of the Company and its
Subsidiaries has ever received any charge, complaint, claim, or notice
alleging any such knowledge of the Company, no third party has interfered
with, infringed upon, misappropriated, or
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otherwise come into conflict with any Intellectual Property rights of any of
the Company and its Subsidiaries.
B. With respect to each item of Intellectual Property that any of the
Company and its Subsidiaries owns:
(i) the identified owner possesses all right, title, and interest in
and to the item;
(ii) the item is not subject to any outstanding judgment, order,
decree, stipulation, injunction, or charge;
(iii) no charge, complaint, action, suit, proceeding, hearing,
investigation, claim, or demand is pending or, to the knowledge of
the Company, is threatened which challenges the legality,
validity, enforceability, use, or ownership of the item; and
(iv) none of the Company and its Subsidiaries has ever agreed to
indemnify any person or entity for or against any interference,
infringement, misappropriation, or other conflict with respect to
the item.
C. SECTION 3.11 of the Disclosure Schedule also identifies each item
of Intellectual Property that any third party owns and that any of
the Company and its Subsidiaries uses pursuant to license,
sublicense, agreement or permission. The Company has supplied the
Parent with correct and complete copies of all such licenses,
sublicenses, and permissions (as amended to date). With respect to
each such item of used Intellectual Property:
(i) the license, sublicense, agreement or permission covering the item
is legal, valid, binding, enforceable and in full force and effect;
(ii) the license, sublicense, agreement or permission will continue to
be legal, valid, binding, enforceable and in full force and effect
on identical terms following the Closing;
(iii) no party to the license, sublicense, agreement or permission is in
material breach or default, and no event has occurred which with
notice or lapse of time would constitute a breach or default or
permit termination, modification or acceleration thereunder;
(iv) no party to the license, sublicense, agreement or permission has
repudiated any provision thereof;
(v) with respect to each sublicense, the representation and warranties
set forth in subsections (i) through (iv) above are true and
correct with respect to the underlying license;
(vi) the underlying item of Intellectual Property is not subject to any
outstanding judgment, order, decree, stipulation, injunction or
charge;
(vii) no charge, complaint, action, suit, proceeding, hearing,
investigation, claim, or demand is pending, or, to the knowledge
of the Company and the directors and officers (and employees with
responsibility for Intellectual Property matters) of the Company
and its Subsidiaries, is threatened which challenges the legality,
validity, or enforceability of the underlying item of Intellectual
property; and
(viii) none of the Company and its Subsidiaries has granted any
sublicense or similar right with respect to the license,
sublicense, agreement or permission.
SECTION 3.12 RELATED TRANSACTIONS. SECTION 3.12 of the Company Disclosure
Schedule sets forth a true, correct and complete description of any Contractual
Obligation or transaction between the Company and any of its officers,
directors, employees, stockholders, or any Affiliate of any thereof (other than
reasonable compensation for services as officers, directors and employees and
reimbursement for out-of-pocket expenses reasonably incurred in support of the
Company's business), including without
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limitation any providing for the furnishing of services to or by, providing for
rental of property, real, personal or mixed, to or from, or providing for the
lending or borrowing of money to or from or otherwise requiring payments to or
from, any officer, director, stockholder or employee, or any Affiliate of any
thereof.
SECTION 3.13 INSURANCE. The Company and its Subsidiaries have been covered
during the past five (5) years by insurance in scope and amount reasonable for
the business in which they have been engaged during such period. SECTION 3.13 of
the Company Disclosure Schedule lists all insurance policies maintained by the
Company (or a Subsidiary) and includes the insurers' names, policy numbers,
expiration dates, risks insured against, amounts of coverage, annual premiums,
exclusions, deductibles and self-insured retention and describes in reasonable
detail any retrospective rating plan, fronting arrangement or any other
self-insurance or risk assumption agreed to by the Company (or a Subsidiary) or
imposed upon the Company (or a Subsidiary) by any such insurers, as well as any
self-insurance program that is in effect. Neither the Company nor any Subsidiary
is in breach or violation of or in default under any such policy, and all
premiums due thereon have been paid, and each such policy or a comparable
replacement policy will continue to be in force and effect up to and including
the Closing Date. The Company (or a Subsidiary) has not received any written
notice from the insurer disclaiming coverage or reserving rights with respect to
a particular claim or such policy in general. The Company (or a Subsidiary) has
not incurred any material loss, damage, expense or liability covered by any such
insurance policy for which it has not properly asserted a claim under such
policy.
SECTION 3.14 TAX MATTERS.
A. The Company (or a Subsidiary) has in accordance with all Applicable
Laws filed all Tax Returns which are required to be filed, and has paid, or
made adequate provision for the payment of, all material Taxes which have or
may become due and payable pursuant to said Returns and all other material
governmental charges and assessments received to date. All Taxes which the
Company (or a Subsidiary) is required by law to withhold and collect have
been duly withheld and collected, and have been paid over, in a timely
manner, to the proper Authorities to the extent due and payable, except as
set forth on SECTION 3.14 (A) of the Company Disclosure Schedule. The
Company (nor any Subsidiary) has not executed any waiver to extend, or
otherwise taken or failed to take any action that would have the effect of
extending, the applicable statute of limitations in respect of any Tax
liabilities of the Company (or a Subsidiary) for the fiscal years prior to
and including the most recent fiscal year. Except as set forth in SECTION
3.14 (A) of the Company Disclosure Schedule, adequate provision has been
made on the most recent balance sheet forming part of the Company Financial
Statements for all Taxes of any kind, including interest and penalties in
respect thereof, whether disputed or not, and whether past, current or
deferred, accrued or unaccrued, fixed, contingent, absolute or other.
Neither the Company nor any Subsidiary is a "consenting corporation" within
the meaning of Section 341(f) of the Code.
B. The Company (or a Subsidiary) has paid all material Taxes which have
become due pursuant to its Returns.
C. From the end of its most recent fiscal year to the date hereof, the
Company and its Subsidiaries have not made any payment on account of any
Taxes except regular payments required in the ordinary course of business,
consistent with prior practice, with respect to current operations or
property presently owned.
D. The information shown on the consolidated Federal income Tax Returns
of the Company and its Subsidiaries (true, correct and complete copies of
which have been furnished by the Company to the Parent) is true, correct and
complete and fairly and accurately reflects the information purported to be
shown. Federal and state income Tax Returns of the Company have been
examined by the IRS or applicable state Authority through the taxable
periods set forth in SECTION 3.14(D) of the
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Company Disclosure Schedule, and the Company has not been notified regarding
any pending examination, except as shown in SECTION 3.14(D) of the Company
Disclosure Schedule.
E. The Company is not a party to any tax sharing agreement or
arrangement, except as set forth in SECTION 3.14(E) of the Company
Disclosure Schedule.
F. The Company is not and within five years of the date hereof has not
been, a "United States real property holding corporation" as defined in
Section 897 of the Code.
SECTION 3.15 EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974.
A. The Company (which for purposes of this SECTION 3.15 shall include
any Subsidiary or ERISA Affiliate with respect to any Plan subject to Title
IV of ERISA) does not contribute to any Plan or sponsor any Plan or Benefit
Arrangement and has not contributed to or sponsored any Plan or Benefit
Arrangement, except as set forth in SECTION 3.15(A) of the Company
Disclosure Schedule. As to all Plans and Benefit Arrangements listed in
SECTION 3.15(A) of the Company Disclosure Schedule, and except as disclosed
in such SECTION 3.15(A)of the Company Disclosure Schedule:
(i) all Plans and Benefit Arrangements comply and have been
administered in all material respects in form and in operation with
all Applicable Laws, and the Company has not received any
outstanding notice from any Authority questioning or challenging
such compliance;
(ii) all Plans maintained or previously maintained by the Company that
are or were intended to comply with Section 401 of the Code comply
and complied in form and in operation with all applicable
requirements of such Section, and no event has occurred which will
or could reasonably be expected to give rise to disqualification
of any such Plan under such Section;
(iii) none of the assets of any Plan are invested in employer securities
or employer real property;
(iv) there are no "prohibited transactions" (as described in Section
406 of ERISA or Section 4975 of the Code) with respect to any Plan
for which the Company has any liability;
(v) there are no Claims (other than routine claims for benefits)
pending or threatened involving Plans or the assets of Plans;
(vi) neither the Company nor any ERISA Affiliate has maintained any
Plan that is subject to Title IV of ERISA;
(vii) to the extent that the most recent balance sheet forming part of
the Company Financial Statements do not include a pro rata amount
of the contributions which would otherwise have been made in
accordance with past practices for the Plan years which include
the Closing Date, such amounts are set forth in SECTION 3.15(A) of
the Company Disclosure Schedule;
(viii) the Company nor any of its directors, officers, employees or any
other fiduciary has committed any breach of fiduciary
responsibility imposed by ERISA that would subject the Company or
any of its respective directors, officers or employees to any
material liability under ERISA;
(ix) except as set forth in SECTION 3.15(A), of the Company Disclosure
Schedule (which entry, if applicable, shall indicate the present
value of accumulated plan liabilities calculated in a manner
consistent with FAS 106 and actual annual expense for such
benefits for each of the last two (2) years) and pursuant to the
provisions of COBRA, the Company maintains no Plan that provides
benefits described in Section 3(1) of ERISA to any former
employees or retirees of the Company; and
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(x) the Company has made available to the Buyer a copy of the two most
recently filed Federal Form 5500 series and accountant's opinion,
if applicable, for each Plan.
B. The Company is not nor ever has been a party to any Multiemployer
Plan or made contributions to any such plan.
SECTION 3.16 EMPLOYMENT ARRANGEMENTS.
A. The Company (which term for purposes of this SECTION 3.16 shall
include any Subsidiary) has no obligation or liability, contingent or other,
under any Employment Arrangement (whether or not listed in SECTION 3.15(A)
of the Company Disclosure Schedule), other than those listed or described in
SECTION 3.16(A) of the Company Disclosure Schedule. The Company is not now
nor during the past three (3) years has been subject to or involved in or,
to the Company's knowledge, threatened with any union elections, petitions
therefor or other organizational activities, except as described in SECTION
3.16(A) of the Company Disclosure Schedule. None of the employees of the
Company is represented by any labor union or other employee collective
bargaining organization and there are no pending grievances, disputes or
controversies with any union or any other employee collective bargaining
organization of such employees.
B. Except as set forth in SECTION 3.16(B) of the Company Disclosure
Schedule, no employee shall accrue or receive additional benefits, service
or accelerated rights to payments of benefits under any Employment
Arrangement, including the right to receive any parachute payment, as
defined in Section 280G of the Code, or become entitled to severance,
termination allowance or similar payments as a direct result of this
Agreement, the Acquisition Merger or the Transactions.
SECTION 3.17 MATERIAL AGREEMENTS. Listed on SECTION 3.17 of the Company
Disclosure Schedule are all Material Agreements relating to the ownership or
operation of the business and property of the Company (or a Subsidiary)
presently held or used by it or to which it is a party or to which it or any of
its property is subject or bound. True, complete and correct copies of each of
the Material Agreements have been furnished by the Company to the Parent (or, if
oral, true, complete and correct descriptions thereof have been set forth in
SECTION 3.17 of the Company Disclosure Schedule). All of the Material Agreements
are valid, binding and legally enforceable obligations of the Company (or a
Subsidiary) and, to the Company's knowledge, the other parties thereto (except
as such enforceability may be subject to bankruptcy, moratorium, insolvency,
reorganization, arrangement, voidable preference, fraudulent conveyance and
other similar laws relating to or affecting the rights of creditors and except
as the same may be subject to the effect of general principles of equity), and
the Company is validly and lawfully operating its business and owning its
property under each of the Material Agreements. Except as disclosed in SECTION
3.17 of the Company Disclosure Schedule: (i) the Company (or any Subsidiary) is
not in default in the payment or performance of any of its obligations under any
Material Agreement; (ii) no Event which, with the giving of notice or the
passage of time, or both, constitutes an event of default by the Company (or a
Subsidiary) under any Material Agreement has occurred and is continuing; and
(iii) to the knowledge of the Company, no other party to any Material Agreement
is in default in any material respect in the payment or performance of its
obligations thereunder and no Event which, with the giving of notice or the
passage of time, or both, constitutes a material event of default by such other
party under any Material Agreement has occurred and is continuing.
SECTION 3.18 ORDINARY COURSE OF BUSINESS.
A. The Company (which term for purposes of this SECTION 3.18 shall
include any Subsidiary), from the date of the most recent audited balance
sheet forming part of the Company Financial Statements to the date hereof
and until the Closing Date, except as may be described on SECTION 3.18(A) of
the Company Disclosure Schedule, disclosed in the Company's periodic reports
under
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the Securities Exchange Act of 1934, as amended, or as may expressly be
required or permitted by the terms of this Agreement:
(i) has operated, and will continue to operate, its business in the
normal, usual and customary manner in the ordinary course of
business, consistent with prior practice;
(ii) has not sold or otherwise disposed of, or contracted to sell or
otherwise dispose of, and will not sell or otherwise dispose of or
contract to sell or otherwise dispose of, any of its properties or
assets, other than in the ordinary course of business;
(iii) except in each case in the ordinary course of business, consistent
with prior practice,
(a) has not incurred and will not incur any Indebtedness, obligations
or liabilities (fixed, contingent or other);
(b) has not entered and will not enter into any commitments;
(c) has not canceled and will not cancel any debts or claims; and
(d) has not prepaid and will not prepay any Indebtedness in advance
of its contractual maturity date.
(iv) has not made or committed to make, and will not make or commit to
make, any additions to its property or any purchases of machinery
or equipment, except for normal maintenance and replacements;
(v) has not discharged or satisfied, and will not discharge or satisfy,
any Lien and has not paid and will not pay any obligation or
liability (absolute or contingent) other than current liabilities
or obligations under contracts then existing or thereafter entered
into in the ordinary course of business, consistent with prior
practice, and commitments under Leases existing on that date or
incurred since that date in the ordinary course of business;
(vi) has not created or permitted to be created, and will not create or
permit to be created any Lien on any of its tangible property;
(vii) has not transferred or created, or permitted to be created, and
will not transfer or create, or permit to be created, any Lien on
any Intangible Assets;
(viii) except in the ordinary course of business, consistent with prior
practice, has not increased and will not increase the compensation
payable or to become payable to any of its directors, officers,
employees, advisers, consultants, salesmen or agents or otherwise
alter, modify or change the terms of their employment or
engagement;
(ix) has not suffered any material damage, destruction or loss (whether
or not covered by insurance) or any acquisition or taking of
property by any Authority;
(x) has not waived, and will not waive, any rights of material value
without fair and adequate consideration;
(xi) has not experienced any work stoppage;
(xii) has not entered into, amended or terminated and will not enter
into, amend or terminate any Lease, Governmental Authorization,
Private Authorization, Material Agreement or Employment
Arrangement or any Contractual Obligation or transaction with any
Affiliate, except for amendments or terminations in the ordinary
course of business, consistent with prior practice, in accordance
with the terms thereof, and except for the termination of all
outstanding option, employment and severance agreements as of the
Effective Date;
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(xiii) has not amended or terminated and will not amend or terminate, and
has kept and will keep in full force and effect including without
limitation renewing to the extent the same would otherwise expire
or terminate, all insurance policies and coverage;
(xiv) has not entered into, and will not enter into, any other
transaction or series of related transactions which individually
or in the aggregate is material to the Company, except in the
ordinary course of business, consistent with prior practice;
(xv) has not incurred and will not incur any Indebtedness owing to any
Stockholder and has not made and will not make any loans or
advances to any Stockholder;
(xvi) has not split, combined or reclassified any of the Company's
capital stock or issued or authorized the issuance of any
securities in respect of, in lieu of or in substitution of any
shares of the Company's capital stock, and will not do any of the
foregoing;
(xvii) has not issued, sold or otherwise disposed of any of its capital
stock, or issued Option Securities or Convertible Securities or
preemptive rights or other rights to purchase or obtain any of its
capital stock, and has not declared, set aside, or paid any
dividend or distributions with respect to its capital stock or
redeemed, purchased, or otherwise acquired any of its capital
stock;
(xviii) has not amended and will not amend any of its Organic Documents;
(xix) has not changed and will not change any method of accounting or
accounting practice or policy, except as required by Applicable
Law or by GAAP; and
(xx) has not accelerated accounts receivable, delayed accounts payable,
or liquidated inventory, and will not do so, except in the ordinary
course of business consistent with past practice.
