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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 27, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10233
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MAGNETEK, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-3917584
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
26 Century Boulevard
Nashville, Tennessee 37214
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (615) 316-5100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $.01 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant (based on the closing price of such stock, as reported by the
New York Stock Exchange, on September 1, 1999) was $261,238,900.
The number of shares outstanding of the Registrant's Common Stock, as
of September 10, 1999, was 29,458,367 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the MagneTek, Inc. 1999 Annual Report for the year ended
June 27, 1999 are incorporated by reference into Part II of this Form 10-K. With
the exception of those portions which are expressly incorporated by reference in
the Annual Report on Form 10-K, the MagneTek, Inc. 1999 Annual Report is not
deemed filed as part of this Report.
Portions of the MagneTek, Inc. definitive Proxy Statement to be filed
with the Securities and Exchange Commission within 120 days after the close of
the fiscal year ended June 27, 1999 are incorporated by reference into Part III
hereof.
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MAGNETEK, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 1999(1)
<TABLE>
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Page
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<S> <C> <C>
ITEM 1. BUSINESS......................................................................1
ITEM 2. PROPERTIES....................................................................8
ITEM 3. LEGAL PROCEEDINGS............................................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........................10
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........10
ITEM 6. SELECTED FINANCIAL DATA......................................................11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS...................................................................11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................................11
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE...................................................................11
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...........................12
ITEM 11. EXECUTIVE COMPENSATION.......................................................14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............14
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................14
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.............14
</TABLE>
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(1) The Company uses a 52-53 week fiscal year which ends on the Sunday nearest
June 30. For clarity of presentation, all periods are presented as if the
year ended on June 30. Fiscal years 1999, 1998 and 1997 each contained 52
weeks.
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PART I
ITEM 1. BUSINESS.
GENERAL
MagneTek, Inc. ("MagneTek" or the "Company") makes electronic and
electrical products used in data processing and telecommunications, building and
factory automation, lighting and other markets. MagneTek's primary product lines
include power supplies, lighting ballasts and motor drives. They are sold to
equipment builders for incorporation into their products, to resellers and to
end-users. Founded in 1984, the Company operates 11 factories in North America,
four in Europe and one in Asia, and employs approximately 8,700 people
worldwide.
The Company sold its Generators business for $115 million during the
fourth fiscal quarter and its Motors business for $253 million subsequent to the
1999 fiscal year end. These businesses, which together comprised 41% of the
Company's total revenue in fiscal 1998, are treated for reporting purposes as
discontinued operations in fiscal 1999. The Company now operates in three
segments: Lighting Power Products, Power Electronic Products and Drives and
Systems.
Lighting Power Products Segment
General. MagneTek is the second largest producer in North America of
lighting ballasts, which are essential to start and operate fluorescent, neon
and similar gas-filled electric lamps. Lighting Power Products accounted for
approximately 62% of net sales in fiscal 1999. International sales accounted for
19% of the segment's total net sales in fiscal 1999; and Lithonia Lighting, a
domestic lighting fixture original equipment manufacturer (an "OEM"), accounted
for 10% of segment sales.
Magnetic Ballasts. Magnetic ballasts -- including high intensity
discharge ("HID") and sign ballasts -- accounted for 53% (44% in the U.S. and 9%
internationally) of the segment's net sales in fiscal 1999. Magnetic fluorescent
ballasts are used primarily in standard fluorescent lighting fixtures in
commercial buildings, hospitals, schools, hotels, factories, homes, warehouses
and airports. HID ballasts accounted for 18% (14% in the U.S. and 4%
internationally) of the segment's net sales in fiscal 1999. HID ballasts are
used in lighting fixtures in industrial and municipal applications, such as
manufacturing plants, warehouses, parking facilities, roadways, sports arenas,
security areas and traffic tunnels. In the U.S. approximately 64% of the
Company's magnetic fluorescent and HID ballasts are sold directly to lighting
fixture OEMs. The rest are sold through GE Lighting and independent
manufacturers' representatives to more than 2,000 independent distributors
nationwide. In Europe, sales are made through a combination of the Company's
direct sales force and sales agents, primarily to OEMs. MagneTek's principal
customers for its magnetic ballasts include Lithonia, Cooper Lighting, Simkar
and Genlyte. Sign and neon ballasts accounted for approximately 4% of segment
sales in fiscal 1999.
Electronic Ballasts. While their initial cost to consumers is higher
than magnetic ballasts, electronic fluorescent ballasts can provide cost savings
through reduced energy consumption. Sales of electronic ballasts, primarily in
the U.S., accounted for 33% of the segment's total net sales in fiscal 1999. The
Company anticipates a continuing shift in demand toward electronic ballasts from
magnetic products as more end-users focus on long-term operating efficiency and
as the cost of electronic ballasts declines. Electronic ballasts are sold
through the same channels as magnetic ballasts. Approximately 67% of
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MagneTek's electronic ballasts are sold directly to OEMs and the remainder are
sold through GE Lighting and independent representatives to more than 2,000
independent distributors. MagneTek's principal customers for its electronic
ballasts include Lithonia, GE, Cooper Lighting, U.S. Industries and Genlyte.
Backlog. Backlog in the Lighting Products segment as of June 30, l999
was $25 million compared to $27 million at the end of fiscal 1998. The decrease
in backlog in this segment is a reflection of customer demand for reduced lead
times, the Company's increasing customer responsiveness and slightly lower
demand levels than those experienced in fiscal 1998.
Competition. MagneTek's primary competitors in the lighting ballast
business in the U.S. are Advance Transformer (a division of North American
Philips) and Motorola, and in Europe, Schwabe, Helvar and Zumtobel. Some of
these companies have substantially greater resources than MagneTek.
Power Electronic Products Segment
General. The Power Electronic Products segment accounted for 25% of the
Company's net revenues in fiscal 1999. Two customers, IBM and Siemens accounted
for 24% and 6%, respectively, of the segment's net sales in fiscal year 1999,
and are especially important to the revenue base for the segment. The Company
believes that its Italian subsidiary is the largest independent producer of
power supplies for data processing and telecommunications applications for the
European market. European sales accounted for 56% of the Power Electronic
Products segment's net sales in fiscal 1999.
This segment manufactures both custom power supplies and special
purpose power supplies, as well as magnetic components. Custom power supplies
are used primarily in computers, telecommunications equipment and office
machines. Special purpose power supplies are used in recreational vehicles such
as campers, mobile homes and boats. MagneTek's magnetic components are used in a
variety of electronic products.
Backlog. Backlog in the Power Electronic Products segment as of June
30, 1999 was $69.0 million compared to $64.7 million as of the end of fiscal
1998. The increase in backlog in this segment reflects increased penetration of
current accounts and continued growth in the telecommunications market.
Drives and Systems Segment
General. MagneTek believes it is the second largest supplier of
alternating-current drives in the U.S. market, with a predominant share of the
overhead traveling crane and hoist market. The Drives and Systems segment
accounted for 13% of the Company's net revenues in fiscal 1999. Major customers
include United Technologies and American Standard. These and other customers
incorporate MagneTek drives into their products or systems, which are marketed
internationally, to control electric motor performance.
The Drives and Systems segment designs and builds both
alternating-current (A/C) and direct-current (D/C) motor drives and
reduced-voltage motor starters. Using proprietary hardware and software
technology, this segment also customizes A/C drives built by Yaskawa Electric
America for various commercial and industrial applications, and is Yaskawa's
largest North American trading partner in this market. In addition, the segment
develops and manufactures automatic voltage regulators and supplies a variety of
accessories with its crane and hoist drives.