B. From the end of its most recent fiscal year to the date hereof,
except as described in SECTION 3.18(B) of the Company Disclosure Schedule,
the Company has not, or on or prior to the Closing Date will have, declared,
made or paid, or agreed to declare, make or pay, any Distribution.
SECTION 3.19 BROKER OR FINDER. Other than the Management Resource Center,
Inc., which acted as the financial adviser to the Company, no Person assisted in
or brought about the negotiation of this Agreement, the Acquisition Merger or
the subject matter of the Transactions in the capacity of broker, agent or
finder or in any similar capacity on behalf of the Company (or a Subsidiary).
SECTION 3.20 ENVIRONMENTAL MATTERS. Except as set forth in SECTION 3.20 of
the Company Disclosure Schedule:
A. As of the date hereof, to the knowledge of the Company, no
underground storage tanks are present under any property that the Company
(which term for purposes of this SECTION 3.20 shall include any Subsidiary)
or any Affiliate has at any time owned, operated, occupied or leased. As of
the date hereof, to the knowledge of the Company, no material amount of any
substance that has been designated by any federal, state or local
governmental agency, board or authority (a "GOVERNMENTAL ENTITY") or by
applicable federal state or local law to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment, including, without
limitation, PCB's, asbestos, petroleum, urea-formaldehyde and all substances
listed as hazardous substances pursuant to the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended, or defined as
a hazardous waste pursuant to the United States Resource Conservation
Recovery Act of 1976, as amended, and the regulations promulgated pursuant
to said laws, (a "HAZARDOUS MATERIAL"), but excluding office and janitorial
supplies, are present, as a result of the actions of the Company or to the
knowledge of the Company any actions of any third party or otherwise, in, on
or under any property, including the land and the improvements, ground water
and surface water, that the Company or any Affiliate has at any time owned,
operated, occupied or leased. The Company is not aware of any Event
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which could involve the Company in any environmental litigation or impose
upon the Company any environmental liabilities which would have an Adverse
Effect on the Company.
B. To the knowledge of the Company, at no time has the Company or an
Affiliate transported, stored, used, manufactured, disposed of, released or
exposed its employees or others to Hazardous Materials in violation of any
law in effect on or before the Closing Date, nor has the Company or any
Affiliate disposed of, transported, sold, or manufactured any product
containing a Hazardous Material (collectively, "HAZARDOUS MATERIALS
ACTIVITIES") in material violation of any rule, regulation, treaty or
statute promulgated by any Governmental Entity to prohibit, regulate or
control Hazardous Materials or any Hazardous Material Activity, which such
violation would have an Adverse Effect on the Company.
C. To the Company's knowledge, the Company currently holds all material
environmental approvals, permits, licenses, clearances and consents (the
"ENVIRONMENTAL PERMITS") necessary for the conduct of its Hazardous Material
Activities and other businesses as such activities and businesses are
currently being conducted, the absence of which would have an Adverse Effect
on the Company.
D. To the Company's knowledge, no action, proceeding, revocation
proceeding, amendment procedure, writ injunction or claim is pending or
threatened concerning any Environmental Permit or any Hazardous Materials
Activity of the Company.
E. The Company has not performed an environmental site assessment, nor
has such an assessment been conducted by or on behalf of the Company at any
property owned or leased by the Company. The Company has received a copy of
the Phase One Environmental Site Assessment, draft dated May 1, 1998, by
Dames & Moore, attached hereto as EXHIBIT F (the "Dames & Moore Report").
SECTION 3.21 BOOKS AND RECORDS. Except as set forth in SECTION 3.21 of the
Company Disclosure Schedule, the minute books and other similar records of the
Company and its Subsidiaries contain true and complete records of all actions
taken at any meetings of the Company's and Subsidiaries' stockholders, Board of
Directors, members, managers or any committee thereof and of all written
consents executed in lieu of the holding of any such meeting.
SECTION 3.22 CUSTOMERS AND SUPPLIERS. SECTION 3.22 of the Company
Disclosure Schedule sets forth a list of the ten (10) largest suppliers and a
list of the ten (10) largest customers of the Company and its Subsidiaries based
on dollar values of purchases during the twelve-month period ended March 31,
1998. Neither the Company nor any Subsidiary has any reason to believe that any
customer or supplier listed on SECTION 3.22 of the Company Disclosure Schedule
has any plan or intention to materially alter its relationship with the Company
or any Subsidiary.
SECTION 3.23 OFFICERS AND DIRECTORS. SECTION 3.23 of the Company
Disclosure Schedule sets forth a true and complete list of all officers,
directors, members and managers of the Company and its Subsidiaries.
SECTION 3.24 BANK ACCOUNTS. SECTION 3.24 of the Company Disclosure
Schedule sets forth all checking accounts, savings accounts, custodial accounts,
certificates of deposit, safe deposit boxes or other similar accounts maintained
by the Company and its Subsidiaries, together with the name of each person with
signature authority for each such account.
SECTION 3.25 ANTI-TAKEOVER STATUTES NOT APPLICABLE. No "fair price",
"moratorium", "control share acquisition" or other form of anti-takeover statute
or regulation is applicable to the Company's or the Stockholders' entering into
this Agreement and consummating the transactions contemplated hereby.
SECTION 3.26 PROXY STATEMENT. The information included in the Proxy
Statement (the "Proxy Statement") to be sent to the stockholders of the Company
in connection with the solicitation of proxies to approve the Acquisition Merger
shall not, on the date the Proxy Statement is first mailed to such stockholders
or at the Effective Time, contain any statement which, at such time and in light
of the
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circumstances under which it is made, is false or misleading with respect to any
material fact, or omit to state any material fact necessary in order to make the
statements made in the Proxy Statement not false or misleading or necessary to
correct any statement in any earlier communication which has become false or
misleading.
SECTION 3.27 OPINION OF FINANCIAL ADVISOR. The financial advisor of the
Company, Marshall & Stevens Incorporated, has delivered to the Company an
opinion dated April 20, 1998 to the effect that, as of such date, the
Consideration Per Share is fair, from a financial point of view, to the
stockholders of the Company. The Company has provided a true and correct copy of
such opinion to the Buyer.
SECTION 3.28 LITIGATION. SECTION 3.28 of the Company Disclosure Schedule
sets forth each instance in which any of the Company and its Subsidiaries (i) is
subject to any unsatisfied judgment, order, decree, stipulation, injunction, or
charge or (ii) is a party or, to the knowledge of the Company, is threatened to
be made a party to any charge, complaint, action, suit, proceeding or
investigation of or in any court or quasi-judicial or administrative agency of
any federal, state, local or foreign jurisdiction or before any arbitrator. None
of the charges, complaints, actions, suits, proceedings, hearings, and
investigations set forth in SECTION 3.28 of the Company Disclosure Schedule
could result in any Adverse Change to the Company.
SECTION 3.29 PRODUCT WARRANTY. Each product manufactured, distributed,
sold, or delivered by any of the Company and its Subsidiaries has been in
conformity with all applicable contractual commitments and all express and
implied warranties, and none of the Company and its Subsidiaries has any
liability for damages in connection therewith, subject only to the reserve for
product warranty claims set forth in the most recent audited balance sheet
contained in the Company Financial Statements as adjusted for the passage of
time through the Closing Date in accordance with the past custom and practice of
the Company. No product manufactured, sold, distributed, serviced, leased, or
delivered by any of the Company and its Subsidiaries is subject to any guaranty,
warranty, or other indemnity of the company or any Subsidiary beyond the
applicable standard terms and conditions of sale or lease.
SECTION 3.30 PRODUCT LIABILITY. Except as set forth in SECTION 3.28 or
3.30 of the Company Disclosure Schedule, none of the Company and its
Subsidiaries has any material liability arising out of any injury to persons or
property as a result of the ownership, possession, or use of any product
manufactured, distributed, sold, leased, serviced or delivered by any of the
Company and its Subsidiaries.
SECTION 3.31 CONTINUING REPRESENTATIONS AND WARRANTIES. Except for those
representations and warranties which speak as of a specific date, all of the
representations and warranties of the Company set forth in this Article shall be
true and correct on the Closing Date with the same force and effect as though
made on and as of that date and those, if any, which speak as of a specific date
shall be true and correct as of such date on the Closing Date.
SECTION 3.32 DISCLOSURE. No representation or warranty by the Company
contained in this Agreement, and no statement contained in the Company
Disclosure Schedule or any other document, certificate or other instrument
delivered to or to be delivered by or on behalf of the Company pursuant to this
Agreement, contains or will contain any untrue statement of a material fact or,
to the knowledge of the Company, omits or will omit to state any material fact
necessary, in light of the circumstances under which it was or will be made, in
order to make the statements herein or therein not misleading.
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE
PARENT AND THE MERGER SUBSIDIARY
Each of the Parent and the Merger Subsidiary represents, warrants and
covenants to, and agrees with, the Company as follows:
SECTION 4.1 ORGANIZATION AND BUSINESS; POWER AND AUTHORITY; EFFECT OF
TRANSACTION.
A. Each of the Parent and the Merger Subsidiary:
(i) is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware,
(ii) has all requisite corporate power and authority to own or hold
under lease its properties and to conduct its business as now
conducted and has in full force and effect all Governmental
Authorizations and Private Authorizations and has made all
Governmental Filings, to the extent required for such ownership and
lease of its property and conduct of its business, except to the
extent that the failure to have obtained any such Governmental
Authorization or Private Authorization or to have made any such
Governmental Filing would not have an Adverse Effect; and
(iii) has duly qualified and is authorized to do business and is in good
standing as a foreign corporation in each jurisdiction (a true and
correct list of which is set forth in SECTION 4.1(A)(III) of the
Parent Disclosure Schedule) in which the character of its property
or the nature of its business or operations requires such
qualification or authorization, except to the extent the failure so
to qualify or to maintain such authorizations would not have an
Adverse Effect.
B. Each of the Parent and the Merger Subsidiary has all requisite power
and authority (corporate and other) and, other than the filing and
termination of the waiting period pursuant to the HSR Act and as set forth
in SECTION 4.1(C) of the Parent Disclosure Schedule, has in full force and
effect all Governmental Authorizations and Private Authorizations in order
to enable it to execute and deliver, and to perform its obligations under,
this Agreement and each Collateral Document executed or required to be
executed by it pursuant hereto or thereto and to consummate the Acquisition
Merger and the Transactions, and the execution, delivery and performance of
this Agreement and each Collateral Document executed or required to be
executed pursuant hereto or thereto have been duly authorized by all
requisite corporate or other action. This Agreement has been duly executed
and delivered by the Parent and the Merger Subsidiary and constitutes, and
each Collateral Document executed or required to be executed pursuant hereto
or thereto or to consummate the Acquisition Merger and the Transactions,
when executed and delivered by the Company will constitute, legal, valid and
binding obligations of the Parent and the Subsidiary, enforceable in
accordance with their respective terms, except as such enforceability may be
subject to bankruptcy, moratorium, insolvency, reorganization, arrangement,
voidable preference, fraudulent conveyance or other similar laws relating to
or affecting the rights of creditors, and except as the same may be subject
to the effect of general principles of equity.
C. Except as set forth in SECTION 4.1(C) of the Parent Disclosure
Schedule, neither the execution and delivery of this Agreement or any
Collateral Document executed or required to be executed pursuant hereto or
thereto, nor the consummation of the Acquisition Merger or the Transactions,
nor compliance with the terms, conditions and provisions hereof or thereof
by the Parent, the Merger Subsidiary or any of the other parties hereto or
thereto which is Affiliated with the Parent or the Merger Subsidiary:
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(i) will conflict with, or result in a breach or violation of, or
constitute a default under, any Applicable Law on the part of the
Parent or any Subsidiary or will conflict with, or result in a
breach or violation of, or constitute a default under, or permit the
acceleration of any obligation or liability in, or but for any
requirement of giving of notice or passage of time or both would
constitute such a conflict with, breach or violation of, or default
under, or permit any such acceleration in, any Contractual
Obligation of the Parent or any Subsidiary, or
(ii) will require any Governmental Authorization or Governmental Filing
or Private Authorization and filing requirements under Applicable
Law in connection with the Acquisition Merger and the Transactions
and pursuant to the HSR Act.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
Each Stockholder, for himself or itself only, hereby represents and warrants
to, and agrees with, the Parent and Merger Subsidiary as follows:
SECTION 5.1 OWNERSHIP. Such Stockholder is the lawful owner of record and
beneficial owner of the number of shares of Company Common Stock set forth
opposite his or its name in SECTION 5.1 of the Company Disclosure Schedule. Such
Stockholder is not party to or bound by any agreement or commitment pursuant to
which it is obligated to purchase or otherwise acquire any equity securities,
Option Securities or Convertible Securities of the Company, and (ii) between the
date hereof and the Closing, such Stockholder will not sell or purchase, or
agree to sell or purchase, any equity securities, Option Securities or
Convertible Securities of the Company.
SECTION 5.2 LIENS. The shares of the Company Common Stock owned by such
Stockholder are free and clear of all Liens, and none of such shares of the
Company Common Stock is subject to any written or oral agreement whatsoever with
respect to the voting thereof, the sale of pledge thereof (including, without
limitation, any option or right of first refusal to sell any such shares) or any
like matter, nor has any proxy been granted to any Person with respect to any
such shares of the Company Common Stock (except as provided in the Voting and
Option Agreement and the Letter of Intent, dated March 19, 1998, between the
Parent and the Company).
SECTION 5.3 AUTHORIZATION OF AGREEMENT. This Agreement has been duly and
validly executed and delivered on behalf of such Stockholder and constitutes a
valid obligation such Stockholder, enforceable in accordance with its terms,
except to the extent that its enforceability may be limited by applicable
insolvency, bankruptcy or similar laws affecting the enforcement of creditors'
rights generally.
SECTION 5.4 NO GOVERNMENTAL CONSENTS. Except as set forth in SECTION 5.4
of the Company Disclosure Schedule, no Governmental Authorization or
Governmental Filing or Private Authorization is required to be obtained or made
by the Company or such Stockholder in connection with the Acquisition Merger and
the Transactions except for filing requirements under Applicable Laws in
connection with the Acquisition Merger and the Transactions and except pursuant
to the HSR Act.
SECTION 5.5 INFORMATION SUPPLIED. None of the information specifically
supplied or to be supplied by such Stockholder with respect to such Stockholder
for inclusion or incorporation by reference in the Proxy Statement will, at the
date the Proxy Statement is first mailed to the stockholders of the Company or
at the time of the stockholders' meeting, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
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ARTICLE 6
ADDITIONAL COVENANTS
SECTION 6.1 CONFIDENTIALITY; ACCESS TO INFORMATION.
A. The Company and the Parent acknowledge that the Company and the
Parent have heretofore executed confidentiality letters, dated November 25,
1997 and December 1, 1997 (the "CONFIDENTIALITY LETTERS"), which separately
and as incorporated herein shall remain in full force and effect after and
notwithstanding the execution and delivery of this Agreement, and that
information obtained from the Company by the Parent or its Representatives
or by the Company or its Representatives from the Parent, pursuant to
SECTION 6.1(B), the Confidentiality Letters or otherwise shall be subject to
the provisions of the Confidentiality Letters.
B. The Company will afford to the Parent and the Parent's
Representatives full access during normal business hours throughout the
period prior to the Closing Date to all of its properties, books, contracts,
commitments and records (including without limitation Tax Returns) and,
during such period, shall furnish promptly upon request all information
relating to the Company, that the Parent or any of its Representatives
reasonably requires. Subject to the terms and conditions of the
Confidentiality Letter which are expressly incorporated herein by reference
thereto for the benefit of the parties hereto, the Parent shall hold and
shall use its best efforts to cause the Parent's Representatives to hold,
and the Company shall hold and shall use its best efforts to cause its
Representatives to hold, in strict confidence all non-public documents and
information furnished (whether prior or subsequent hereto) to the Parent or
the Company, as the case may be, in connection with this Agreement, the
Acquisition Merger and the Transactions.
C. Subject to the terms and conditions of the Confidentiality Letter,
the Parent and the Company may disclose such information as may be necessary
in connection with seeking all Governmental and Private Authorizations or
that is required by Applicable Law to be disclosed. In the event that this
Agreement is terminated in accordance with its terms, the Parent and the
Company shall each promptly redeliver all non-public written material
provided pursuant to this Section or any other provision of this Agreement
or otherwise in connection with the Acquisition Merger and the Transactions
and shall not retain any copies, extracts or other reproductions in whole or
in part of such written material other than one copy thereof which shall be
delivered to independent counsel for such party.
D. No investigation pursuant to this Section 6.1 shall affect any
representation or warranty in this Agreement of any Party hereto or any
condition to the obligations of the Parties hereto; provided, however, that
Parent and the Merger Subsidiary acknowledge and agree that the
representations and warranties of the Company in Section 3.20 are subject to
the information concerning the premises leased by the Company in Santa Ana,
California, contained in the Dames & Moore Report.
SECTION 6.2 APPROVAL OF STOCKHOLDERS. The Company will (a) as promptly as
practicable, take all steps necessary to duly call, give notice of, convene and
hold a meeting of its stockholders for the purpose of approving the Acquisition
Merger and will use best efforts to obtain the necessary approvals of its
stockholders of the Acquisition Merger. In connection therewith, Benjamin C.
Harris, Willard V. Harris, Jr., Willard P. Harris, James L. Behrens and John D.
Hornsby have simultaneously with the execution of this Agreement, executed and
delivered to the Company a Voting and Option Agreement in the form of EXHIBIT A
hereto (the "Voting and Option Agreement").
SECTION 6.3 AGREEMENT TO COOPERATE.
A. COMPANY PROXY SOLICITATION. The Parties will cooperate in connection
with the preparation and filing by the Company with the SEC such proxy or
information materials as may be necessary or appropriate relating to the
Acquisition Merger (the "Proxy Statement"), or as shall be necessary or
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desirable in order to consummate the transactions contemplated by this
Agreement, each to be undertaken as promptly as practicable, and the Company
will use its best efforts to mail the Proxy Statement to the Company's
stockholders as promptly as practicable.
B. Each of the Parties shall use its best efforts to take, or cause to
be taken, all actions and to do, or cause to be done, all things necessary,
proper or advisable under Applicable Law to consummate the Acquisition
Merger and make effective the Transactions, including using its best efforts
(i) to prepare and file with the applicable Authorities as promptly as
practicable after the execution of this Agreement all requisite applications
and amendments thereto, together with related information, data and
exhibits, necessary to request issuance of orders approving the Acquisition
Merger and the Transactions by all such applicable Authorities; (ii) to
obtain all necessary or appropriate waivers, consents and approvals, and
(iii) to effect all necessary registrations, filings and submissions
(including without limitation filings under federal or state securities laws
or the HSR Act and any other submissions requested by the Federal Trade
Commission or Department of Justice) and (iv) to lift any injunction or
other legal bar to the Acquisition Merger and the Transactions (and, in such
case, to proceed with the Acquisition Merger and the Transactions as
expeditiously as possible). Each of the Parties recognizes that the
consummation of the Acquisition Merger and the Transactions is subject to
the preacquisition notification requirements of the HSR Act. Each agrees
that, to the extent required by Applicable Law to consummate the Acquisition
Merger, it will file with the Antitrust Division of the Department of
Justice and the Federal Trade Commission a Notification and Report Form in a
manner so as to constitute substantial compliance with the notification
requirements of the HSR Act. Each covenants and agrees to use its best
efforts to achieve the prompt termination or expiration of any waiting
period or any extension thereof under the HSR Act.
C. Each of the Parties agrees to take such actions as may be necessary
to obtain any Governmental Authorizations legally required for the
consummation of the Acquisition Merger and the Transactions, including the
making of any Governmental Filings, publications and requests for extensions
and waivers.
D. The Company will use its best efforts on or prior to the Closing Date
(i) to obtain the satisfaction of the conditions specified in SECTIONS 7.1
and 7.2; and (ii) if requested by the Parent, to obtain the consents (to the
extent required) to the continued existence in accordance with its then-
stated terms of all long-term debt of each of the Company and each
Subsidiary. The Parent will use its best efforts on or prior to the Closing
Date to obtain the satisfaction of the conditions applicable to it specified
in SECTIONS 7.1 and 7.3.
SECTION 6.4 NOTIFICATION OF CERTAIN MATTERS. The Company shall give prompt
notice to the Parent, and the Parent shall give prompt notice to the Company, of
the occurrence or non-occurrence of any Event the occurrence or non-occurrence
of which would be likely to cause (i) any representation or warranty of the
Company or the Parent (or Merger Subsidiary), as the case may be, contained in
this Agreement to be untrue or inaccurate in any material respect, or (ii) in
the case of the Company, any change to be made in the Company Disclosure
Schedule and any failure of the Company or the Parent (or Merger Subsidiary), as
the case may be, to comply with or satisfy, or be able to comply with or
satisfy, any material covenant, condition or agreement to be complied with or
satisfied by it hereunder; provided, however, that the delivery of any notice
hereunder shall not limit or otherwise affect the liability of any Party giving
such notice or the remedies available hereunder to the Party receiving such
notice.
SECTION 6.5 PUBLIC ANNOUNCEMENTS. Except as may be required by applicable
law, the Parties agree that they will consult with each other concerning any
proposed press release or public announcement pertaining to the transactions
contemplated hereby and shall endeavor to agree on the text of such release or
the making of such public announcement. The foregoing shall not restrict in any
way the method and timing of any Party's compliance with securities or other
laws applicable to it, even if the same require a unilateral public disclosure
of the matters addressed in this Agreement or any Collateral Document. Any
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Party making any public disclosure of the matters addressed herein shall give
the other Parties prompt notice thereof, in advance of public disclosure if
practicable and legally permissible.
SECTION 6.6 CONVEYANCE TAXES. The Parties shall cooperate with one another
in the preparation, execution and filing of all Returns, questionnaires,
applications, or other documents regarding any real property transfer or gains,
sales, use, transfer, value added, stock transfer and stamp Taxes, any transfer,
recording, registration and other fees, and any similar Taxes which become
payable in connection with the Transactions that are required or permitted to be
filed on or before the Closing Date. Any such Taxes shall be paid by the Party
required to do so under Applicable Law.
SECTION 6.7 NO SOLICITATION.
A. The Company shall not, and shall cause its Representatives not to,
and no Stockholder shall, during the period commencing on the date hereof
and ending with the earlier to occur of the Closing or the termination of
this Agreement in accordance with its terms, directly or indirectly (i)
solicit or initiate the submission of proposals or offers from any Person
for, (ii) participate in any discussions pertaining to, or (iii) furnish any
information to any Person other than the Parent and its Representatives
relating to, any acquisition or purchase of any of the Company Common Stock
or all or a material portion of the assets of the Company, or a merger,
consolidation or business combination of the Company (or a Subsidiary), or
any Other Transaction (other than the Acquisition Merger).
B. Nothing contained in the foregoing shall prevent the Company or its
Board of Directors from furnishing non-public information to, or entering
into discussions or negotiations with, any person or entity in connection
with an unsolicited bona fide written proposal in respect of an Other
Transaction by such person or entity or recommending an unsolicited bona
fide written proposal in respect of an Other Transaction to the shareholders
of the Company, if and only to the extent that the Board of Directors of the
Company determines in good faith by a majority vote, (x) after consultation
with its financial advisor, that such proposal in respect of an Other
Transaction would, if consummated, result in a transaction more favorable to
the shareholders of the Company from a financial point of view than the
transaction contemplated by this Agreement (any such more favorable Other
Transaction being referred to in this Agreement as a "Superior Proposal")
and (y) based on the written opinion of outside legal counsel, that failing
to take such action would likely result in a breach of its fiduciary duties
to shareholders under applicable law. Nothing contained in this Agreement
shall prevent the Company's Board of Directors from performing its fiduciary
duties, however, such performance of fiduciary duties shall under no
circumstances absolve the Company of its obligations under this Agreement.
C. The Company will notify Parent immediately (and no later than 24
hours) after receipt by the Company (or its advisors) of any proposal in
respect of any Other Transaction or any request for non-public information
in connection with any Other Transaction or for access to the properties,
books or records of the Company or any of its subsidiaries by any person or
entity that informs the Company that it is considering making, or has made a
proposal concerning any Other Transaction. Such notice to Parent shall be
made orally and in writing and shall indicate in reasonable detail the
identity of the offeror and the terms and conditions of such proposal,
inquiry or contact. The Company will keep Parent informed of all material
developments and the status of any proposal in respect of any Other
Transaction, any negotiations or discussions with respect to any such
proposal in respect of any Other Transaction or any request for non-public
information in connection with any such proposal in respect of any Other
Transaction or for access to the properties, books or records of the Company
or any of its subsidiaries by any person or entity that is considering
making, or has made, a proposal in respect of any Other Transaction. The
Company will provide Parent with copies of all documents received from or
delivered or sent to any person or entity that is considering making or has
made, a proposal in respect of any Other Transaction.
SECTION 6.8 ENVIRONMENTAL INSPECTIONS.
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A. Prior to the Closing, the Parent shall have the right to conduct
environmental and other tests, audits, studies and assessments of the real
property owned or leased by the Company (or a Subsidiary) and the buildings
and improvements thereon, and to review such records and documents as may be
required by the Parent to enable it to evaluate the condition of and
potential liabilities affecting such property.
B. If, in the course of the Parent's tests, audits, studies,
assessments and review pursuant to subsection (A) above, the Parent shall
determine that any of the Company's representations and warranties set forth
in SECTION 3.20 are untrue and such misrepresentations, individually or in
the aggregate, could reasonably be expected to have an Adverse Effect, the
Parent may terminate this Agreement pursuant and subject to SECTION 8.1(D).
ARTICLE 7
CLOSING CONDITIONS
SECTION 7.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS UNDER THIS
AGREEMENT. The respective obligations of each Party under this Agreement shall
be subject to the fulfillment at or prior to the Effective Time of the following
conditions, none of which may be waived:
A. STOCKHOLDERS' APPROVAL. This Agreement, the Acquisition Merger and
the Transactions shall have been approved by the requisite vote of the
stockholders of the Company.
B. GOVERNMENTAL CONSENTS. All authorizations, consents, orders or
approvals of, or declarations or filings with, and all expirations of
waiting periods imposed by, any governmental or regulatory authority or
agency which are necessary for the consummation of the transactions
contemplated by this Agreement, including without limitation the Acquisition
Merger, shall have been filed, occurred or been obtained (all such
authorizations, orders, declarations, approvals, filings and consents and
the lapse of all such waiting periods being referred to as the "REQUISITE
REGULATORY APPROVALS") and all such Requisite Regulatory Approvals shall be
in full force and effect.
C. NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an
"INJUNCTION") preventing the consummation of the transactions contemplated
by this Agreement shall be in effect; nor shall there be any statute, rule
or regulation enacted, enforced or deemed applicable to the Acquisition
Merger which makes the consummation of the Acquisition Merger illegal.
D. EXCHANGE AGREEMENT. Parent and the Exchange Agent shall have
executed and delivered the Exchange Agreement.
SECTION 7.2 CONDITIONS TO THE OBLIGATIONS OF PARENT AND THE MERGER
SUBSIDIARY UNDER THIS AGREEMENT. The obligations of the Parent and the Merger
Subsidiary under this Agreement shall be further subject to the satisfaction or
waiver by the Parent and the Merger Subsidiary, at or prior to the Effective
Time, of the following conditions:
A. ABSENCE OF MATERIAL ADVERSE CHANGES. There shall not have occurred
any change since December 31, 1997 in the assets, liabilities, business,
operations, results of operations, financial condition or prospects of the
Company which has had, individually or in the aggregate, an Adverse Effect
on the Company.
B. REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. The
obligations of the Company and the Stockholders required to be performed by
it or them at or prior to the Effective Time pursuant to the terms of this
Agreement shall have been duly performed and complied with and the
representations and warranties of the Company and the Stockholders contained
in this Agreement shall be true and correct in all material respects as of
the date of this Agreement and as of the
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Effective Time as though made at and as of the Effective Time (except as
otherwise specifically contemplated by this Agreement and except as to any
representation or warranty which specifically relates to an earlier date)
and the Parent shall have received certificates to that effect signed on
behalf of the Company by the chairman or president and the chief financial
officer or chief accounting officer of the Company and by each Stockholder
on behalf of himself. The use of the term "material" in this SECTION 7.2(B)
shall be disregarded when determining whether any representation or warranty
of the Company or the Stockholders contained in this Agreement is true and
correct if the term "material," "materially" or any other similar term is
used in the text of any such representation or warranty.
C. THIRD-PARTY (NON-GOVERNMENTAL) APPROVALS. Any and all permits,
consents, waivers, clearances, approvals and authorizations of or notices to
all non-governmental and non-regulatory third parties which are necessary in
connection with the consummation of the transactions contemplated by this
Agreement and are required to be received, made or obtained by the Company
or the Stockholders, shall have been so received, made or obtained, other
than permits, consents, waivers, clearances, approvals, authorizations and
notices the failure of which to have received, made or obtained would
neither make it impossible to consummate the transactions contemplated by
this Agreement nor result in any Adverse Effect on the Parent after the
Effective Time.
D. BURDENSOME CONDITION. None of the Requisite Regulatory Approvals
shall impose any term, condition or restriction upon Parent that Parent in
good faith reasonably determines would so materially adversely impact the
economic or business benefits of the transactions contemplated by this
Agreement as to render inadvisable in the reasonable judgment of Parent the
consummation of the Acquisition Merger.
E. LEGAL OPINION. The Parent shall have received the opinion of
Jeffer, Mangels, Butler & Marmaro LLP, counsel to the Company, dated the
Closing Date covering the matters set forth on EXHIBIT C hereto.
F. LITIGATION. There shall be no pending or threatened litigation or
proceeding which, in the judgment of the Buyer, makes it inadvisable to
proceed with the Acquisition Merger; nor shall there be issued and in effect
any Injunction limiting or restricting the conduct of the business of the
Company by Parent or Buyer after the Acquisition Merger.
G. DISSENTERS. The holders of no more than 10% of the Company's
outstanding Common Stock of record shall have asserted dissenters' rights
under Chapter 13 of the CGCL in connection with the Acquisition Merger.
H. VOTING AND OPTION AGREEMENT. The Stockholders shall have executed
and shall be in full compliance with the Voting and Option Agreement.
I. CANCELLATION OF SEVERANCE PROVISIONS. All contractual provisions
whereby an obligation of the Company to pay severance to any person may be
triggered in whole or in part by a change of control transaction such as the
Acquisition Merger shall be terminated.
J. CANCELLATION OF OPTIONS. All outstanding options and other
securities convertible or exchangeable into Company Common Stock shall have
been canceled.
K. EMPLOYMENT AGREEMENTS. Willard P. Harris and John D. Hornsby shall
have entered into employment agreements with the Company, all such
agreements to be substantially in the form attached hereto as Exhibit D and
to become effective at the closing of the Acquisition Merger.
L. INDEBTEDNESS FOR BORROWED MONEY. The Company shall have delivered a
certificate executed by an officer representing in reasonable detail the
amount of the Company's Indebtedness for Borrowed Money on the Closing Date.