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Backlog. Backlog in the Drives and Systems segment as of June 30, 1999
was $11.1 million compared to $11.0 million as of the end of fiscal 1998. No
significant change occurred in the year to year backlog results.
Competitive Strengths
The Company believes that it benefits from competitive advantages in
each of the following areas.
Technological Capabilities. MagneTek emphasizes its ability to combine
electro-magnetic and power-electronic technologies into custom solutions for
process and power control. Long a leader in providing innovative, energy
efficient products, MagneTek has used its technological expertise to pioneer
advances in lighting and power supply applications. To maintain and enhance its
technological capabilities, MagneTek has established advanced development
centers for each product segment.
Established Customer Relationships. MagneTek has extensive
relationships with major original equipment manufacturers such as IBM, Siemens,
Ericsson, Otis Elevator, Lithonia and GE Lighting. MagneTek believes that these
long-term customer relationships result from its reputation as a reliable, high
quality supplier with a well-recognized brand name in the industry. Maintenance
and development of close relationships with OEMs is an important strategic
priority of the Company.
Low Cost Manufacturing. MagneTek competes as a high-quality, low-cost
supplier of electronic and magnetic components and subsystems that are
incorporated into customers' electronic and electrical products and systems. The
Company has taken steps to enhance its competitive position such as relocating
production to low-cost labor areas and restructuring manufacturing operations.
Strength of Market Channels and Breadth of Product Offerings.
MagneTek's distribution and OEM market channels have been developed over many
years, would be difficult and expensive to duplicate, and constitute a valuable
asset. MagneTek provides a broad diversity of products in each of its product
lines. Since product breadth is an important consideration of customers in their
selection of suppliers, MagneTek's breadth of product has been an advantage in
penetrating and maintaining both OEM and distribution channels.
Restructuring and Current Strategy
Since the mid-1990s, the Company has undertaken a series of strategic
initiatives to strengthen its financial position and improve its
competitiveness. A number of business units have been sold, most recently the
Generators and Motors businesses in 1999, resulting in proceeds over the last
five years of more than $500 million in the aggregate which were applied to
reduce indebtedness, repurchase the Company's stock, and make select
product-line acquisitions. Most of the Company's Lighting Power Products
operations were relocated to low-labor-rate areas, and significant restructuring
reserves were established and charges recorded, principally in connection with
the Lighting Power Products segment, in fiscal 1994, 1996 and 1999.
From 1996 through 1999, the Company implemented demand-pull techniques
in many of its manufacturing plants to improve responsiveness to customers,
adopted Six Sigma methods to enhance product/service quality, and installed
Oracle Enterprise Resource Planning software modules to standardize and expedite
data processing.
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Major goals of MagneTek's restructuring and current business strategy
are as follows:
Reduction of Balance Sheet Leverage. From the end of fiscal 1994 to the
end of fiscal 1999, the Company reduced its Debt-to-Shareholders Equity ratio
from 4.6:1 to 0.9:1, using proceeds from business divestitures and internally
generated cash flow as well as through the conversion of outstanding convertible
debt securities. Interest costs were reduced from $5.6 million in fiscal 1995 to
$1.9 million in fiscal 1999. Subsequent to fiscal 1999 year-end, the Company
repaid all borrowings under its domestic lines of credit with proceeds from the
divestiture of its Motors business. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in the Company's 1999
Annual Report.
Increased Emphasis on Power Electronics. In coming periods MagneTek
will seek initially to establish the profitability and cash flow generating
capability of its continuing operations under delevered conditions; to
strengthen the Company's product offerings through internal development and
selected product line additions; and ultimately to grow and diversify
aggressively in the electronic power products business. Attractive growth
opportunities are believed to exist in the power supplies business in North
America, especially in applications where MagneTek has achieved substantial
market presence in Europe. Significant opportunities also may exist in
electronic lighting systems and motion controls, among other areas.
International Operations
The Company's international sales accounted for 30% of its net sales in
fiscal 1999. The Company defines international sales as sales of products
manufactured by its facilities outside the U.S., as well as sales of products
manufactured in the U.S. to purchasers outside of the U.S. The Company has two
production facilities in Mexico and employs more than 5,500 employees in that
country. In Europe, the Company has four manufacturing facilities and employs
approximately 1,500 people. The Company's European operations include lighting
ballast and power supply production in Italy, Germany and Hungary. The Company
has one ballast plant in the People's Republic of China employing approximately
100 people.
Suppliers and Raw Materials
The Company has historically manufactured many of the materials and
components used in its products, including capacitors and magnet wire primarily
for lighting ballasts. Based upon analyses of the costs and benefits of its
historical level of vertical integration, the Company is increasing its
outsourcing of certain component parts that were previously produced internally.
Virtually all materials and components purchased by the Company are
available from multiple suppliers. During fiscal 1999, raw materials purchases
accounted for approximately 60% of the Company's cost of sales. Production
requirements depend heavily on certain electronic components, as well as steel
and copper. The Company generally negotiates prices with steel vendors on an
annual basis. The Company purchases copper for the Lighting Power Products
segment primarily in rod form for drawing its own magnet wire. The Company seeks
to mitigate its exposure to fluctuations in copper prices through short-term
hedging programs as well as through forward-contract arrangements with magnet
wire suppliers. The Company purchases aluminum based upon spot prices at
delivery.
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Research and Development
Research and development activities are conducted by the respective
operating segments and are directed toward enhancement of the existing products
and development of new products. Advanced technologies are being developed in
the Company's three main advanced development centers in Huntsville, Alabama;
New Berlin, Wisconsin; and Valdarno, Italy. Total research and development
expenditures were approximately $16.4 million, $16.4 million and $14.8 million,
respectively for the 1999, 1998 and 1997 fiscal years.
Trademarks and Patents
The Company holds numerous patents and believes that it holds all the
patent, trademark and other intellectual property rights necessary to conduct
its business.
Employees
As of September 1, 1999, the Company had approximately 1,800 salaried
employees and approximately 6,900 hourly employees, of whom approximately 5,300
were covered by collective bargaining agreements with various unions. The
Company believes that its relationships with its employees are favorable.
Environmental Matters
General. The Company has from time to time discovered contamination by
hazardous substances at certain of its facilities. In response to such a
discovery, the Company conducts remediation activities to bring the facility
into compliance with applicable laws and regulations. The Company's remediation
activities for fiscal 1999 did not entail material expenditures, and its
remediation activities for fiscal 2000 are not expected to entail material
expenditures. Future discoveries of contaminated areas could entail material
expenditures, depending upon the extent and nature of the contamination.
Century Electric (McMinnville, Tennessee). Prior to its purchase by the
Company in 1986, Century Electric, Inc. ("Century Electric") acquired a business
from Gould Inc. ("Gould") in May 1983 which included a leasehold interest in a
fractional horsepower electric motor manufacturing facility located in
McMinnville, Tennessee. In connection with this acquisition, Gould agreed to
indemnify Century Electric from and against liabilities and expenses arising out
of the handling and cleanup of certain waste materials, including but not
limited to cleaning up any PCBs at the McMinnville facility (the "1983
Indemnity"). Investigation has revealed the presence of PCBs and other
substances, including solvents, in portions of the soil and in the groundwater
underlying the facility and in certain offsite soil, sediment and biota samples.