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M. NON-COMPETITION AGREEMENTS. Parent and Willard V. Harris, Jr.,
Benjamin C. Harris, Willard P. Harris, John D. Hornsby and James L. Behrens
shall have executed and delivered non-competition agreements substantially
in the form of EXHIBIT B hereto, which shall include provisions for one-time
non-competition payments of (i) $517,500 to Willard V. Harris, Jr., (iii)
$382,500 to Benjamin C. Harris, (iii) $950,000 to each of Willard P. Harris
and John D. Hornsby and (iv) $250,000 to James L. Behrens.*
N. PARTNERSHIP INTEREST. The Company shall have completed the
transfer, sale and assignment of its entire limited partnership interest in
California Real Estate Partners to Willard V. Harris, Jr. under terms which
(i) provide for nominal consideration (approximately $25,000) to be paid for
such interest, (ii) are reasonably satisfactory to Parent, Company and Mr.
Harris, and (iii) provide for full indemnification of the Company for any
and all Claims based upon, attributable to or resulting from the Company's
ownership, sale, disposition or transfer of such interest.
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As amended in Amendment No. 2, dated July 29, 1998.
O. TERMINATION OF EMPLOYMENT AGREEMENTS. Parent and Merger Subsidiary
shall have received from the Company evidence, reasonably satisfactory to the
Parent, that any and all Employment Arrangements between the Company (which for
purpose of this Section 2.2(O) include any Subsidiary thereof) and (i) Willard
V. Harris, Jr. and (ii) Benjamin C, Harris have been terminated.*
In addition to the foregoing, the Company will furnish the Parent with such
additional certificates, instruments or other documents in the name or on behalf
of the Company executed by appropriate officers or others, including without
limitation certificates or correspondence of governmental agencies or
authorities or nongovernmental third parties, to evidence fulfillment of the
conditions set forth in this SECTION 7.2 as the Parent may reasonably request.
SECTION 7.3 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND THE
STOCKHOLDERS UNDER THIS AGREEMENT. The obligations of the Company and the
Stockholders under this Agreement shall be further subject to the satisfaction
or waiver by the Company, at or prior to the Effective Time, of the following
conditions:
A. REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. The
obligations of the Parent and the Merger Subsidiary required to be performed by
it at or prior to the Effective Time pursuant to the terms of this Agreement
shall have been duly performed and complied with and the representations and
warranties of the Parent and the Merger Subsidiary contained in this Agreement
shall be true and correct in all material respects as of the date of this
Agreement and as of the Effective Time as though made at and as of the Effective
Time (except as otherwise specifically contemplated by this Agreement and except
as to any representation or warranty which specifically relates to an earlier
date) and the Company shall have received a certificate to that effect signed by
the president and chief financial officer (or other authorized officer(s)) of
the Parent.
B. LEGAL OPINION. The Company shall have received the opinion of Sullivan
& Worcester LLP, counsel to Parent, dated the Closing Date, in a form that is
customary for transactions of this type.
In addition to the foregoing, the Parent will furnish the Company with such
additional certificates, instruments or other documents in the name or on behalf
of the Parent, executed by appropriate officers or others, including without
limitation certificates or correspondence of governmental agencies or
authorities or nongovernmental third parties, to evidence fulfillment of the
conditions set forth in this SECTION 7.3 as the Company may reasonably request.
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* Added in First Amendment to the Agreement and Plan of Reorganization, dated
July 8, 1998.
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ARTICLE 8
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.1 TERMINATION. This Agreement may be terminated at any time
prior to the Closing Date:
A. by mutual consent of the Parent and the Company;
B. by either the Parent or the Company if any permanent injunction,
decree or judgment by any Authority preventing the consummation of the
Acquisition Merger shall have become final and nonappealable;
C. by the Company: (i) in the event of a material breach of this
Agreement by the Parent or the Merger Subsidiary that has not been cured, or
if any representation or warranty of the Parent or the Merger Subsidiary
shall have become untrue in any material respect, which in either case is
incapable of being cured by the Closing Date or will prevent or delay
consummation of the Acquisition Merger by or beyond the Termination Date; or
(ii) if the Closing shall not have occurred on or before the Termination
Date by reason of the failure of any condition precedent under SECTION 7.1
or 7.3 hereof (unless the failure results primarily from the Company's or
any Stockholder's breaching any representation, warranty or covenant
contained in this Agreement or any Collateral Document);
D. by the Parent (on behalf of itself and the Merger Subsidiary): (i) in
the event of a material breach of this Agreement by the Company or the
Stockholders that has not been cured, or if any representation or warranty
of the Company or the Stockholders shall have become untrue in any material
respect, which in either case is incapable of being cured by the Closing
Date or will prevent or delay consummation of the Acquisition Merger by or
beyond the Termination Date; or (ii) if the Closing shall not have occurred
on or before the Termination Date by reason of the failure of any condition
precedent under SECTION 7.1 or 7.2 hereof (unless the failure results
primarily from the Parent's or Merger Subsidiary's breaching any
representation, warranty or covenant contained in this Agreement or any
Collateral Document); or
E. by the Parent (on behalf of itself and the Merger Subsidiary), if
(i) the Board of Directors of the Company shall have withdrawn or modified
its recommendation in favor of the Acquisition Merger in a manner adverse to
Parent or shall have resolved to do so; (ii) the Company or its Board of
Directors or any Stockholder takes any action prohibited by SECTION 6.7;
(iii) the Company or its Board of Directors, in accordance with the
provisions of SECTION 6.7(B), furnishes non-public information to, or enters
into discussions or negotiations with, any Person in connection with, or the
Board of Directors of the Company recommends an unsolicited bona fide
written proposal concerning, an Other Transaction; or (iv) any of the
Stockholders shall have breached any material provision of the Voting and
Option Agreement referenced in SECTION 6.2.
The use of the term "material" in any provision of this SECTION 8.1 shall be
disregarded when determining whether the breach of any term of this Agreement
has occurred, or whether any representation or warranty of the Company, Parent,
Merger Sub or any Stockholder has become untrue, if the term "material,"
"materially" or any other similar term is used in the text of any such term of
this Agreement or representation or warranty.
SECTION 8.2 EFFECT OF TERMINATION. Except as provided in SECTIONS 6.1 and
8.5, in the event of the termination of this Agreement pursuant to SECTION 8.1,
this Agreement shall forthwith become void, there shall be no liability on the
part of any Party, or any of their respective officers or directors, to the
other and all rights and obligations of any Party shall cease; provided,
however, that such termination shall not relieve any Party from liability for
the breach of any of its representations, warranties, covenants or agreements
set forth in this Agreement.
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SECTION 8.3 AMENDMENT. This Agreement may be amended by the Parties by
action taken by or on behalf of the respective Boards of Directors thereof at
any time prior to the Closing Date; provided, however, that any such amendment
executed after approval of this Agreement by the Company's stockholders which by
law requires further approval of such stockholders shall be subject to such
further approval. This Agreement may not be amended to impose any additional
material obligation on a Party or to burden or limit a material right of such
Party except by an agreement in writing signed by the Party so affected.
SECTION 8.4 WAIVER. At any time prior to the Closing Date, except to the
extent Applicable Law does not permit, either the Parent and the Company may
extend the time for the performance of any of the obligations or other acts of
the other, subject, however, to the terms and conditions of SECTION 8.1, waive
any inaccuracies in the representations and warranties of the other contained
herein or in any document delivered pursuant hereto, and waive compliance by the
other with any of the agreements, covenants or conditions contained herein. Any
such extension or waiver shall be valid only if set forth in an agreement in
writing signed by the Party or Parties to be bound thereby.
SECTION 8.5 FEES, EXPENSES AND OTHER PAYMENTS. Each of the Parent and the
Merger Subsidiary, on the one hand, and the Company, on the other hand, shall be
responsible for the filing fees and expenses incurred by such Party under the
HSR Act. In the event of termination of this Agreement, all costs and expenses,
incurred in connection with this Agreement, the Acquisition Merger and the
Transactions, and compliance with Applicable Law and Contractual Obligations as
a consequence hereof and thereof, including, without limitation, fees and
disbursements of counsel, financial advisors and accountants, incurred by the
Parties shall be borne solely and entirely by the Party which has incurred such
costs and expenses.
SECTION 8.6 EFFECT OF INVESTIGATION. The right of any Party to terminate
this Agreement pursuant to SECTION 8.1 shall remain operative and in full force
and effect regardless of any investigation made by or on behalf of any Party,
any Person controlling any such party or any of their respective Representatives
whether prior to or after the execution of this Agreement.
ARTICLE 9
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
SECTION 9.1 EFFECTIVENESS OF REPRESENTATIONS, ETC. Except as set forth in
SECTION 6.1(D), regardless of any investigation made by or on behalf of any
other party hereto, any Person controlling such party or any of their respective
Representatives whether prior to or after the execution and consummation of this
Agreement, the representations, warranties, covenants and agreements set forth
in ARTICLE 3 and ARTICLE 4 and ARTICLE 5 hereof shall survive the Acquisition
Merger and remain operative and in full force and effect until the date that is
twelve months after the Closing Date, except for (i) those representations and
warranties set forth in SECTIONS 3.20 which shall remain operative and in full
force and effect until the date that is three (3) years after the Closing Date,
(ii) those representations and warranties set forth in SECTIONS 3.3, 3.14 and
3.15, which shall remain operative and in full force and effect until the
expiration of the applicable statute of limitations after the Closing Date, and
(iii) those representations and warranties set forth in SECTIONS 5.1, 5.2, 5.3
and 5.5 which shall remain operative and in full force and effect indefinitely.
SECTION 9.2 INDEMNIFICATION.
A. The Company and the Stockholders, jointly and severally, agree to
make whole, indemnify and hold the Parent and its Affiliates, agents,
successors and assigns (collectively, the "PARENT INDEMNIFIED PARTIES")
harmless as a result of, from or against:
(i) any and all Claims of the Parent Indemnified Parties or other
Persons based upon, attributable to or resulting from any inaccuracy
in or breach of any representation or warranty on the
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part of any one or more of the Company or any Stockholder under this
Agreement or any Collateral Document;
(ii) any and all Claims of the Parent Indemnified Parties or other
Persons based upon, attributable to or resulting from the material
breach of any covenant or other agreement on the part of any one or
more of the Company or any Stockholder under this Agreement or any
Collateral Document;
(iii) any and all Claims of the Parent Indemnified Parties or other
Persons incident to the foregoing or to the enforcement of this
Section;
(iv) all transaction costs and expenses of the sort specified in clause
(ix) of the definition of "Indebtedness for Borrowed Money", set
forth in Article 11 hereof, to the extent such costs and expenses
are not deducted from the Merger Consideration paid at the Closing;
and
(v) any and all Claims of the Parent Indemnified Parties or other
Persons asserted within three (3) years after the Closing Date based
upon, attributable to or resulting from any matters set forth in the
Dames & Moore Report.
B. The Parent hereby agrees to make whole, indemnify and hold the
Company, the Stockholders and their respective Affiliates, agents, heirs,
successors and assigns (collectively, the "COMPANY INDEMNIFIED PARTIES")
harmless as a result of, from or against:
(i) any and all Claims of the Company Indemnified Parties or other
Persons based upon, attributable to or resulting from any inaccuracy
in or breach of any representation or warranty on the part of the
Parent or Merger Sub under this Agreement or any Collateral
Document;
(ii) any and all Claims of the Company Indemnified Parties or other
Persons based upon, attributable to or resulting from the material
breach of any covenant or other agreement on the part of the
Parent; and
(iii) any and all Claims of the Company Indemnified Parties or other
Persons incident to the foregoing or to the enforcement of this
Section,
C. Notwithstanding the foregoing:
(i) None of the Company or the Stockholders shall be required to pay any
amount for indemnification to the Parent Indemnified Parties except
to the extent the aggregate amount of Claims under this SECTION 9.2
asserted against the Company and the Stockholders exceeds Two
Hundred Thousand Dollars ($200,000), and then only with respect to
such Claims in excess of such sum (the "DEDUCTIBLE"); and
(ii) The aggregate amount that the Company and the Stockholders shall be
required to pay for indemnification to the Parent Indemnified
Parties under this SECTION 9.2 shall be limited to One Million
Seven Hundred and Fifty Thousand Dollars ($1,750,000), PROVIDED,
that such aforesaid sum shall be increased by up to an additional
Seven Hundred and Fifty Thousand Dollars ($750,000) (the
"Additional Cap") in respect of, and solely in respect of, Claims
made in connection with SECTION 9.2(A)(V) or SECTION 9.2(A)(I)
(solely on account of any inaccuracy in or breach of any of the
representations and warranties contained in SECTION 3.20). All
obligations of the Company and the Stockholders in respect of the
Additional Cap shall terminate upon the earliest to occur of.
(a) the amendment of Section 4.B of the lease of the Company's
facility in Santa Ana, California, to provide in substance as set
forth in Exhibit E hereto; or
(b) the date which is two (2) years after the Closing Date, provided,
that no notice of any Claim has been given with respect to the
Additional Cap prior thereto.
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(iii) Notwithstanding anything else in this Article 9, to the extent that
any Claim relates to a breach by a Stockholder of a representation
or warranty contained in Article V of this Agreement, then only
such breaching Stockholder shall be subject to this Article 9 with
respect to the Claim resulting from such breach.
(iv) The Deductible and cap set forth in clauses (i) and (ii) of this
SECTION 9.2(C) shall not apply to or limit indemnification Claims
under SECTION 9.2(A)(IV).
SECTION 9.3 PROCEDURES CONCERNING CLAIMS BY THIRD PARTIES; PAYMENT OF
DAMAGES; ETC.
A. In the event that any Legal Action shall be instituted or asserted by
any Person other than such indemnified party in respect of which payment may
be sought hereunder, the indemnified party shall reasonably and promptly
cause written notice of the assertion of any Legal Action of which it has
knowledge which is covered by the indemnities under SECTION 9.2 to be
forwarded to the indemnifying party. In such event, unless in such
indemnified party's reasonable judgement a conflict of interest between the
indemnified party and the indemnifying party may exist in respect of the
Claims, the indemnifying party shall have the right, at its sole option and
expense, to be represented by counsel of its choice, which must be
reasonably satisfactory to the indemnified party, and to defend against,
negotiate, settle or otherwise deal with any Legal Action which relates to
any Claims instituted or asserted by any Person other than such indemnified
party and indemnified against hereunder; provided, however, that no
settlement thereof shall be made without the prior written consent of the
indemnified party, which consent shall not be unreasonably withheld,
conditioned or delayed. If the indemnifying party elects to defend against,
negotiate, settle or otherwise deal with any Legal Action which relates to
any such Claims, it shall within thirty (30) days (or sooner, if the nature
of the Legal Action so requires) notify the indemnified party of its intent
to do so. If the indemnifying party elects not to defend against, negotiate,
settle or otherwise deal with any Legal Action which relates to any such
Claims, fails to notify the indemnified party of its election as herein
provided or contests its obligation to indemnify the indemnified party for
such Claims under this Agreement, or the indemnified party determines that a
conflict of interest may exist, the indemnified party may defend against,
negotiate, settle or otherwise deal with such Legal Action. If the
indemnified party defends any Legal Action, then the indemnifying party
shall reimburse the indemnified party for Claims incurred in defending such
Legal Action upon submission of periodic bills, The indemnified party may
not settle any Legal Action without the prior written consent of the
indemnifying party, which consent shall not be unreasonably withheld,
conditioned or delayed. If the indemnifying party shall assume the defense
of any Legal Action instituted or asserted by any Person other than an
indemnified party, the indemnified party may participate in the defense of
such Legal Action at such party's own expense.
B. After any final judgment or award shall have been rendered by a
court, arbitration board (which may be engaged as required by law or
contract or upon the consent of each of the indemnifying party and the
indemnified parties) or administrative agency of competent jurisdiction and
the expiration of the time in which to appeal therefrom, or a settlement
shall have been consummated, or the indemnified party and the indemnifying
party shall have arrived at a mutually binding agreement with respect to a
Legal Action hereunder, the indemnifying party shall deliver to the
indemnified party, by wire transfer of immediately available funds, an
amount equal to the sums due and owing to the indemnified party within five
business days after the date of notice of such judgment or award.
C. The failure of the indemnified party to give reasonably prompt
notice of any Legal Action instituted or asserted by any Person other than
such indemnified party and indemnified against hereunder shall not release,
waive or otherwise affect the indemnifying party's obligations with respect
thereto except to the extent that the indemnifying party can demonstrate
actual loss or material prejudice as a result of such failure. The
indemnified parties shall not be deemed to have notice of any Legal Action
by virtue of knowledge acquired on or prior to the Closing Date by an
employee or other Representative of the Company or the Parent.
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D. No Legal Action to enforce a claim for indemnity shall be stayed or
dismissed for failure to join one or more indemnifying parties or to permit
an indemnifying party to cross-claim against another indemnifying party, nor
shall the failure to join an indemnifying party be deemed grounds for
preventing a separate or subsequent Legal Action to enforce a Claim for
indemnification against such party, each such Legal Action being deemed a
separate and independent Claim for indemnification.
E. If such claim does not arise from the Claim of a third party, the
indemnifying party shall have forty five (45) days after notice thereof to
either cure the conditions giving rise to such claim or to present the
indemnified party with materials indicating that such Claim is not subject
to indemnity under SECTION 9.2 hereof before the indemnified party may
commence legal action against the indemnifying party in respect thereof.
F. Notwithstanding anything herein to the contrary, with respect to any
indemnification claim by the Parent for Claims arising out of any breach or
inaccuracy of any representation or warranty made by the Company and the
Stockholders set forth in SECTION 3.14 hereof with respect to Taxes, the
Stockholders shall have the fight to participate in any Tax audit or
administrative, judicial or other proceeding to the extent such audit,
proceeding or determination affects the amount of the Claim for which the
Company and Stockholders are liable under SECTION 9.2 hereof
SECTION 9.4 EXCLUSIVE REMEDY. The indemnification provisions set forth in
this ARTICLE 9 shall be the exclusive remedy following and subject to the
Closing for any breaches or alleged breaches of any representation, warranty or
covenant contained in this Agreement or any Collateral Document, except for
breaches arising from intentional fraud or intentional misconduct.
SECTION 9.5 NET RECOVERY. The amount to which a Parent Indemnified Party
or a Company Indemnified Party may become entitled in respect of any Claim under
this ARTICLE 9 shall be reduced by any tax, insurance or other third party
recovery, reimbursement or benefit received in respect of such Claim before the
expiration of two years after payment of such Claim by the indemnifying party.
The amount of any such recovery, less all reasonable costs, charges and expenses
incurred by the relevant Parent Indemnified Party or Company Indemnified Party,
as the case may be, in obtaining such recovery from the third party, shall be
repaid by the relevant Parent Indemnified Party or Company Indemnified Party, as
the case may be, to the relevant indemnifying Party promptly upon the receipt
thereof from the third party.
SECTION 9.6 INDEMNIFICATION OF OFFICERS AND DIRECTORS. From and after the
Effective Date, Parent shall indemnify persons who served as directors, officers
and agents of the Company on or before the Effective Date in accordance with and
subject to the provisions of the Company's current Articles of Incorporation and
By-laws as delivered to the Parent prior to the execution of this Agreement
until the date that is three years after the Closing Date.
ARTICLE 10
GENERAL PROVISIONS
SECTION 10.1 NOTICES. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
or made as of the date delivered or transmitted, and shall be effective upon
receipt, if delivered personally, mailed by registered or certified mail
(postage prepaid, return receipt requested) to the parties at the follOwing
addresses (or at such other address for a party as shall be specified by like
changes of address) or sent by electronic transmission to the facsimile number
specified below:
A. If to the Parent or the Merger Subsidiary:
DESA International, Inc.
2701 Industrial Drive
Bowling Green, Kentucky 42102
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Attn.: Robert H. Elman
Facsimile No.: (502) 781-9807
with copies to:
J.W. Childs Associates, L.P.
One Federal Street, 21st Floor
Boston, MA 02110
Attn: Adam L. Suttin
Facsimile No.: (617) 753-1101
Sullivan & Worcester LLP
One Post Office Square
Boston, MA 02109
Attn: Christopher Cabot, Esquire
Facsimile No.: (617) 338-2880
B. If to the Company or the Stockholders:
Fireplace Manufacturers, Inc.
2701 South Harbor Boulevard
Santa Ana, CA 92704
Attn.: Willard P. Harris
Facsimile No.: (714) 549-4723
with a copy to:
Jeffer, Mangles, Butler & Marmaro LLP
2121 Avenue of the Stars, 10th Fl
Los Angeles, CA 90067-5010
Attn.: Ronald P. Givner, Esquire
Facsimile No.: (310) 203-0567
SECTION 10.2 HEADINGS. The headings contained in this Agreement are for
purposes of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 10.3 SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the Transactions is not affected in any manner Adverse to any
party. Upon determination that any term or other provision is invalid, illegal
or incapable of being enforced, the Parent and the Company shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
Parties as closely as possible to the fullest extent permitted by Applicable Law
in an acceptable manner to the end that the Transactions are fulfilled to the
extent possible.
SECTION 10.4 ENTIRE AGREEMENT. This Agreement (together with the Company
Disclosure Schedule, the Confidentiality Letter and the other Collateral
Documents delivered in connection herewith), constitutes the entire agreement of
the Parties and supersedes all prior agreements (other than the Confidentiality
Letter) and undertakings, both written and oral, between the Parties, or any of
them, with respect to the subject matter hereof.
SECTION 10.5 ASSIGNMENT. This Agreement shall not be assigned by operation
of law or otherwise and any purported assignment shall be null and void.
SECTION 10.6 PARTIES IN INTEREST. This Agreement shall be binding upon and
inure solely to the benefit of each Party, and nothing in this Agreement,
express or implied, is intended to or shall confer
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upon any Person any right, benefit or remedy of any nature whatsoever under or
by reason of this Agreement.
SECTION 10.7 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the substantive laws of the State of Delaware
governing contracts made and to be performed in such jurisdiction, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
law.
SECTION 10.8 ENFORCEMENT OF THE AGREEMENT. Each Party recognizes and
agrees that each other Party's remedy at law for any breach of the provisions of
this Agreement would be inadequate and agrees that for breach of such
provisions, such Party shall, in addition to such other remedies as may be
available to it at law or in equity or as provided in this Agreement, be
entitled to injunctive relief and to enforce its rights by an action for
specific performance to the extent permitted by Applicable Law. Each Party
hereby waives any requirement for security or the posting of any bond or other
surety in connection with any temporary or permanent award of injunctive,
mandatory or other equitable relief. Nothing herein contained shall be construed
as prohibiting a Party from pursuing any other remedies available to such Party
for any breach or threatened breach hereof or failure to take or refrain from
any action as required hereunder to consummate the Acquisition Merger and carry
out the Transactions.
SECTION 10.9 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, and by the different Parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
SECTION 10.10 MUTUAL DRAFTING. This Agreement is the result of the joint
efforts of the Parent and the Company, and each provision hereof has been
subject to the mutual consultation, negotiation and agreement of the parties and
there shall be no construction against any Party based on any presumption of
that Party's involvement in the drafting thereof.
SECTION 10.11 DISCLOSURE SUPPLEMENTS. From time to time prior to the
Closing Date, each Party will promptly supplement or amend its respective
Disclosure Schedule delivered in connection herewith with respect to any matter
which, if existing, occurring or known at the date of this Agreement, would have
been required to be set forth or described in such Company Disclosure Schedule
or which is necessary to correct any information in such Company Disclosure
Schedule which has been rendered inaccurate thereby. The making of any such
amendment shall not otherwise affect the liability of any Party delivering such
Amendment or the rights of any Party receiving such amendment.
ARTICLE 11
DEFINITIONS
As used herein, unless the context otherwise requires, the following terms
(or any variant in the form thereof) have the following respective meanings.
Terms defined in the singular shall have a comparable meaning when used in the
plural, and VICE VERSA, and the reference to any gender shall be deemed to
include all genders. Unless otherwise defined or the context otherwise clearly
requires, terms for which meanings are provided herein shall have such meanings
when used in the Disclosure Schedules and each Collateral Document, notice,
certificate, communication, opinion or other document executed or required to be
executed pursuant hereto or thereto or otherwise delivered, from time to time,
pursuant hereto or thereto.
ACQUISITION MERGER shall have the meaning given to it in SECTION 2.1.
ADVERSE, ADVERSELY, when used alone or in conjunction with other terms
(including without limitation "Affect," "Change" and "Effect") shall mean, with
respect to the Company, or to the Parent, as the case may be, any Event which
could reasonably be expected to (a) adversely affect the validity or
enforceability of this Agreement or any Collateral Document executed or required
to be executed pursuant hereto or
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thereto, or (b) adversely affect the business, properties, assets, results of
operations, financial condition or prospects of the Company and its Subsidiaries
taken as a whole or the Parent and its Subsidiaries, taken as a whole, as the
case may be, or (c) impair the ability of the Company and/or its Subsidiaries or
the Parent and Buyer, as applicable, to fulfill its obligations under the terms
of any Collateral Document executed or required to be executed pursuant hereto
or thereto, or (d) adversely affect the aggregate rights and remedies of the
Parent and Buyer or the Company and/or its Subsidiaries, as the case may be,
under this Agreement or any Collateral Document executed or required to be
executed pursuant hereto or thereto, in all cases, unless otherwise specifically
set forth, in a material respect or manner or to a material degree.
AFFILIATE, AFFILIATED shall mean, with respect to any Person, (a) any other
Person at the time directly or indirectly controlling, controlled by or under
direct or indirect common control with such Person, (b) any other Person of
which such Person at the time owns, or has the right to acquire, directly or
indirectly, fifty percent (50%) or more of any class of the capital stock or
beneficial interest, (c) any other Person which at the time owns, or has the
right to acquire, directly or indirectly, fifty percent (50%) or more of any
class of the capital stock or beneficial interest of such Person, (d) any
executive officer or director of such Person, (e) with respect to any
partnership, joint venture or similar Entity, any general partner thereof, and
(f) when used with respect to an individual, shall include any member of such
individual's immediate family or a family trust.
AGREEMENT shall mean this Agreement and Plan of Reorganization as originally
in effect, including unless the context otherwise specifically requires, all
schedules, including the Disclosure Schedules and exhibits hereto, and as the
same may from time to time be supplemented, amended, modified or restated in the
manner herein or therein provided.
ALTERNATIVE MERGER STRUCTURE shall have the meaning given to it in SECTION
2.9.
APPLICABLE LAW shall mean any Law of any Authority, whether domestic or
foreign, including without limitation all federal and state securities laws and
Environmental Laws, to or by which a Person or it or any of its business or
operations is subject or any of its property of assets is bound.
ARTICLES OF MERGER shall have the meaning given to it in SECTION 2.2.
AUTHORITY shall mean any governmental or quasi-governmental authority,
whether administrative, executive, judicial, legislative or other, or any
combination thereof, including without limitation any federal, state,
territorial, county, municipal or other government or governmental or
quasi-governmental agency, arbitrator, authority, board, body, branch, bureau,
central bank or comparable agency or Entity, commission, corporation, court,
department, instrumentality, master, mediator, panel, referee, system or other
political unit or subdivision or other Entity of any of the foregoing, whether
domestic or foreign.
BENEFIT ARRANGEMENT shall mean, with respect to any Person, any material
benefit arrangement that is not a Plan, including (i) any employment or
consulting agreement, (ii) any arrangement providing for insurance coverage or
workers' compensation benefits, (iii) any incentive bonus or deferred bonus
arrangement, (iv) any arrangement providing termination allowance, severance or
similar benefits, (v) any equity compensation plan, (vi) any deferred
compensation plan and (vii) any compensation policy and practice.
BEST EFFORTS shall mean commercially reasonable, good faith efforts.
BUYER shall have the meaning given in the recitals to this Agreement.
CERTIFICATE shall have the meaning given to it in SECTION 2.7.
CERTIFICATE OF MERGER shall have the meaning given to it in SECTION 2.2.
CGCL shall mean the California General Corporation Law.
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CLAIM shall mean any debt, liability, obligation, loss, damage, deficiency,
assessment or penalty, together with any Legal Action, pending or threatened, or
any claim or judgment of whatever kind and nature relating thereto, and all
fees, costs, expenses and disbursements (including without limitation reasonable
attorneys' and other legal fees, costs and expenses) relating to any of the
foregoing, provided that in no event shall a change in the value of Parent
Common Stock give rise to or constitute a Claim.
CLOSING shall have the meaning given to it in SECTION 1.1.
CLOSING DATE shall mean the date which is (a) five business days after the
later to occur of (i) approval of the Acquisition Merger under the HSR Act or
(ii) approval of the Acquisition Merger by the Company's stockholders, or (b)
upon the agreement of the Parent and the Company, a date or successive dates
subsequent thereto not later than the Termination Date.
COBRA shall mean the Consolidated Omnibus Budget Reconciliation Act of 1985,
as amended, as set forth in Section 4980B of the Code and Part 6 of Title I of
ERISA.
CODE shall mean the Internal Revenue Code of 1986, as amended.
COLLATERAL DOCUMENT shall mean any agreement, instrument, certificate,
opinion, memorandum, schedule or other document delivered by a Party pursuant to
this Agreement or in connection with the Acquisition Merger and the
Transactions.
COMPANY shall have the meaning given to it in the recitals of this
Agreement.
COMPANY COMMON STOCK shall have the meaning given it in SECTION 3.3.
COMPANY DISCLOSURE SCHEDULE shall mean the Company Disclosure Schedule dated
as of the date of this Agreement delivered by the Company to the Parent.
COMPANY FINANCIAL STATEMENTS shall have the meaning given to it in SECTION
3.2.
COMPANY INDEMNIFIED PARTIES shall have the meaning given to it in SECTION
9.2(B).
CONFIDENTIALITY LETTER shall have the meaning given to it in SECTION 6.1(A).
CONSIDERATION PER SHARE shall mean the Merger Consideration divided by the
number of shares of Company Common Stock issued and outstanding immediately
prior to the Effective Time.*
CONSTITUENT CORPORATIONS shall have the meaning given to it in SECTION 2.1.
CONTRACT, CONTRACTUAL OBLIGATION shall mean, with regard to any Person, any
term, condition, provision, representation, warranty, agreement, covenant,
undertaking, commitment, indemnity or other obligation set forth in the Organic
Documents of such Person or which is outstanding or existing under any
instrument, contract, lease or other contractual under-taking (including without
limitation any instrument relating to or evidencing any Indebtedness) to which
such Person is a party or by which it or any of its business is subject or
property or assets is bound, to the extent that any of the foregoing is material
to such Person.
CONTROL (including the terms "controlled," "controlled by" and "under common
control with") means the possession, directly or indirectly or as trustee or
executor, of the power to direct or cause the direction of the management or
policies of a Person, or the disposition of such Person's assets or properties,
whether through the ownership of stock, equity or other ownership, by contract,
arrangement or understanding, or as trustee or executor, by contract or credit
arrangement or otherwise.
CONVERTIBLE SECURITIES shall mean any evidences of indebtedness, shares of
capital stock (other than common stock) or other securities directly or
indirectly convertible into or exchangeable for equity
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securities, whether or not the right to convert or exchange thereunder is
immediately exercisable or is conditioned upon the passage of time, the
occurrence or non-occurrence or existence or non-existence of some other Event,
or both.
CURRENT USES shall have the meaning given to it in SECTION 3.6(C).
DGCL shall mean the Delaware General Corporation Law, as amended.
DISTRIBUTION shall mean, with respect to a Party: (a) the declaration or
payment of any dividend (except dividends payable in common stock of such Party)
on or in respect of any shares of any class of capital stock of such Party or
any equity securities of any Subsidiary owned by a Person other than such Party
or a Subsidiary, (b) the purchase, redemption or other retirement of any shares
of any class of capital stock of such Party or any shares of capital stock of
any Subsidiary owned by a Person other than such Party or a Subsidiary, and (c)
any other distribution on or in respect of any shares of any class of capital
stock of such Party or any shares of capital stock of any Subsidiary owned by a
Person other than such Party or a Subsidiary.