Century Electric has kept the Tennessee Department of Environment and
Conservation, Division of Superfund, apprised of test results from the
investigation. The McMinnville plant has been listed as a Tennessee Inactive
Hazardous Substance Site, a report on that site has been presented to the
Tennessee legislature, and community officials and plant employees have been
notified of the presence of contaminants as above described. In 1995, Gould
completed an interim remedial measure of excavating and disposing onsite soil
containing PCBs. Gould also conducted preliminary investigation and cleanup of
certain onsite and offsite contamination. The cost of any further investigation
and cleanup of onsite and offsite contamination cannot presently be determined.
The Company recently sold its leasehold interest in the McMinnville plant and
believes that the costs for further onsite and offsite cleanup (including
ancillary costs) are covered by the 1983 Indemnity. While the Company believes
that Gould will continue to perform
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substantially under its indemnity obligations, Gould's substantial failure to
perform such obligations could have a material adverse effect on the Company.
Offsite Locations. The Company has been identified by the United States
Environmental Protection Agency and certain state agencies as a potentially
responsible party for cleanup costs associated with alleged past waste disposal
practices at several offsite locations. Due, in part, to the existence of
indemnification from the former owners of certain acquired businesses for
cleanup costs at certain of these sites, the Company's estimated share in
liability (if any) at the offsite facilities is not expected to be material. It
is possible that the Company will be named as a potentially responsible party in
the future with respect to other sites.
Indemnification Obligations From Restructuring. In selling certain
business operations, the Company from time to time has agreed, subject to
various conditions and limitations, to indemnify buyers with respect to
environmental liabilities associated with the acquired operations. The Company's
indemnification obligations pursuant to such agreements did not entail material
expenditures for fiscal 1999, and its indemnification obligations for fiscal
2000 are not expected to entail material expenditures. Future expenditures
pursuant to such agreements could be material, depending upon the nature of any
future asserted claims subject to indemnification.
Cautionary Statement
This document contains "forward-looking statements" as defined on the
Private Securities Litigation Reform Act of 1995, that are subject to risks and
uncertainties which, in many cases, are beyond the control of the Company. These
include but are not limited to economic conditions in general, business
conditions in electrical and electronic equipment markets, competitive factors
such as pricing and technology, and the risk that the Company's ultimate costs
of doing business exceed present estimates.
In addition, the Company's results of operations could be adversely
affected by general business and legal risks, as well as the following specific
risks.
Risks Associated with New Business Strategy. The sale of two
significant businesses (Generators and Motors) by MagneTek during fiscal 1999
has significantly changed its size and profile as a company. While strengthening
MagneTek's balance sheet and focus, these divestitures, coupled with planned
stock buybacks, may impact the market for the Company's stock as a result of
smaller market capitalization and decreased analyst coverage. Due to diminished
size, MagneTek may also find it more difficult to raise financing in the future.
While the divestitures and related corporate downsizing are expected to result
in reduced expenses, these anticipated cost reductions may prove less than
expected, and reduced management resources may adversely affect results of
operations. Additionally, MagneTek will seek to expand its core businesses
through select product line acquisitions and similar opportunistic investments.
Such new acquisitions or investments could pose difficulties integrating new
operations and, through the incurrence of related indebtedness, could result in
decreased liquidity.
Competition and Pricing Pressures. MagneTek operates in an intensely
competitive environment, and certain of its competitors are significantly larger
and have substantially greater resources than the Company. Certain of such
companies are seeking to employ competitive and management strategies similar to
those of MagneTek. As a result, MagneTek's competitive standing may be expected
to vary from time to time and among different markets. Pricing pressures in the
lighting ballast business during fiscal 1999, and
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continuing to the present, have adversely affected the profitability of the
Lighting Power Products segment.
Dependence on Significant Customers. MagneTek's sales to its top five
customers represented approximately 26% of its net sales in fiscal 1999. The
loss of any such customers or significant decreases in any such customer's
levels of purchases from MagneTek could have a material adverse effect on the
Company's business.
Sensitivity to General Economic and Industry Conditions. MagneTek's
markets are cyclical in nature and subject to general trends in the economy.
Profitability and cash flow availability could be adversely affected by any
prolonged economic downturn.
International Sales and Operations; Foreign Currency Exposure.
International sales, including sales from domestic operations, accounted for
approximately 30% of MagneTek's net sales in fiscal 1999. As a result of its
international sales and operations, the Company is subject to the risk of
fluctuation in currency exchange rates. Further, MagneTek's international
operations are subject to risks associated with changes in local economic and
political conditions, currency exchange restrictions, regulatory requirements
and taxes.
Approximately 26% of MagneTek's net sales in fiscal 1999 were
denominated in currencies other than the U.S. dollar, principally the Italian
lira and the German mark. Commencing January 1, 1999, 11 countries in the
European Union began conversion to a common legal currency, known as the "euro."
Conversion to the euro is expected to have broad implications to companies doing
business in Europe, including MagneTek. Such consequences may include
significant changes in exposure to currency fluctuations; changes in the
competitive environment among participating countries, including the potential
of increased business consolidation; requirements for changes in pricing
policies and changes in information technology requirements. At this time,
MagneTek is unable to gauge the effect on its business of the euro conversion,
including whether such effect will be positive or negative.
Year 2000 Compliance. The Year 2000 Issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. The Company's computer programs or any hardware that has
date-sensitive software or imbedded chips may recognize a date using "00" as the
year 1900 rather than the year 2000. Such an occurrence could result in
operating systems that either fail or miscalculate information. Should such
failures occur, normal business processes could be disrupted.
The Company's plan to resolve the Year 2000 Issue includes specific
phases of software/hardware review, testing and final implementation. In fiscal
1997, the Company initiated a comprehensive systems review that resulted in the
purchase of an Oracle "Enterprise Resource Planning" software package. While the
primary purpose of the software is to improve business processes, it also
enabled the Company to address Year 2000 issues. In addition to the
implementation of Oracle, some of the Company's software and hardware is being
modified or replaced so that its computer systems will function properly with
respect to the dates in the year 2000 and thereafter. To date, the Company has
completed all review and testing phases and has completed 95% of the final
implementation phase. Management believes this process will substantially
address its Year 2000 issues and anticipates a completion date no later than the
end of October 1999. Local area networks, voice and data lines, computer
hardware at the Company's third party installation and local microprocessors
have had final reviews. Certain administrative software (e.g. accounts
receivable) at specific locations still remains to be fully implemented but
these locations are
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not felt to pose a material risk of not having implementation completed in the
requisite time frames.
The Company has also enlisted a third party review of systems to
evaluate its degree of preparation and readiness in this area. MagneTek has also
contacted and will continue to contact critical suppliers to determine that
their products and services are Year 2000 compliant. The Company has contacted
its significant suppliers, none of which share information systems with the
Company. The Company will continue to solicit Year 2000 compliance responses
from suppliers in an effort to reduce risk. To date, the Company is not aware of
any third party with a Year 2000 issue that would materially impact the
Company's results of operations, liquidity or capital resources. However, the
Company cannot ensure that all external agents will be Year 2000 ready. The
inability of third parties to complete their Year 2000 resolution process in a
timely fashion could materially impact the Company. The effect of non-compliance
by external agents is not determinable. Management estimates that the total cost
of the project attributable to continuing operations at $8.5 million with
funding occurring from the operating cash flows of the Company. Approximately $7
million has been spent through fiscal 1999.