EFFECTIVE TIME shall mean the specific time on the Closing Date at which the
Acquisition Merger has become effective pursuant to Delaware and California
law.*
EMPLOYMENT ARRANGEMENT shall mean, with respect to any Person, any
employment, consulting, retainer, severance or similar contract, agreement,
plan, arrangement or policy (exclusive of any which is terminable within thirty
(30) days without liability, penalty or payment of any kind by such Person or
any Affiliate), or providing for severance, termination payments, insurance
coverage (including any self-insured arrangements), workers compensation,
disability benefits, life, health, medical, dental or hospitalization benefits,
supplemental unemployment benefits, vacation or sick leave benefits, pension or
retirement benefits or for deferred compensation, profit-sharing, bonuses, stock
options, stock purchase or appreciation rights or other forms of incentive
compensation or post-retirement insurance, compensation or benefits, or any
collective bargaining or other labor agreement, whether or not any of the
foregoing is subject to the provisions of ERISA.
ENTITY shall mean any corporation, firm, unincorporated organization,
association, partnership, limited liability company, trust, estate of a
deceased, insane or incompetent individual, business trust, joint stock company,
joint venture or other organization, entity or business, whether acting in an
individual, fiduciary or other capacity, or any Authority.
ENVIRONMENTAL LAW shall mean any Law relating to or otherwise imposing
liability or standards of conduct concerning pollution or protection of the
environment.
ENVIRONMENTAL PERMITS shall have the meaning given to it in SECTION 3.20(C).
ERISA shall mean the Employee Retirement Income Security Act of 1974, and
the rules and regulations thereunder, all as from time to time in effect, or any
successor law, rules or regulations, and any reference to any statutory or
regulatory provision shall be deemed to be a reference to any successor
statutory or regulatory provision.
ERISA AFFILIATE shall mean any Person that is treated as a single employer
under Sections 414(b), (c), (m) or (o) of the Code or Section 4001(b)(1) of
ERISA.
EVENT shall mean the occurrence or existence of any act, action, activity,
circumstance, condition, event, fact, failure to act, omission, incident or
practice, or any set or combination of any of the foregoing.
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* As amended in Amendment No. 2, dated July 29, 1998.
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EXCHANGE AGENT, EXCHANGE AGREEMENT AND EXCHANGE FUND shall have the meanings
given to in SECTION 2.7.
GAAP shall mean generally accepted accounting principles as in effect from
time to time in the United States of America.
GOVERNMENTAL AUTHORIZATIONS shall mean, with regard to any Person, all
approvals, concessions, consents, franchises, licenses, permits, plans,
registrations and other authorizations of all Authorities that are material to
such Person.
GOVERNMENTAL ENTITY shall have the meaning given to it in SECTION 3.20(A).
GOVERNMENTAL FILINGS shall mean all filings, including franchise and similar
Tax filings, and the payment of all fees, assessments, interest and penalties
associated with such filings, with all Authorities.
GUARANTY OR GUARANTEED shall mean any agreement, undertaking or arrangement
by witch a Party guarantees, endorses or otherwise becomes or is liable,
directly or indirectly, contingently or otherwise, upon any Indebtedness of any
other Person including without limitation the payment of amounts drawn down by
beneficiaries of letters of credit (other than by endorsements of negotiable
instruments for deposit or collection in the ordinary course of business). The
amount of the obligor's obligation under any Guaranty shall be deemed to be the
outstanding amount (or maximum permitted amount, if larger) of the Indebtedness
directly or indirectly guaranteed thereby (subject to any limitation set forth
therein).
HAZARDOUS MATERIALS shall have the meaning given to it in SECTION 3.20(A).
HAZARDOUS MATERIALS ACTIVITIES shall have the meaning given to it in SECTION
3.20(B).
HSR Act shall mean the Hart-Scott-Rodino Antitrust Improvement Act of 1976,
and the rules and regulations thereunder, all as from time to time in effect, or
any successor law, rules or regulations, and any reference to any statutory or
regulatory provision shall be deemed to be a reference to any successor
statutory or regulatory provision.
INDEBTEDNESS shall mean, with respect to a Party, (a) all items, except
items of capital stock or of surplus on the consolidated balance sheet of such
Party, which in accordance with GAAP would be included in determining total
liabilities as shown on the liability side of a balance sheet of such Party or
such Subsidiary, (b) all obligations secured by any Lien to which any property
or asset owned or held by such Party is subject, whether or not the obligation
secured thereby shall have been assumed, and (c) to the extent not otherwise
included, all Contractual Obligations of such Party constituting capitalized
leases and all obligations of such Party with respect to Leases constituting
part of a sale and leaseback arrangement and off-balance sheet financings
(including, without limitation, synthetic leases and other similar financing
arrangements).
INDEBTEDNESS FOR BORROWED MONEY shall mean, without duplication on a
consolidated basis with its Subsidiaries, all indebtedness of the Company
(without regard to the above definition of Indebtedness) for or under any of the
following: (i) borrowed money, whether current, short-term, or long-term,
secured or unsecured, (ii) the deferred purchase price for purchases of property
(other than trade payables which are not overdue by more than 90 days), (iii)
any conditional sale or other title retention agreement with respect to property
acquired, (iv) all off-balance sheet financings including, without limitation,
synthetic leases and other similar financing arrangements, and excluding the
operating leases described in Note 9 to the most recent audited financial
statements forming part of the Company Financial Statements, (v) any payment
obligations in respect of banker's acceptances or letters of credit (other than
stand-by letters of credit in support of ordinary course trade payables), (vi)
any liability with respect to interest rate swaps, collars, caps and similar
obligation, (vii) any debt paid or prepaid since the date of this Agreement,
which payment or prepayment is a breach of the representations and warranties
set forth in SECTION 3.18(A)(III)(D), (viii) any
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accrued and unpaid interest or other charges (including any contractual
prepayment premiums, penalties or similar charges resulting from the
transactions contemplated hereby or the discharge of such obligations) with
respect to any of the foregoing, and (ix) all costs or expenses incurred by the
Company in connection with the transactions contemplated hereby, including legal
fees and disbursements, and any other payments to any broker, finders, agents or
similar intermediary, which have not been paid on or before the Closing, to the
extent that the Company at the Effective Time does not have on hand cash or cash
equivalents in an amount sufficient to pay such costs and expenses.
INJUNCTION shall have the meaning given to it in SECTION 7.1.
INTANGIBLE ASSETS shall mean all assets and property lacking physical
properties the evidence of ownership of which must customarily be maintained by
independent registration, documentation, certification, recordation or other
means.
INTELLECTUAL PROPERTY means all (a) patents, patent applications, patent
disclosures, and improvements thereto, (b) trademarks, service marks, trade
dress, logos, tradenames, and corporate names and registrations and applications
for registration thereof, (c) copyrights and registrations and applications for
registration thereof, (d) mask works and registrations and applications for
registration thereof, (e) computer software, data, and documentation, (f) trade
secrets and confidential business information (including ideas, formulas,
compositions, inventions (whether patentable or unpatentable and whether or not
reduced to practice), know-how, manufacturing and production processes and
techniques, research and development information, drawings, specifications,
designs, plans, proposal, technical data, copyrightable works, financial,
marketing, and business data, pricing and cost information, business and
marketing plans, and customer and supplier lists and information), (g) other
proprietary rights, and (h) copies and tangible embodiments thereof (in whatever
form or medium.
KNOWLEDGE of a Party means actual knowledge after reasonable investigation
(or what such party would have known if reasonable investigation had been made).
LAW shall mean any (a) administrative, judicial, legislative or other
action, code, consent decree, constitution, decree, directive, enactment,
finding, guideline, law, injunction, interpretation, judgment, order, ordinance,
policy statement, proclamation, promulgation, regulation, requirement, rule,
rule of law, rule of public policy, settlement agreement, statute, or writ or
any Authority, domestic or foreign; (b) the common law, or other legal or
quasi-legal precedent; or (c) arbitrator's, mediator's or referees award,
decision, finding or recommendation; including, in each such case or instance,
any interpretation, directive, guideline or request, whether or not having the
force of law including, in all cases, without limitation any particular section,
part or provision thereof.
LEASE shall mean any lease or sublease of property, whether real, personal
or mixed, and all amendments thereto.
LEGAL ACTION shall mean any litigation or legal or other actions,
arbitrations, counterclaims, investigations, proceedings, requests for material
information by or pursuant to the order of any Authority, or suits, at law or in
arbitration, equity or admiralty commenced by any Person, whether or not
purported to be brought on behalf of a party hereto affecting such party or any
of such party's business, property or assets.
LIEN shall mean any of the following: mortgage; lien (statutory or other);,
preference, priority or other security agreement, arrangement or interest;
hypothecation, pledge or other deposit arrangement; assignment; charge; levy;
executory seizure; attachment; garnishment; encumbrance (including any easement,
exception, variance, reservation or limitation, right of way, zoning
restriction, building or use restriction, encroachment, and the like except
utility and similar easements which do not interfere in any material respect
with the use of the property involved or which materially reduces the fair
market value of such property); conditional sale, title retention or other
similar agreement, arrangement, device or restriction; preemptive or similar
right; any financing lease involving substantially the same economic effect as
any of
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the foregoing; the filing of any financing statement under the Uniform
Commercial Code or comparable law of any jurisdiction; restriction on sale,
transfer, assignment, disposition, Lease or other alienation, or any option,
equity, claim or right of or obligation to, any other Person, of whatever kind
and character.
MATERIAL OR MATERIALITY for the purposes of this Agreement, shall, unless
specifically stated to the contrary, be determined without regard to the fact
that various provisions of this Agreement set forth specific dollar amounts.
MATERIAL AGREEMENT OR MATERIAL COMMITMENT shall mean, with respect to a
Party, any Contractual Obligation which (a) was not entered into in the ordinary
course of business, (b) was entered into in the ordinary course of business
which (i) involves the purchase, sale or lease of goods or materials or
performance of services aggregating more than Fifty Thousand Dollars ($50,000),
(ii) extends for more than three (3) months, or (iii) is not terminable on
thirty (30) days or less notice without penalty or other payment, (c) involves
Indebtedness for money borrowed in excess of Fifty Thousand Dollars ($50,000),
(d) is or otherwise constitutes a written agency, dealer, license,
distributorship, sales representative or similar written agreement, or (e) would
account for more than ten percent (10%) of purchases or sales projected to be
made by such Party during its current fiscal year.
MERGER CONSIDERATION shall mean Twenty Three Million Seven Hundred and Fifty
Thousand Dollars ($23,750,000) minus the Company's Indebtedness for Borrowed
Money at the Effective Time.
MERGER SUBSIDIARY shall have the meaning given to it in the recitals of this
Agreement.
MERGER SUBSIDIARY COMMON STOCK shall mean the common stock, par value $1.00
per share, of the Merger Subsidiary.
MULTIEMPLOYER PLAN shall mean a "multiemployer plan" within the meaning of
Section 4001(a)3 of ERISA.
OPTION SECURITIES shall mean all rights, options and warrants, and calls or
commitments evidencing the fight, to subscribe for, purchase or otherwise
acquire shares of capital stock or Convertible Securities, whether or not the
right to subscribe for, purchase or otherwise acquire is immediately exercisable
or is conditioned upon the passage of time, the occurrence or non-occurrence or
the existence or non-existence of some other Event.
ORGANIC DOCUMENT shall mean, (a) with respect to a Person which is a
corporation, its charter, its by-laws and all Company agreements, voting trusts
and similar arrangements applicable to any of its capital stock, (b) with
respect to a Person which is a partnership, its agreement and certificate of
partnership, any agreements among partners, and any management and similar
agreements between the partnership and any general partners (or any Affiliate
thereof), and (c) with respect to a Person which is a limited liability company,
its certificate of organization and operating agreement, any agreements among
members, and any management and similar agreements between the limited liability
company and any members (or any Affiliate thereof).
OTHER TRANSACTION shall mean a transaction or series of related transactions
(other than the Acquisition Merger) resulting in (a) any change in control of
the Company, (b) any merger or consolidation of the Company or any Subsidiary,
regardless of which is the surviving Entity, (c) any tender offer or exchange
offer for, or any acquisition of, any securities of the Company, or (d) any sale
or other disposition of assets of the Company or any Subsidiary not otherwise
permitted under SECTION 3.18 hereof.
PARENT shall have the meaning given to it in the recitals of this Agreement.
PARENT COMMON STOCK shall have the meaning given to it in SECTION 4.3.
A-40
<PAGE>
PARENT DISCLOSURE SCHEDULE shall mean the disclosure schedule dated as of
the date of this Agreement delivered by the Parent to the Company.
PARENT INDEMNIFIED PARTIES shall have the meaning given to it in SECTION
9.2(A).
PARTY shall mean a signatory to this Agreement.
PERSON shall mean any natural individual or any Entity.
PLAN shall mean, with respect to a Party and at a particular time, any
employee benefit plan which is covered by ERISA and in respect of which such
Party is an "employer" as defined in Section 3(5) of ERISA, other than a
Multiemployer Plan.
PRIVATE AUTHORIZATIONS mean all approvals, concessions, consents,
franchises, licenses, permits, and other authorizations of all Persons (other
than Authorities) including without limitation those with respect to agreements,
leases, contracts, patents, trademarks, service marks, trade names, copyrights,
computer software programs, technology and know-how.
PROXY STATEMENT shall have the meaning given to it in SECTION 6.3.
PURCHASE PRICE shall have the meaning given to it in SECTION 2.5.
REPRESENTATIVES (of a Party) shall mean the officers, directors, employees,
accountants, counsel, financial advisors, consultants, financing sources, and
other representatives (of such Party or its Affiliates).
REQUIRED REGULATORY APPROVALS shall have the meaning given to it in SECTION
7.1.
STOCKHOLDERS shall have the meaning given to it in the recitals of this
Agreement.
SUBSIDIARY shall mean, with respect to a Person, any Entity a majority of
the capital stock ordinarily entitled to vote for the election of directors of
which, or if no such voting stock is outstanding, a majority of the equity
interests of which, is owned directly or indirectly, legally or beneficially, by
such Person or any other Person controlled by such Person.
SUPERIOR PROPOSAL shall have the meaning given to it in SECTION 6.7.
SURVIVING CORPORATION shall have the meaning given to it in SECTION 2 1.
SURVIVING CORPORATION COMMON STOCK shall mean the common stock of the
Surviving Corporation as provided in SECTION 2.5(B).
TAX (and "Taxable", which shall mean subject to Tax), shall mean, with
respect to a Party, (a) all taxes (domestic or foreign), including without
limitation any income (net, gross or other including recapture of any tax items
such as investment tax credits), alternative or add-on minimum tax, gross
income, gross receipts, gains, sales, use, leasing, lease, user, ad valorem,
transfer, recording, franchise, profits, property (real or personal, tangible or
intangible), fuel, license, withholding on amounts paid to or by such Party,
payroll, employment, unemployment, social security, excise, severance, stamp,
occupation, premium, environmental or windfall profit tax, custom, duty or other
tax, governmental fee or other like assessment or charge of any kind whatsoever,
together with any interest, levies, assessments, charges, penalties, addition to
tax or additional amount imposed by any Taxing Authority, (b) any joint or
several liability of such Party with any other Person for the payment of any
amounts of the type described in (a), and (c) any liability of such Party for
the payment of any amounts of the type described in (a) as a result of any
express or implied obligation to indemnify any other Person.
TAX RETURN OR RETURNS shall mean all returns, consolidated or otherwise
(including without limitation information returns), required to be filed with
any Authority with respect to Taxes.
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<PAGE>
TAXING AUTHORITY shall mean any Authority responsible for the imposition of
any Tax.
TERMINATION DATE shall mean September 30, 1998.
TRANSACTIONS shall mean the other transactions contemplated by this
Agreement or the Acquisition Merger or by any Collateral Document executed or
required to be executed in connection herewith or therewith.
IN WITNESS WHEREOF, the Parent, the Merger Subsidiary, the Company and the
Stockholders have caused this Agreement to be executed as of the date first
written above.
DESA INTERNATIONAL, INC.
<TABLE>
<S> <C>
By: /s/ ROBERT H. ELMAN
----------------------------------------
Chairman, President or VP
By: /s/ EDWARD G. PATRICK
----------------------------------------
Secretary or Assistant Secretary
FMI ACQUISITION, INC.
By: /s/ ADAM SUTTIN
----------------------------------------
Chairman, President or VP
By: /s/ ADAM SUTTIN
----------------------------------------
Secretary or Assistant Secretary
FIREPLACE MANUFACTURERS, INC.
By: /s/ WILLARD P. HARRIS
----------------------------------------
Chairman, President or VP
By: /s/ JOHN HORNSBY
----------------------------------------
Secretary or Assistant Secretary
</TABLE>
A-42
<PAGE>
<TABLE>
<S> <C>
STOCKHOLDERS
/s/ WILLARD V. HARRIS, JR.
- ---------------------------------------------
Name: Willard V. Harris, Jr.
/s/ WILLARD P. HARRIS
- ---------------------------------------------
Name: Willard P. Harris
/s/ BENJAMIN C. HARRIS
- ---------------------------------------------
Name: Benjamin C. Harris
/s/ JOHN HORNSBY
- ---------------------------------------------
Name: John D. Hornsby
</TABLE>
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<PAGE>
EXHIBITS*
<TABLE>
<S> <C> <C>
Exhibit A -- Voting and Option Agreement
Exhibit B -- Non-competition agreements
Exhibit C -- Matters to be addressed in Company counsel opinion
Exhibit D -- Form of Employment Agreement
Exhibit E -- Form of Lease amendment under Section 9.2(C)
Exhibit F -- Phase One Environmental Site Assessment, draft dated May 1, 1998, by Dames &
Moore
</TABLE>
- ------------------------
* Exhibits, except the Voting and Option Agreement which follows as part of
this Appendix A, are available from the Corporate Secretary of Fireplace
Manufacturers, Inc. upon written request.
A-44
<PAGE>
SCHEDULES*
Company Disclosure Schedule
Parent Disclosure Schedule
- ------------------------
* Schedules are available from the Corporate Secretary of Fireplace
Manufacturers, Inc. upon written request.
A-45
<PAGE>
VOTING AND OPTION AGREEMENT
BY AND AMONG
DESA INTERNATIONAL, INC.,
FMI ACQUISITION, INC.
AND
CERTAIN
SECURITYHOLDERS OF
FIREPLACE MANUFACTURERS, INC.
DATED AS OF MAY 13, 1998
A-46
<PAGE>
VOTING AND OPTION AGREEMENT
THIS VOTING AND OPTION AGREEMENT (this "Agreement"), is dated as of May 13,
1998, by and among each of the undersigned securityholders (individually, a
"Securityholder" and collectively, the "Securityholders" of Fireplace
Manufacturers, Inc., a California corporation ("Company"), Desa International,
Inc., a Delaware corporation ("Parent"), and FMI Acquisition, Inc., a Delaware
corporation ("Acquiror").
RECITALS
A. Each Securityholder is the beneficial and record owner of the number of
shares, if any, of common stock, par value $.01 per share, of Company ("Company
Common Stock") set forth opposite such Securityholder's name on Schedule A
hereto.
B. Each Securityholder is the beneficial and record owner of the Company
Option Securities, if any, (which under existing circumstances may be exercised
for the number of shares of Company Common Stock set forth opposite each such
Securityholder's name on Schedule A hereto) set forth opposite such
Securityholder's name on Schedule A hereto.
C. Parent, Acquiror, Company and the Securityholders have concurrently
herewith entered into an Agreement and Plan of Reorganization (the "Merger
Agreement"), pursuant to which Company will be merged with Acquiror (the
"Merger").
D. The Board of Directors of Company has approved the Merger Agreement and
this Agreement.
E. In order to induce Parent and Acquiror to enter into the Merger
Agreement, the Securityholders wish to make certain representations, warranties,
covenants and agreements in connection with the Merger.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants hereinafter set forth, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows.
ARTICLE 1
DEFINITIONS
1.1 DEFINITIONS. Terms defined in the singular shall have a comparable
meaning when used in the plural, and vice versa. The reference to any gender
shall be deemed to include all genders. Capitalized terms used herein but not
otherwise defined herein shall have the respective meanings ascribed thereto in
the Merger Agreement. The following terms shall have the following meanings:
"BENEFICIALLY OWN" shall have the meaning set forth in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended.
"OPTION" shall have the meaning set forth in Section 5.1. hereof.
"REPRESENTATIVES" shall mean in respect of a person, any of its
partners, officers, affiliates, employees, agents, investment bankers,
attorneys, financial advisors or other representatives.
A-47
<PAGE>
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
OF THE SECURITYHOLDERS
2.1 REPRESENTATIVES AND WARRANTIES OF THE SECURITYHOLDERS. The provisions
of Article 5 of the Merger Agreement are incorporated herein in their entirety.
ARTICLE 3
COVENANTS
3.1 NO DISPOSITION OF SECURITIES. Each Securityholder agrees that such
Securityholder shall not, except pursuant to the Merger Agreement or this
Agreement, sell, transfer, pledge, hypothecate, encumber or otherwise dispose
of, or enter into any contract, option or other arrangement or understanding
with respect to the sale, transfer, pledge, hypothecation, encumbrance or other
disposition of, any of or any interest in any of the shares of Company Common
Stock or Company Option Securities, or shares of Company Common Stock issuable
upon exercise of any such Company Option Securities, set forth opposite such
Securityholder's name on Schedule A or hereafter owned beneficially or of record
by such Securityholder. Each Securityholder agrees that (a) at the request of
the Parent, the certificates representing the shares of Company Common Stock and
Company Option Securities owned by such Securityholder, and the certificates and
other instruments representing any shares of Company Common Stock or Company
Option Securities hereafter owned by such Securityholder, shall bear the
following legend:
"The securities represented by this certificate are subject to the terms
of that certain Voting and option Agreement, dated May 13, 1998, by and
among DESA International, Inc., FMI Acquisition, Inc. and certain
securityholders of Fireplace Manufacturers, Inc. This legend shall
terminate upon the termination of such Voting and option Agreement."
(b) that any attempted or purported transfer of Company Common Stock or Company
Option Securities in violation of this Section 3.1 shall be null and void and
without effect, and (c) Company shall not be required to enter in its stock or
other records, or reflect, recognize or give effect to for any purpose, any
transfer of securities of Company in violation of this Agreement.
3.2 VOTING ARRANGEMENTS. Each Securityholder agrees that, except pursuant
to this Agreement, it shall not grant any proxies, deposit any shares of Company
Common Stock into a voting trust or enter into any voting agreement with respect
to any shares of Company Common Stock now or hereafter owned beneficially or of
record by such Securityholder, other than proxies to vote such shares at any
annual or special meeting of stockholders of Company on matters unrelated to the
matters set forth in Section 4.1 hereof.
3.3 SATISFACTION OF CONDITIONS TO THE MERGER. Each Securityholder agrees
that, subject to its fiduciary duty as a director of Company, such
Securityholder, in its capacity as such, shall assist and cooperate with the
parties to the Merger Agreement in doing all things necessary, proper or
advisable under Applicable Laws as promptly as practicable to consummate and
make effective the Merger and the other transactions contemplated by the Merger
Agreement. Each Securityholder agrees that it shall not take any action in its
capacity as such Securityholder that would or is reasonably likely to result in
any of its representations and warranties set forth in this Agreement being
untrue as of the date made or in any of the conditions set forth in the Merger
Agreement not being satisfied.
3.4 SURRENDER OF COMPANY OPTION SECURITIES. Each Securityholder hereby
agrees, at and subject to the Closing, to deliver to, and surrender for
cancellation by, Company all Company option Securities legally or beneficially
owned by such Securityholder on the Closing Date, and acknowledges and agrees
that such Securityholder shall not be entitled to any payment of monies or any
other consideration in connection with the delivery and surrender of such
Company Option Securities.
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<PAGE>
ARTICLE 4
PROXY; CONVERSION;
ELECTIONS; WAIVER OF RIGHTS
4.1 PROXY.
(a) Each Securityholder hereby agrees that, during the term of this
Agreement, at any meeting of the stockholders of Company, however called, and at
every adjournment thereof, and in any action by written consent of the
stockholders of Company, to (i) vote all of the shares of Company Common Stock
then owned by such Securityholder in favor of the adoption of the Merger
Agreement as in effect on the date hereof (as such agreement may be amended) and
each of the other transactions contemplated thereby and any action required in
furtherance thereof, (ii) vote such shares against any action or agreement that
would result in a breach in any material respect of any covenant, representation
or warranty or any other obligation of Company under the Merger Agreement, and
(iii) vote such shares against any Other Transaction or any other action or
agreement that, directly or indirectly, is inconsistent with or that would, or
is reasonably likely to, directly or indirectly, impede, interfere with or
attempt to discourage the Merger or any other transaction contemplated by the
Merger Agreement, including but not limited to (I) any extraordinary corporate
transaction (other than the Merger), such as a merger, consolidation, business
combination, reorganization, recapitalization or liquidation involving Company
or any of its Subsidiaries, (II) a sale or transfer of a material amount of
assets of Company and its Subsidiaries taken as a whole, (III) any redemption of
securities of Company, or (IV) any material change in Company's capitalization,
corporate structure or business; provided, however, that, if such Securityholder
is a director of Company, nothing herein shall be construed to obligate such
Securityholder to act in his capacity as a director in any manner which
conflicts with such Person's fiduciary duties as a director of Company.
(b) In furtherance of the foregoing, (i) each Securityholder hereby appoints
Parent and the proper officers of Parent, and each of them, with full power of
substitution in the premises, its proxies to vote all such Securityholder's
shares of Company Common Stock now or hereafter owned beneficially or of record
by such Securityholder at any meeting, general or special, of the stockholders
of Company, and to execute one or more written consents or other instruments
from time to time in order to take such action without the necessity of a
meeting of the stockholders of Company, in accordance with the provisions of the
preceding paragraph and (ii) Parent hereby agrees to vote such shares or execute
written consents or other instruments in accordance with the provisions of the
preceding paragraph.
(c) The proxy and power of attorney granted herein shall be irrevocable
during the term of this Agreement, shall be deemed to be coupled with an
interest and shall revoke all prior agreements to vote and proxies granted by
such Securityholder. Such Securityholder shall not grant any proxy to any person
which conflicts with the proxy granted herein, and any attempt to do so shall be
void. The power of attorney granted herein is a durable power of attorney and
shall survive the disability or incompetence of such Securityholder.
4.2 WAIVER OF APPRAISAL RIGHTS. Each Securityholder hereby waives its
dissenters' rights under Chapter 13 of the CGCL with respect to any shares of
Company Common Stock owned by it or issuable to it in connection with the
transactions contemplated by 5 the Merger Agreement.
4.3 WAIVER OF CERTAIN RIGHTS. Each securityholder hereby waives and agrees
not to assert any claims or rights it may have against any director of Company
in respect of approval or adoption of the Merger-Agreement or the consummation
of the Merger or the other transactions contemplated thereby.
A-49
<PAGE>
ARTICLE 5
OPTION
5.1 GRANT OF OPTION; PRICE. Each Securityholder hereby grants to Acquiror
the unconditional, irrevocable (during the term of this Agreement) option (the
"Option") to purchase from such Securityholder all Company Common Stock and
Company Option Securities beneficially owned by such Securityholder at the time
of exercise of the Option, as provided below. The Option granted hereunder may
be exercised for all, but not less than all, Company Common Stock and Company
Option Securities beneficially owned by all such Securityholders at the time of
exercise. The price for Company Common Stock purchased by Acquiror hereunder
shall be $7.14 per share and the price for Company Option Securities shall be
the product of (x) the number of shares of Company Common Stock with respect to
which such Company Option Securities are vested at the time of exercise and (y)
the excess, if any, of $7.14 over the per share exercise price of such Company
Option Securities.
5.2 EXERCISE OF OPTION; DURATION.
(a) The Acquiror may exercise the option in the event that (i) Parent has
the right to terminate the Merger Agreement pursuant to Section 8.1(D)(i) or
8.1(E) thereof (irrespective of whether it actually terminates the Merger
Agreement); or (ii) if any Securityholder shall breach the terms of this
Agreement in any material respect or seeks to rescind or revoke any material
provision hereof.
(b) The Option will terminate automatically if it is not exercised by the
later of 120 days after the date of the Voting and Option Agreement and Buyer's
receipt of requisite governmental approvals under the Hart-Scott-Rodino
Antitrust Improvement Act of 1976, as amended, and in any event it will
terminate if not exercised within 180 days after the date hereof.
(c) The terms and provisions of this Article 5 shall survive any termination
of this Agreement triggered by the Termination of-the Merger Agreement by Parent
pursuant to Section 8.1(D) or (E) thereof.
5.3 MANNER OF EXERCISE; CLOSING. In the event that the Acquiror is
entitled to and wishes to exercise the Option, it shall send to the
Securityholders a written notice specifying a place and time, not more than
thirty (30) business days after the date of such notice, for the closing of such
purchase. At the closing, the Acquiror shall pay the Securityholders the
aggregate purchase price specified above for Company Common Stock and Company
Option Securities in immediately available funds by wire transfer to bank
accounts designated by the Securityholders. At the closing, each Securityholder
shall deliver to the Acquiror (i) a certificate or certificates representing all
of the shares of Company Common Stock held by such Securityholder together with
stock powers duly executed, with signatures guaranteed, and endorsed in blank;
and (ii) duly executed instruments of assignment in form reasonably satisfactory
to Acquiror in respect of all Company Option Securities held by such
Securityholder. The Acquiror shall deliver to each Securityholder a written
undertaking that it will not sell or offer to sell or otherwise dispose of any
Company Common Stock and Company Option Securities in violation of Applicable
Law.
Simultaneously with the exercise of the Option, Parent shall cause the
Company (then its subsidiary) to enter into Non-Competition Agreements, in the
Form of Exhibit B to the Merger Agreement, with those Securityholders named
Section 7.2(M) of the Merger Agreement. Upon full execution of such Non-
Competition Agreements the Parent shall pay the amounts, by wire transfer,
provided for in Section 7.2(M) of the Merger Agreement to the Securityholders.
The refusal of any Securityholder to enter into any such Non-Competition
Agreement shall not prevent the exercise of the Option under the terms of this
Agreement.
A-50
<PAGE>
ARTICLE 6
MISCELLANEOUS
6.1 TERMINATION. This Agreement shall terminate upon the earlier to occur
of (a) the mutual consent of Parent, Acquiror and each of the Securityholders,
(b) the termination of the Merger Agreement and (c) the Effective Time of the
Merger.
6.2 AMENDMENT. This Agreement may be amended only by a written instrument
executed by the parties or their respective successors or assigns.
6.3 NOTICES. The notice provisions of Section 10.1 of the Merger Agreement
are hereby incorporated herein by reference in their entirety.
6.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts and each counterpart shall be deemed to be an original, but all of
which shall constitute one and the same original.
6.5 APPLICABLE LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California without reference to choice
of law principles, including all matters of construction, validity and
performance.
6.6 SEVERABILITY; ENFORCEMENT. The invalidity of any portion hereof shall
not affect the validity, force or effect of the remaining portions hereof. If it
is ever held that any restriction hereunder is too broad to permit enforcement
of such restriction to its fullest extent, each party agrees that a court of
competent jurisdiction may enforce such restriction to the maximum extent
permitted by law, and each party hereby consents and agrees that such scope may
be judicially modified accordingly in any proceeding brought to enforce such
restriction.
6.7 FURTHER ASSURANCES. Each party hereto shall execute and deliver such
additional documents as may be necessary or desirable to consummate the
transactions contemplated by this Agreement.