Management of the Company believes it has a program in place to resolve
the Year 2000 Issue in a timely manner. While the Company has not completed all
phases of its Year 2000 program, the remaining elements for completion are
primarily restricted to the stages of implementation as opposed to review and
testing of software and hardware. In the event schedules for final
implementation would appear at risk with the current resources, the Company has
reviewed contingency plans which include incremental support from third party
agents. The Company believes that while not without risk, these actions would
support completion of the program in the required time frames. Based upon work
completed to date, management believes that the likelihood of a material adverse
impact due to problems with systems is remote. Notwithstanding its efforts, the
Company feels that disruptions in the general economy or from third parties upon
which it relies for means of production or administrative services, resulting
from Year 2000 issues, could adversely affect the Company in a material manner.
Environmental Matters. MagneTek has from time to time discovered
contamination by hazardous substances at certain of its facilities and in
selling certain business operations. The Company has agreed, in some instances,
to provide indemnification against environmental liabilities associated with the
acquired operations.
Raw Materials. MagneTek's raw material costs represented approximately
51% of its net sales in fiscal 1999. The principal raw materials used by the
Company are copper, steel and aluminum. MagneTek attempts to hedge against the
risk of fluctuation in the prices of copper and aluminum by entering into
futures contracts. However, unanticipated increases in raw material requirements
or price increases not covered by hedging would increase production costs and
could adversely affect profitability.
ITEM 2. PROPERTIES.
MagneTek's headquarters and each of its manufacturing facilities for
the continuing operations of the Company are listed below, each of which is
owned by the Company unless shown as leased.
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<TABLE>
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Approximate
Location Lease Term Size (Sq. Ft.) Principal Use
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<S> <C> <C> <C>
Bridgeport, Connecticut 1999 100,000 Capacitor manufacturing
Chatsworth, California 2003 48,000 Power supply manufacturing
Cincinnati, Ohio 2000 14,000 Drives and systems manufacturing
Gallman, Mississippi 1999 plus 130,000 Wire mill
options to 2073
Goodland, Indiana -- 75,000 Component transformer manufacturing
Huntsville, Alabama -- 125,000 Electronic ballast manufacturing;
power electronics and ballast
research and development center
Mainaschaff, Germany Various 209,000 Ballast, ignition coil and
transformer manufacturing
Matamoros, Mexico Various 320,000 Ballast, RV converter and
transformer manufacturing
Menomonee Falls, Wisconsin 2004 74,000 Drives and systems manufacturing
Milan, Italy -- 53,000 Ballast manufacturing
Nashville, Tennessee 2005 67,000 Corporate headquarters
New Berlin, Wisconsin 2008 122,400 Drives and systems manufacturing
Pomaz, Hungary 2006, 2007 44,000 Power supply and ballast
manufacturing
Reynosa, Mexico 2008 151,000 Ballast and power supply
manufacturing
Shanghai, China 2003 36,000 Ballast manufacturing
Valdarno, Italy -- 149,000 Power supply manufacturing
</TABLE>
The Company believes its facilities are in satisfactory condition and
are adequate for its present operations.
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ITEM 3. LEGAL PROCEEDINGS.
Product Liability
The Company is a party to a number of product liability lawsuits, many
of which involve fires allegedly caused by defective ballasts. All of these
cases are being defended by the Company, and management believes that its
insurers will bear all liability, except for applicable deductibles, and that
none of these proceedings individually or in the aggregate will have a material
effect on the Company.
Patent
In April 1998, Ole K. Nilssen filed a lawsuit in the U.S. District
Court for the Northern District of Illinois alleging the Company is infringing
seven of his patents pertaining to electronic ballast technology. The plaintiff
seeks an unspecified amount of damages and an injunction to preclude the Company
from making, using or selling those products allegedly infringing his patents.
The Company denies that it has infringed, or is infringing, any of the
plaintiff's patents, and has asserted several affirmative defenses. The Company
also filed a counterclaim seeking judicial declaration that it is not infringing
(and has not infringed) the patents asserted by the plaintiff, and that such
asserted patents are invalid. The Company intends to defend this matter
vigorously. Due to the preliminary state of the litigation, it is difficult to
predict the outcome of the foregoing legal proceeding. However, management of
the Company does not believe that the financial impact of such litigation will
be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the stockholders of the Company during the
quarter ended June 30, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The following table sets forth the high and low sales prices of the
Company's Common Stock during each quarter of fiscal 1998 and 1999:
<TABLE>
<CAPTION>
Quarter Ending High Low
-------------- ---- ---
<S> <C> <C>
September 30, 1998 16-5/8 9-13/16
December 31, 1998 13-7/8 8-15/16
March 31, 1999 12-13/16 8-1/4
June 30, 1999 11-13/16 8-5/16
September 30, 1997 23 15-7/8
December 31, 1997 24-5/16 17-7/8
March 31, 1998 20-1/2 16-1/16
June 30, 1998 20-11/16 14-5/16
</TABLE>
10
<PAGE> 13
The Company's Common Stock is traded on the New York Stock Exchange
under the ticker symbol "MAG." As of September 10, 1999, there were 305 record
holders of its Common Stock. No cash dividends have been paid on the Common
Stock.
MagneTek has not paid any cash dividends on its Common Stock and does
not anticipate paying cash dividends in the near future. The ability of the
Company to pay dividends on its Common Stock is restricted by provisions in the
Company's 1997 bank loan agreement, which provides that the Company may not
declare or pay any dividend or make any distribution with respect to its capital
stock except for (i) the repurchase of up to $15.0 million of the Company's
Common Stock so long as no event of default exists or would result from such
declaration and payment, and the ratio of the Company and certain subsidiaries'
Funded Debt to Capitalization (as such terms are defined in the bank loan
agreement) is not more than 0.65 to 1.00, or (ii) other distributions so long as
no event of default exists or would result from such declaration and payment,
and the ratio of the Company and certain subsidiaries' Funded Debt to
Capitalization is not more than 0.55 to 1.00. MagneTek is currently negotiating
an amendment to the loan agreement which if adopted would permit MagneTek to pay
dividends or repurchase its Common Stock, provided no event of default exists or
would result from such dividends or repurchase, in the amount, for periods after
June 28, 1999, not to exceed (i) $60 million for the period ending on or about
February 15, 2000, and (ii) $90 million thereafter.
ITEM 6. SELECTED FINANCIAL DATA.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by Part II, Items 6, 7 and 8 is hereby
incorporated by reference to the Management's Discussion and Analysis of
Financial Condition and Results of Operations, the Financial Statements and the
Report of Ernst & Young LLP, Independent Auditors, of the Company's 1999 Annual
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
11
<PAGE> 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Executive Officers of the Registrant
The following table sets forth certain information regarding the
current executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Andrew G. Galef 66 Chairman of the Board of Directors,
President and Chief Executive Officer
Antonio Canova 57 Executive Vice President
Brian R. Dundon 53 Executive Vice President
Alexander Levran, Ph.D. 49 Senior Vice President, Technology
David P. Reiland 45 Senior Vice President and Chief Financial Officer
John P. Colling, Jr. 43 Vice President and Treasurer
Thomas R. Kmak 49 Vice President and Controller
Samuel A. Miley 42 Vice President, General Counsel and Secretary
Dennis L. Hatfield 51 Assistant Vice President, Facilities and Environmental
Affairs
</TABLE>
Mr. Galef has been the Chairman of the Board of Directors since July
1984 and the President and Chief Executive Officer of the Company since May 4,
1999. He also is the Chairman of the Nominating and Corporate Governance
Committee. Mr. Galef was the Chief Executive Officer of the Company from
September 1993 until June 1996. He has been President of The Spectrum Group,
Inc. ("Spectrum"), a private investment and management firm, since its
incorporation in California in 1978 and its Chairman and Chief Executive Officer
since 1987. Prior to the formation of Spectrum, Mr. Galef was engaged in
providing professional interim management services to companies with serious
operating and financial problems. Mr. Galef is presently a director of Warnaco,
Inc., a diversified apparel manufacturer, and its parent, The Warnaco Group,
Inc., and was formerly Chairman of Aviall, Inc., a company providing aircraft
engine refurbishment and related products and services, and Exide Corporation, a
manufacturer of automotive and industrial batteries. Mr. Galef also currently
serves as a director, and was formerly the Chairman, of Petco Animal Supplies,
Inc. In addition, Mr. Galef serves as chairman or a director of other privately
held Spectrum portfolio companies.
Mr. Canova has been Executive Vice President, with responsibility for
the Company's Power Supplies business since October 1993. He has served as
managing director of MagneTek S.p.A. in Italy since March 1991. He held the same
position with Plessey S.p.A. from 1988 until March 1991 when Plessey S.p.A. was
acquired by the Company. From 1969 to 1988, Mr. Canova served as general manager
of Plessey S.p.A.
Mr. Dundon has been Executive Vice President, with responsibility for
the Company's Lighting Products business since April 1998. From November 1986,
when
12
<PAGE> 15
Century Electric, Inc. was acquired by the Company, until April 1998, Mr. Dundon
served as Senior Vice President, Motors and Controls. Prior to the acquisition
Mr. Dundon had been with Gould Inc. and Century Electric since 1971, serving in
various capacities.
Dr. Levran has been Senior Vice President, Technology since January
1995. He served as Vice President, Technology from July 1993 until January 1995.
From 1991 to June 1993, Dr. Levran was employed by EPE Technologies, Inc., a
subsidiary of Groupe Schneider, as Vice President of Engineering and Technology
with worldwide engineering responsibilities. From 1981 to 1991, he held various
engineering management positions with Teledyne Inet, a subsidiary of Teledyne,
Inc., most recently as Vice President of Engineering. Dr. Levran received his
Ph.D. in electrical engineering from the Polytechnic Institute of New York in
1981.
Mr. Reiland has been Senior Vice President since July 1996 and Chief
Financial Officer of the Company since July 1988. Mr. Reiland was also an
Executive Vice President of the Company from July 1993 until July 1996 and
Senior Vice President from July 1989 until July 1993. He was Controller of the
Company from August 1986 to October 1993, and was Vice President, Finance from
July 1987 to July 1989. Prior to joining the Company, Mr. Reiland was an Audit
Manager with Arthur Andersen & Co. where he served in various capacities since
1980.
Mr. Colling has been Vice President of the Company since July 1990,
Treasurer of the Company since June 1989 and was assistant treasurer of the
Company from July 1987 to June 1989. Prior to that, Mr. Colling was the
assistant treasurer of Century Electric, where he served in various capacities
since August 1981.
Mr. Kmak has been Vice President of the Company since October 1993,
Controller since November 1994 and Operations Controller from October 1993 to
November 1994. Mr. Kmak was the vice president, finance of the Company's Motors
and Controls business from November 1986 when Century Electric was acquired by
the Company until July 1992 and served as vice president, operational finance of
the Company's Motors and Controls business from July 1992 until October 1993.
Prior to the acquisition Mr. Kmak had been with Century Electric since 1976,
serving in various capacities.
Mr. Miley joined the Company in February 1990 as Vice President,
General Counsel and Secretary. Prior to that time, he was an attorney with the
law firms of Sheppard, Mullin, Richter & Hampton in Los Angeles, California from
March 1986 until January 1990 and Sidley & Austin in Chicago, Illinois from May
1982 until March 1986.
Mr. Hatfield joined the Company in August 1992 as Assistant Vice
President, Facilities and Environmental Affairs. Prior to that he was a
principal in the industrial environmental consulting firms of Patterson Schafer,
Inc. from February 1989 until December 1990 and Schafer Environmental
Associates, Inc. from March 1991 until July 1992. From July 1985 to February
1989, Mr. Hatfield served as Director of Environmental Affairs of the Specialty
Chemicals Group at Morton Thiokol, Inc.
13
<PAGE> 16
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by Part III, Items 10, 11, 12 and 13, is
hereby incorporated by reference to the Company's definitive Proxy Statement to
be mailed to Stockholders in September 1999, except for information regarding
the Executive Officers of the Company, which is provided in response to Item 10,
above.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Index to Consolidated Financial Statements, Consolidated Financial
Statement Schedules and Exhibits:
<TABLE>
<CAPTION>
EDGARized Annual Report
Form 10-K Page Page
-------------- -------------
<S> <C> <C>
1. CONSOLIDATED FINANCIAL STATEMENTS -- 5
Consolidated Statements of Income for Years Ended -- 11
June 30, 1999, 1998 and 1997
Consolidated Balance Sheets at June 30, 1999 and 1998 -- 12
Consolidated Statements of Stockholders' Equity for -- 14
Years Ended June 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for Years Ended -- 15
June 30, 1999, 1998 and 1997
Notes to Consolidated Financial Statements -- 16
Report of Ernst & Young LLP, Independent Auditors -- 34
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
EDGARized Annual Report
Form 10-K Page Page
-------------- -------------
<S> <C> <C>
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Report of Ernst & Young LLP, Independent Auditors S-1 55
Schedule II -- Valuation and Qualifying Accounts S-2 56
</TABLE>
All other schedules have been omitted since the required information is
not present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the Consolidated
Financial Statements and related notes.
<TABLE>
<CAPTION>
EDGARized Annual Report
Form 10-K Page Page
-------------- -------------
<S> <C> <C>
3. Exhibit Index 15 47
</TABLE>
The following exhibits are filed as part of this Annual Report Form
10-K, or are incorporated herein by reference. Where an exhibit is incorporated
by reference, the number which precedes the description of the exhibit indicates
the documents to which the cross-reference is made.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C> <C>
3.1 (1) Restated Certificate of Incorporation of the Company, as filed with the Delaware
Secretary of State on November 21, 1989.
3.2 (2) By-laws of the Company, as amended and restated.
4.1 (3) Specimen Common Stock Certificate.
10.1 (4) 1987 Stock Option Plan of MagneTek, Inc. ("1987 Plan").
10.2 (5) Amendments No. 1 and 2 to 1987 Plan.
10.3 (6) Amendments No. 3 and 4 to 1987 Plan.
10.4 (7) Amendment No. 5 to 1987 Plan.
10.5 (8) Second Amended and Restated 1989 Incentive Stock Compensation Plan of MagneTek, Inc.
("1989 Plan").
10.6 (7) Amendment No. 1 to 1989 Plan.
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C> <C>
10.7 (7) Standard Terms and Conditions Relating to Non-Qualified Stock Options, revised as of
July 24, 1996, pertaining to the 1987 Plan and the 1989 Plan.
10.8 (7) Form of Non-Qualified Stock Option Agreement Pursuant to the Second Amended and
Restated 1989 Incentive Stock Compensation Plan of the Company.
10.9 (7) Form of Restricted Stock Agreement Pursuant to the Second Amended and Restated 1989
Incentive Stock Compensation Plan of the Company.
10.10 (9) MagneTek, Inc. 1997 Non-Employee Director Stock Option Plan.
10.11 (4) Senior Executive Medical Expense Reimbursement Plan for the Company.