6.8 PARTIES IN INTEREST; ASSIGNMENT. Neither this Agreement nor any of the
rights, interest or obligations hereunder shall be assigned by any of the
parties hereto without the prior written consent of the other parties; provided,
however, that the Acquiror may assign the Option to an Affiliate.
6.9 ENTIRE AGREEMENT. This Agreement and the Merger Agreement contain the
entire understanding of the parties hereto and thereto with respect to the
subject matter contained herein and therein, and supersede and cancel all prior
agreements, negotiations, correspondence, undertakings and communications of the
parties, oral or written, respecting such subject matter. There are no
restrictions, promises, representations, warranties, agreements or undertakings
of any party hereto or to the Merger Agreement with respect to the transactions
contemplated by this Agreement and the Merger Agreement other than those set
forth herein or therein or made hereunder or thereunder.
6.10 SPECIFIC PERFORMANCE. The parties hereto agree that the remedy at law
for any breach of this Agreement will be inadequate and that any party by whom
this Agreement is enforceable shall be entitled to specific performance or
injunctive relief in addition to any other appropriate relief or remedy. Such
party may, in its sole discretion, apply to a court of competent jurisdiction
for specific performance or injunctive relief or such other relief as such court
may deem just and proper in order to enforce this Agreement or prevent any
violation hereof and, to the extent permitted by applicable law, each party
waives any objection to the imposition of such relief or any requirement for the
posting of a bond or other collateral in connection therewith.
6.11 HEADINGS; REFERENCES. The section and paragraph headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement. All references herein to
"Sections" or "Exhibits" shall be deemed to be references to Articles or
Sections hereof or Exhibits hereto unless otherwise indicated.
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[remainder of page intentionally left blank]
A-52
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be duly executed and delivered as of the day and year first above written,
<TABLE>
<S> <C> <C>
PARENT:
DESA INTERNATIONAL, INC.
By: /s/ ROBERT H. ELMAN
-------------------------------------------
Name: Robert H. Elman
Title: Chairman and CEO
ACQUIROR:
FMI ACQUISITION, INC.
By: /s/ ADAM L. SUTTIN
-------------------------------------------
Name: Adam L. Suttin
Title: President
SECURITYHOLDERS:
/s/ BENJAMIN C. HARRIS
-------------------------------------------
Name: Benjamin C. Harris
/s/ WILLARD V. HARRIS, JR.
-------------------------------------------
Name: Willard V. Harris, Jr.
/s/ WILLARD P. HARRIS
-------------------------------------------
Name: Willard P. Harris
/s/ JOHN D. HORNSBY
-------------------------------------------
Name: John D. Hornsby
/s/ JAMES L. BEHRENS
-------------------------------------------
Name: James L. Behrens
/s/ DEBBY HORNSBY
-------------------------------------------
Name: Debby Hornsby
/s/ SHEILA F. HARRIS
-------------------------------------------
Name: Sheila F. Harris
</TABLE>
A-53
<PAGE>
<TABLE>
<S> <C> <C>
Marisa E. Harris
/s/ WILLARD P. HARRIS
-------------------------------------------
By: Willard P. Harris
Title: Custodian
Willard P. Harris, Jr.
/s/ WILLARD P. HARRIS
-------------------------------------------
By: Willard P. Harris
Title: Custodian
Burton-Harris Family Trust
/s/ BENJAMIN C. HARRIS
-------------------------------------------
By:
Title:
Harris-Taylor Family Trust
/s/ WILLARD V. HARRIS, JR.
-------------------------------------------
By:
Title:
Hornsby Family Trust
/s/ JOHN D. HORNSBY
-------------------------------------------
By:
Title:
</TABLE>
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<PAGE>
Fireplace Manufacturers, Inc., a California corporation ("COMPANY") hereby
approves and consents to the foregoing Voting and Option Agreement and hereby
agrees that it will not enter in its stock or other records, or reflect,
recognize or give effect to for any purpose, any transfer of securities of
Company in violation of Section 3.1 of the foregoing Voting and Option
Agreement. Company hereby waives any and all transfer restrictions applicable to
any and all Company Common Stock and Company Option Securities held by any of
the Securityholders in connection with the transfer thereof to Acquiror pursuant
to the Option (as defined in the foregoing Voting and Option Agreement).
FIREPLACE MANUFACTURERS, INC.
/s/ WILLARD V. HARRIS, JR.
--------------------------------------
Name: Willard V. Harris, Jr.
Title: Chairman of the Board-FMI
- ------------------------
Schedule A to the Voting and Option Agreement is available from the Corporate
Secretary of Fireplace Manufacturers, Inc. upon written request.
A-55
<PAGE>
APPENDIX B
Marshall & Stevens
Incorporated
------------------------
Valuation and Financial Consultants
707 Wilshire Boulevard, Suite 5200
Los Angeles, CA 90017
213.612.8000
FAX 213.612.8000
http://ww.marshall-stevens.com/m
April 20, 1998 File Reference 11-11765
The Board of Directors of
Fireplace Manufacturers, Inc.
2701 South Harbor Boulevard
Santa Ana, California 92704
Attention:John D. Hornsby
Chief Operating Officer and Secretary
Dear Mr. Hornsby:
It is our understanding that a Draft Agreement and Plan of Reorganization
(the "Agreement") dated March 27, 1998, was entered into, by and among Desa
International, Inc. ("Desa"), a Delaware corporation; [ ]
Acquisition Corporation ("Merger Subsidiary"), a Delaware Corporation; Fireplace
Manufacturers, Inc. ("FMI"), a California corporation, and the collective
shareholders who will execute this agreement. Pursuant to the Agreement each
outstanding share of common stock of FMI $.01 par value, will be converted into
the right to receive cash in the amount of $7.14. This per share price is
subject to adjustment for any interest bearing indebtedness which, according to
FMI management ("Management"), was nonexistent as of the date of this Opinion.
It is also our understanding that 3,326,775 shares of common stock are
outstanding. Therefore, for purposes of our Opinion, we have assumed that the
Transaction Price will be $23,750,000 ("Transaction Price"). The terms and
conditions of the Reorganization are more fully described in the aforementioned
Agreement.
You have requested our opinion as to whether the Transaction Price is fair
to the FMI shareholders from a financial point of view pursuant to the terms and
subject to the conditions set forth in the Agreement. We have not been engaged
to give advice on whether the FMI shareholders should engage in the Transaction,
nor have we been requested to seek or identify alternatives. The date of this
Opinion is April 20, 1998.
"Market value" is defined as the price at which an asset or business
enterprise would change hands between a willing buyer and a willing seller when
the former is not under any compulsion to buy, the latter is not under any
compulsion to sell, and both parties are well informed about all pertinent facts
of the asset and the market for such asset. Market value is synonymous with the
legal term fair market value.
It is our understanding that you and any other recipient of our Opinion of
fair market value will consult with and rely solely upon your own legal counsel
with respect to said definition. No representation
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is made herein as to any legal matter or the sufficiency of said definition for
any purpose other than setting forth the scope of this Opinion.
"Controlling interest" is defined as any number of shares owned, either
directly or indirectly, that, when exercised, can influence the selection of the
entity's management group, the direction of existing or future operations (sale,
divestiture, or acquisitions, the declaration of dividends, etc.
In connection with this opinion, we have made such reviews, analyses, and
inquiries as we deemed necessary and appropriate under the circumstances. Among
other things, we:
A. Analyzed and inspected FMI's financial statements for the fiscal years
ended March 31, 1994 audited by Ernst & Young, LLP, March 31, 1995
through 1997 audited by McGladrey & Pullen, LLP; and the interim
internally prepared financial statements for the fiscal year ended March
31, 1998, identified by the Management as the most current financial
statements available.
B. Inspected copies of the following documents:
- Certain sections of the Draft Agreement and Plan of Reorganization
(the "Agreement") dated March 27, 1997.
- Draft of Non-competition Agreement dated April 2, 1998. It is our
understanding that Willard V. Harris, Willard P. Harris, John D.
Hornsby and James L. Behrens will be granted 3 year non-compete
covenants. According to Management, Willard V. Harris, Willard P.
Harris, John D. Hornsby and James L. Behrens, individually, would be
able to immediately solicit and take away 20 to 30% of the
revenue-earnings base of FMI, if these agreements were not entered
into.
- Draft of Employment Agreement dated April 2, 1998. It is our
understanding that Willard P. Harris, John D. Hornsby and James L.
Behrens will be granted 3 year employment agreements. In our
discussions with Management and upon our inspection of FMI's Form
10-K, we noted that FMI's audit committee uses a publication
EMPLOYERS EXECUTIVE SALARY SURVEY as a tool in maintaining
compensation within industry standards. We also noted that the base
salary delineated in the Employment Agreement is significantly less
than the compensation paid to these shareholders as of the fiscal
Year ended March 31, 1998.
- News release announcing FMI's letter of intent to sell for a maximum
cash price of $23,750,000 dated March 20, 1998.
- Internal FMI memo addressing the dismissal of the Heat-N-Glo patent
infringement against FMI dated December 11, 1997. It is our
understanding that FMI is now subject to only one pending legal
proceeding involving a worker compensation suit which Management
believes poses no material impact on FMI's financial condition.
- Confidential memorandum regarding FMI prepared by Management Resource
Center, Inc.
- Memo of confirmation and understanding relative to FMI's intent to
sell dated March 19, 1998 prepared by Desa International.
- Schedule of estimated closing costs and future operating projections
prepared by Management.
- Letter of intent to acquire FMI assets in the range of $17 to $20
million from Lennox Industries, Inc. dated January 19, 1998.
C. Performed a search of companies considered comparable to FMI provided by
MOODY'S and COMPUSTAT'S Databases and MERGERSTAT REVIEW 1997.
D. Reviewed certain transaction data for publicly traded companies.
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E. Visited FMI headquarters and conducted telephone interviews with and
relied upon the representations of certain members of Management, as well
as outside consultants, and counsel concerning the operations, financial
condition, future prospects, and projected operations and performance of
FMI.
F. Conducted such other studies, analyses, and inquiries as we deemed
appropriate.
In rendering our Opinion, we have not independently verified the accuracy
and completeness of the information supplied to us with respect to FMI and do
not assume any responsibility with respect to it. We advise the recipients of
this Opinion that nothing has come to our attention in the course of this
engagement that has caused us to believe it unreasonable to utilize and rely
upon the expectations and representations of FMI's management regarding FMI's
future performance. Additionally, our opinion is necessarily based on business,
economic, market and other conditions as they exist and can be evaluated by us
as of the Date of this Opinion.
This Opinion is furnished solely for your benefit and may not be relied upon
by any other person or for any other purpose without our express, prior, written
consent. Marshall & Stevens Incorporated has been retained on behalf of the
Board of Directors of FMI and has delivered this Opinion solely to the lead
counsel for FMI. Other than the Opinion, Marshall & Stevens Incorporated has not
been engaged to render any other financial services and our fee for this service
is not contingent upon the consummation of the aforementioned transaction.
Based upon and subject to the attached summary of our analyses and the
assumptions and limiting conditions, it is our opinion that as of the date of
this Opinion, the Transaction Price is fair to the FMI shareholders from a
financial point of view.
Very truly yours,
MARSHALL & STEVENS, INCORPORATED
TB/tb
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APPENDIX C
CALIFORNIA'S DISSENTERS' RIGHTS LAW
(CHAPTER 13 OF DIVISION 1 OF TITLE 1 OF THE CALIFORNIA CORPORATIONS CODE)
SECTION 1300. RIGHT TO REQUIRE PURCHASE--"DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to vote
on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as defined
in subdivision (b). The fair market value shall be determined as of the day
before the first announcement of the terms of the proposed reorganization or
short-form merger, excluding any appreciation or depreciation in consequence of
the proposed action, but adjusted for any stock split, reverse stock split or
share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by the
Commissioner of Corporations under subdivision (o) of Section 25100 or (B)
listed on the list of OTC margin stocks issued by the Board of Governors of the
Federal Reserve System, and the notice of meeting of shareholders to act upon
the reorganization summarizes this section and Sections 1301, 1302, 1303 and
1304; provided, however, that this provision does not apply to any shares with
respect to which there exists any restriction on transfer imposed by the
corporation or by any law or regulation; and provided, further, that this
provision does not apply to any class of shares described in subparagraph (A) or
(B) if demands for payment are filed with respect to 5 percent or more of the
outstanding shares of that class.
(2) Which were outstanding on the date for the determination of shareholders
entitled to vote on the reorganization and (A) were not voted in favor of the
reorganization or, (B) if described in subparagraph (A) or (B) of paragraph (1)
(without regard to the provisos in that paragraph), were voted against the
reorganization, or which were held of record on the effective date of a
short-form merger; provided, however, that subparagraph (A) rather than
subparagraph (B) of this paragraph applies in any case where the approval
required by Section 1201 is sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
SECTION 1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's
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right under such sections. The statement of price constitutes an offer by the
corporation to purchase at the price stated any dissenting shares as defined in
subdivision (b) of Section 1300, unless they lose their status as dissenting
shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
SECTION 1302. ENDORSEMENT OF SHARES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
SECTION 1303. AGREED PRICE--TIME FOR PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
SECTION 1304. DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date
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on which notice of the approval by the outstanding shares (Section 152) or
notice pursuant to subdivision (i) of Section 1110 was mailed to the
shareholder, but not thereafter, may file a complaint in the superior court of
the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SECTION 1305. APPRAISERS' REPORT--PAYMENT--COSTS.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time as
may be allowed by the court or the report is not confirmed by the court, the
court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees or expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
SECTION 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SECTION 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
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SECTION 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
SECTION 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SECTION 1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Section 1304 and 1305 shall be suspended until final determination of such
litigation.
SECTION 1311. EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.
SECTION 1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such
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shareholder's shares pursuant to this chapter; but if the shareholder institutes
any action to attack the validity of the reorganization or short-form merger or
to have the reorganization or short-form merger set aside or rescinded, the
shareholder shall not thereafter have any right to demand payment of cash for
the shareholder's shares pursuant to this chapter. The court in any action
attacking the validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded shall not restrain or
enjoin the consummation of the transaction except upon 10 days' prior notice to
the corporation and upon a determination by the court that clearly no other
remedy will adequately protect the complaining shareholder or the class of
shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
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FIREPLACE MANUFACTURERS, INC.
PROXY FOR
SPECIAL MEETING OF SHAREHOLDERS
AUGUST 18, 1998
KNOW ALL MEN BY THESE PRESENTS that the undersigned hereby constitutes and
appoints WILLARD V. HARRIS, JR., WILLARD P. HARRIS and JOHN D. HORNSBY, and each
of them, the attorneys and proxies of the undersigned with full power of
substitution to appear and to vote all of the shares of Common Stock of
Fireplace Manufacturers, Inc. ("FMI") held of record by the undersigned on June
23, 1998 at the Special Meeting of Shareholders to be held on August 18, 1998 or
any adjournment thereof, as designated below:
(1) To approve and adopt an Agreement and Plan of Merger pursuant to which FMI
will merge into and with DESA International, Inc. and each outstanding share
of FMI Common Stock will be converted into the right to receive $7.14 in
cash, subject to unlimited reduction, without interest.
/ / FOR / / AGAINST / / ABSTAIN
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF FIREPLACE
MANUFACTURERS, INC. IF NO VOTE IS INDICATED, THIS PROXY WILL BE VOTED FOR
PROPOSAL (1).
YOU ARE URGED TO DATE, SIGN AND RETURN PROMPTLY THIS PROXY IN THE ENVELOPE
PROVIDED. IT IS IMPORTANT FOR YOU TO BE REPRESENTED AT THE SPECIAL MEETING. THE
EXECUTION OF YOUR PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IF YOU ARE
PRESENT AT THE SPECIAL MEETING.
IMPORTANT: Please sign exactly as your name or names appear on the share
certificates, and when signing as an attorney, executor, administrator, trustee
or guardian, give your full title as such. If the signatory is a corporation,
sign the full corporate name by duly authorized officer, or if a partnership,
sign in partnership name by authorized person.
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Date: , 1998 Signature(s)
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