10.12 (6) 1991 Discretionary Director Incentive Compensation Plan of the Company.
10.13 (10) MagneTek, Inc. Deferral Investment Plan.
10.14 (10) MagneTek, Inc. Performance-Based Pension Restoration Plan.
10.15 (11) Form of Rights Agreement dated as of March 4, 1997 by and between the Company and The
Bank of New York, as Rights Agent.
10.16 (12) MagneTek, Inc. Amended and Restated Director Compensation and Deferral Investment
Plan.
10.17 (10) Employment Agreement dated as of June 1, 1996 between the Company and Ronald N. Hoge.
10.18 (13) Secured Promissory Note and Loan Agreement dated October 7, 1997 and Deed of Trust
dated October 7, 1997 of Ronald N. Hoge.
10.19 (14) Secured Promissory Note dated May 4, 1999 of Ronald N. Hoge.
10.20 (14) Pledge Agreement dated as of May 4, 1999 between the Company and Ronald N. Hoge.
10.21 (15) Non-Qualified Stock Option Agreement between the Company and Ronald N. Hoge.
10.22 (15) Non-Qualified Stock Option Agreement between the Company and David P. Reiland.
10.23 (5) Registration Rights Agreement dated as of April 29, 1991 among the Company, Andrew G.
Galef, Frank Perna, Jr. and the other entities named therein.
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C> <C>
10.24 (7) Registration Rights Agreement dated as of June 28, 1996 by and between the Company
and U.S. Trust Company of California, N.A.
10.25 (16) Executive Management Agreement dated as of July 1, 1994, by and between the Company
and The Spectrum Group, Inc.
10.26 (17) Amendment dated as of January 25, 1995 to the Executive Management Agreement between
the Company and The Spectrum Group, Inc.
10.27 (18) Change of Control Agreement dated October 20, 1998 between Antonio Canova and
MagneTek, Inc.
10.28 (18) Change of Control Agreement dated October 20, 1998 between Brian R. Dundon and
MagneTek, Inc.
10.29 (18) Change of Control Agreement dated October 20, 1998 between Alexander Levran and
MagneTek, Inc.
10.30 (18) Change of Control Agreement dated October 20, 1998 between David P. Reiland and
MagneTek, Inc.
10.31 (18) Change of Control Agreement dated October 20, 1998 between John P. Colling, Jr. and
MagneTek, Inc.
10.32 (18) Change of Control Agreement dated October 20, 1998 between Thomas R. Kmak and
MagneTek, Inc.
10.33 (18) Change of Control Agreement dated October 20, 1998 between Samuel A. Miley and
MagneTek, Inc.
10.34 (19) Security Agreement dated March 1, 1993 between the Industrial Development Board of
the City of Huntsville ("the Huntsville IDB") and the Company (the "Huntsville
Security Agreement").
10.35 (20) First Supplemental Security Agreement dated as of August 1, 1993 by and between the
Huntsville IDB and The CIT Group/Equipment Financing, Inc. ("CIT").
10.36 (20) Second Supplemental Security Agreement dated as of October 1, 1993 by and between the
Huntsville IDB and CIT.
10.37 (19) Equipment Lease Agreement of even date with the Huntsville Security Agreement among
the parties thereto.
10.38 (20) Amendment to Equipment Lease Agreement dated as of August 1, 1993 between the
Huntsville IDB and the Company.
10.39 (20) Second Amendment to Equipment Lease Agreement dated as of October 1, 1993 between the
Huntsville IDB and the Company.
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C> <C>
10.40 (21) Lease Agreement dated as of November 1, 1988 between the Huntsville IDB and
Burnett-Nickelson Investments ("Lease Agreement") as to which the Company succeeded
to the lessee's obligations.
10.41 (22) First, Second and Third Amendments to Lease Agreement.
10.42 (23) Fourth Amendment to Lease Agreement.
10.43 (22) Bond Guaranty Agreement between the Company, as Guarantor and First Alabama Bank
dated as of February 1, 1993 relating to the Lease Agreement.
10.44 (22) Indenture dated as of November 1, 1988 relating to First Mortgage Industrial Revenue
Bonds (Burnett-Nickelson Project Series 1988) between Huntsville IDB and First
Alabama Bank, as Trustee, relating to the Huntsville facility (the "Indenture").
10.45 (22) First, Second and Third Supplemental Indentures to the Indenture.
10.46 (23) Fourth Supplemental Indenture to the Indenture.
10.47 (24) Environmental Agreement among the Company, Universal Manufacturing Corporation and
Farley Northwest Industries, Inc., as amended.
10.48 (24) Letter Agreement dated as of January 9, 1986, between the Company and Farley
Northwest Industries, Inc., pursuant to Stock Purchase Agreement.
10.49 (24) Tax Agreement dated as of February 12, 1986, between the Company and Farley Northwest
Industries, Inc.
10.50 (24) Agreement dated as of January 9, 1986, between the Company and Farley/Northwest
Industries, Inc. relating to the Totowa facility.
10.51 (25) Restated Credit Agreement dated as of June 20, 1997 between the Company, as Borrower,
NationsBank of Texas, N.A., as Agent, CIBC Inc., The First National Bank of Chicago,
The Long-Term Credit Bank of Japan, Ltd., Bankers Trust Company, Credit Lyonnais --
New York Branch, and Union Bank of California, N.A., as Co-Agents, and Certain
Lenders (the "Restated Credit Agreement").
10.52 (25) Guaranty dated as of December 29, 1996 by MagneTek Financial Services, Inc., as
Guarantor, for the benefit of NationsBank, in its capacity as Agent for the Lenders
now or in the future party to the Credit Agreement dated as of March 31, 1995 between
the Company, certain lenders and NationsBank (the "1995 Credit Agreement").
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C> <C>
10.53 (25) Security Agreement dated as of December 29, 1996 by the Company and MagneTek
Financial Services, Inc. for the benefit of NationsBank, in its capacity as Agent for
the Lenders now or in the future party to the 1995 Credit Agreement.
10.54 (25) Security Agreement dated as of March 31, 1995 by the Company and the other debtors
party thereto for the benefit of NationsBank, in its capacity as Agent for the
Lenders now or in the future party to the 1995 Credit Agreement (the "1995 Security
Agreement").
10.55 (25) Supplement to Security Agreement dated as of March 31, 1995 between the Company and
NationsBank, in its capacity as Agent for the Lenders now or in the future party to
the 1995 Credit Agreement, with reference to the 1995 Security Agreement.
10.56 (13) First Amendment dated as of March 27, 1998 to the Restated Credit Agreement.
10.57 (24) Lease on Bridgeport, Connecticut facility of Universal Manufacturing.
10.58 (24) Lease on Gallman, Mississippi facility of Universal Manufacturing.
10.59 (26) Lease on Matamoros, Mexico fluorescent ballast manufacturing facility dated
January 1, 1988.
10.60 (2) Lease on Nashville, Tennessee headquarters facility dated as of June 30, 1995.
10.61 (13) Lease on Nashville, Tennessee headquarters facility dated as of March 2, 1998.
10.62 (27) Lease on New Berlin, Wisconsin facility.
10.63 (5) Third Modification of Lease dated as of December 31, 1990 on New Berlin, Wisconsin
facility.
10.64 (23) Fourth Modification of Lease dated as of February 12, 1993 on New Berlin, Wisconsin
facility.
10.65 (14) Lease on Menomonee Falls, Wisconsin facility dated as of July 23, 1999.
10.66 (14) Assignment of Lease and Amendment of Lease on Cincinnati, Ohio facility dated July
1999.
10.67 (28) Stock Purchase Agreement dated as of January 9, 1986, between the Company and
Farley/Northwest Industries, Inc., with list of omitted exhibits and schedules.
</TABLE>
19
<PAGE> 22
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C> <C>
10.68 (28) Stock Purchase Agreement dated as of June 20, 1986, between the Company and Better
Coil and Transformer Corporation, with list of omitted exhibits.
10.69 (29) Purchase Agreement dated as of October 22, 1986, by and among the Company, Century
and certain Securityholders.
10.70 (30) Purchase Agreement dated as of December 15, 1986, between the Company and all the
remaining Securityholders of Century.
10.71 (30) Asset Purchase Agreement dated as of December 30, 1986, between the Company and
Universal Electric.
10.72 (30) Agreement for the Sale of Stock dated as of December 30, 1986, between the Company
and Cooper.
10.73 (2) Asset Purchase Agreement dated as of May 27, 1994, between the Company and The Louis
Allis Company.
10.74 (2) Asset Purchase Agreement dated as of June 17, 1994, among the Company, MagneTek
Controls, Inc. and Controls Acquisition Corporation.
10.75 (2) Asset Purchase Agreement dated as of October 31, 1994, among the Company, MagneTek
National Electric Coil, Inc. and Rail Products International, Inc.
10.76 (2) Asset Purchase Agreement dated as of November 8, 1994, between the Company and MAS
Acquiring Corp.
10.77 (2) Purchase and Sale Agreement dated November 18, 1994, by and among the Company,
MagneTek Tempe, Inc., MagneTek Deutschland Holding GmbH and PTS, Inc.
10.78 (2) Asset Purchase Agreement dated as of March 6, 1995, by and between the Company and GN
Acquisition Partners, L.P.
10.79 (2) Asset Purchase Agreement dated as of March 13, 1995, among the Company, MagneTek
National Electric Coil, Inc. and 800 King Avenue Acquisition Corp.
10.80 (2) Asset Purchase Agreement dated as of May 31, 1995, between MagneTek National Electric
Coil, Inc. and The Guardian Resin Corporation.
10.81 (2) Agreement of Sale dated as of June 23, 1995, between General Signal Corporation and
the Company.
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C> <C>
10.82 (2) Asset and Stock Purchase Agreement dated as of September 14, 1995, among the Company,
MagneTek National Electric Coil, Inc. and National Electric Coil Company, L.P.
10.83 (7) Sino-American Equity Joint Venture Contract dated December 17, 1995 between Fujian
Fufa Company Limited and the Company for the Establishment of MagneTek Fuzhou
Generator Company Limited.
10.84 (7) Amended and Restated Asset Purchase Agreement dated as of February 27, 1996 among
MagneTek National Electric Coil, Inc., the Company, Eastern Electric Apparatus Repair
Company, Inc. and Grand Eagle Companies Inc.
10.85 (7) Stock Purchase Agreement dated as of June 28, 1996 among MagneTek National Electric
Coil, Inc., the Company, Grand Eagle Companies North America, Inc. and Grand Eagle
Companies, Inc.
10.86 (7) Amendment No. 1 dated as of June 28, 1996 to Amended and Restated Asset Purchase
Agreement among MagneTek National Electric Coil, Inc., the Company, Eastern Electric
Apparatus Repair Company, Inc. and Grand Eagle Companies Inc. dated as of
February 27, 1996.
10.87 (7) Asset Purchase Agreement dated as of August 30, 1996 between the Company and
Jefferson Electric, Inc.
10.88 (31) Asset Purchase Agreement dated as of April 26, 1999 between the Company and Emerson
Electric Co.
10.89 (32) Asset Purchase Agreement dated as of June 28, 1999 by and among the Company, MagneTek
Service (U.K.), Limited and A.O. Smith Corporation.
10.90 (14) Asset Purchase Agreement dated July 23, 1999 among the Company, Electric Motor
Systems, Inc., Electromotive Systems, Inc., EMS/Rosa Automation Engineering, Inc.,
Robert G. Friedrich and Steven J. Badinghaus.
13 (14) 1999 Annual Report (pp. 2-34).
23 (14) Consent of Ernst & Young LLP, independent auditors.
27 (14) Financial Data Schedule.
</TABLE>
- -------------------
(1) Previously filed with the Registration Statement on Form S-3 filed on
August 1, 1991, Commission File No. 33-41854, and incorporated herein
by this reference.
(2) Previously filed with Form 10-K for Fiscal Year ended July 2, 1995 and
incorporated herein by this reference.
21
<PAGE> 24
(3) Previously filed with Amendment No. 1 to Registration Statement filed
on May 10, 1989 and incorporated herein by this reference.
(4) Previously filed with Form 10-K for Fiscal Year ended June 30, 1987 and
incorporated herein by this reference.
(5) Previously filed with Form 10-K for Fiscal Year ended June 30, 1991 and
incorporated herein by this reference.
(6) Previously filed with Form 10-K for Fiscal Year ended June 30, 1992 and
incorporated herein by this reference.
(7) Previously filed with Form 10-K for Fiscal Year ended June 30, 1996 and
incorporated herein by this reference.
(8) Previously filed with Form 10-Q for quarter ended December 31, 1994 and
incorporated herein by this reference.
(9) Previously filed with the Registration Statement on Form S-8 filed on
February 10, 1998, Commission File No. 333-45935, and incorporated
herein by this reference.
(10) Previously filed with Form 10-Q for quarter ended December 31, 1996 and
incorporated herein by this reference.
(11) Previously filed with Form 8-K dated March 3, 1997 and incorporated
herein by this reference.
(12) Previously filed with the Registration Statement on Form S-8 filed on
February 10, 1998, Commission File No. 333-45939, and incorporated
herein by this reference.
(13) Previously filed with Form 10-K for Fiscal Year ended June 30, 1998 and
incorporated herein by this reference.
(14) Filed herewith.
(15) Previously filed with Form 10-Q for quarter ended March 31, 1997 and
incorporated herein by this reference.
(16) Previously filed with Form 10-Q for quarter ended March 31, 1994 and
incorporated herein by this reference.
(17) Previously filed with Form 10-Q for quarter ended March 31, 1995 and
incorporated herein by this reference.
(18) Previously filed with Form 10-Q for quarter ended December 31, 1998 and
incorporated herein by this reference.
(19) Previously filed with Form 10-Q for quarter ended March 31, 1993 and
incorporated herein by this reference.
(20) Previously filed with Form 10-Q for quarter ended September 30, 1993
and incorporated herein by this reference.
(21) Previously filed with Form 8-K dated January 5, 1990 and incorporated
herein by this reference.
22
<PAGE> 25
(22) Previously filed with Form 10-K for fiscal year ended June 27, 1993 and
incorporated herein by this reference.
(23) Previously filed with Form 10-K for Fiscal Year ended July 3, 1994 and
incorporated herein by this reference.
(24) Previously filed with Amendment No. 1 to Registration Statement filed
on February 14, 1986 and incorporated herein by this reference.
(25) Previously filed with Form 10-K for Fiscal Year ended June 30, 1997 and
incorporated herein by this reference.
(26) Previously filed with Form 10-K for Fiscal Year ended July 3, 1988 and
incorporated herein by this reference.
(27) Previously filed with the Registration Statement filed on May 3, 1985
and incorporated herein by this reference.
(28) Previously filed with Form 10-K for Fiscal Year ended June 30, 1986 and
incorporated herein by this reference.
(29) Previously filed with Form 10-Q for quarter ended September 30, 1986
and incorporated herein by this reference.
(30) Previously filed with Form 8-K dated December 30, 1986 and incorporated
herein by this reference.
(31) Previously filed with Form 8-K dated April 26, 1999 and incorporated
herein by this reference.
(32) Previously filed with Form 8-K dated August 2, 1999 and incorporated
herein by this reference.
(b) Reports on Form 8-K:
The Company filed one Report on Form 8-K during the last quarter of the
1999 fiscal year on May 10, 1999 (dated April 26, 1999) reporting the sale of
its generator business to Emerson Electric Co.
(c) Refer to (a) 3 above.
(d) Refer to (a) 2 above.
23
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of
Nashville, State of Tennessee, on the 27th day of September, 1999.
MagneTek, Inc.
(Registrant)
/s/ ANDREW G. GALEF
-------------------------------------------
Andrew G. Galef
Chairman of the Board of Directors,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ ANDREW G. GALEF Chairman of the Board of Directors, September 27, 1999
- --------------------------------------------- President and Chief Executive
Andrew G. Galef Officer (Principal Executive
Officer)
/s/ THOMAS G. BOREN Director September 27, 1999
- ---------------------------------------------
Thomas G. Boren
/s/ DEWAIN K. CROSS Director September 27, 1999
- ---------------------------------------------
Dewain K. Cross
/s/ PAUL J. KOFMEHL Director September 27, 1999
- ---------------------------------------------
Paul J. Kofmehl
/s/ FREDERICK D. LAWRENCE Director September 27, 1999
- ---------------------------------------------
Frederick D. Lawrence
/s/ MARGUERITE W. SALLEE Director September 27, 1999
- ---------------------------------------------
Marguerite W. Sallee
/s/ ROBERT E. WYCOFF Director September 27, 1999
- ---------------------------------------------
Robert E. Wycoff
/s/ DAVID P. REILAND Senior Vice President and September 27, 1999
- --------------------------------------------- Chief Financial Officer
David P. Reiland (Principal Financial Officer)
/s/ THOMAS R. KMAK Vice President and Controller September 27, 1999
- --------------------------------------------- (Principal Accounting Officer)
Thomas R. Kmak
</TABLE>
24
<PAGE> 27
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We have audited the consolidated financial statements of MagneTek, Inc. as of
June 30, 1999 and 1998, and for each of the three years in the period ended June
30, 1999, and have issued our report thereon dated August 20, 1999 (incorporated
by reference elsewhere in this Annual Report on Form 10-K). Our audits also
included the financial statement schedule listed in Item 14(a) of this Annual
Report on Form 10-K. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Nashville, Tennessee
August 20, 1999
S-1
<PAGE> 28
Schedule II
MAGNETEK, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ended June 30, 1997, 1998 and 1999
(amounts in thousands)
<TABLE>
<CAPTION>
Balance at Additions Deductions Balance
beginning charged to from at end
June 30, 1997 of year earnings Allowance Other(a) of year
- ------------------ --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for
doubtful
receivables $2,922 $1,136 ($1,316) ($159) $2,583
June 30, 1998
- ------------------
Allowance for
doubtful
receivables $2,583 $1,809 ($1,984) $19 $2,427
June 30, 1999
- ------------------
Allowance for
doubtful
receivables $2,427 $4,860 ($2,976) ($5) $4,306
</TABLE>
(a) Represents primarily opening allowances for doubtful accounts balances
of acquired companies and Foreign Translation Adjustments.
S-2
<PAGE> 1
EXHIBIT 10.19
SECURED PROMISSORY NOTE
$1,307,761.68 May 4, 1999
Nashville, Tennessee
FOR VALUE RECEIVED, subject to the terms and conditions set forth
below, RONALD N. HOGE, an individual (the "Executive"), whose address is 605
Belle Meade Boulevard, Nashville, Tennessee 37205, hereby promises to pay to the
order of MAGNETEK, INC. (the "Holder"), whose address is 26 Century Boulevard,
Nashville, Tennessee 37214, the principal sum of One Million Three Hundred Seven
Thousand Seven Hundred Sixty-One Dollars and Sixty-Eight Cents ($1,307,761.68),
together with interest thereon at the rate of 4.84% per annum or, if less, the
maximum rate allowable under applicable law, compounded semi-annually, and
payable in cash as set forth below. Payment of principal and interest shall be
made in lawful money of the United States of America. Payment of principal and
interest shall be made to the address of the Holder set forth above, or at such
other place as the Holder may from time to time designate in writing to the
Executive.
1. Other Notes. The Executive and the Holder acknowledge and agree that
this Note replaces certain other Unsecured Promissory Notes between the
Executive and the Holder dated March 19, 1997, May 2, 1997, August 15, 1997,
August 31, 1997 and October 1, 1997.
2. Maturity Date. The Executive shall repay the outstanding principal
balance of this Note on December 31, 2000 (the "Maturity Date"). Subject to the
provisions of Section 3 below, all interest shall accrue and be payable on the
Maturity Date.
3. Prepayment. The Executive may prepay all or part of the outstanding
principal balance of this Note, with accrued interest but without premium or
penalty, at any time.
4. Events of Default; Acceleration. The term "Event of Default" shall
consist of (i) a default in payment of interest or principal, when due, or (ii)
the Executive's filing of a petition for bankruptcy relief under title 11 of the
United States Code (the "Bankruptcy Code"). Upon and after the occurrence of any
Event of Default (whether such occurrence shall be voluntary or involuntary or
come about or be effected by operation of law or otherwise) and at any time so
long as such Event of Default shall be continuing, the Holder may, by notice to
the Executive, declare this Note, all interest hereon and all other amounts
payable hereunder, to be immediately due and payable, whereupon this Note, all
such interest and all such amounts shall become and be immediately due and
payable, without presentment, demand, protest or further notice of any kind, all
of which are hereby expressly waived by the Executive. Unpaid principal and
overdue interest on this Note shall continue to bear interest after an Event of
Default until all principal and interest due hereunder has been paid in full.
The Holder may enforce its rights hereunder by an action at law, suit in equity
or other appropriate proceeding.
5. Cancellation. Upon payment in full of all principal and interest
payable hereunder this Note shall be surrendered to the Executive for
cancellation.
6. Amendment and Waiver. Any provision of this Note may be amended or
waived by a written instrument signed by the Executive and by the Holder, such
amendment
<PAGE> 2
or waiver to be effective but only in the specific instance and for the specific
purpose for which the amendment or waiver is made or given. No delay on the part
of the Holder in exercising any right thereunder shall operate as a waiver of
such right.
7. Attorneys' Fees. The Executive shall reimburse Holder for any
reasonable attorneys' fees and expenses incurred by the Holder in connection
with the enforcement of its rights under this Note.
8. Notices. Any notice required or permitted hereunder shall be given
in writing and shall be deemed given upon personal delivery or five days after
deposit in the United States mail, by registered or certified mail, postage
prepaid, addressed (i) if to the Executive at the address set forth above and
(ii) if to the Holder at such Holder's address set forth above, or at such other
address as the Executive or the Holder may designate by notice as provided
herein.
9. Severability. If one or more provision of this Note shall be
unenforceable, the remaining provisions of this Note shall not in any way be
effected or impaired thereby and shall continue in full force and effect.
10. Security. This Note is secured pursuant to the terms of a Pledge
Agreement of even date herewith by and between the Executive and the Holder.
11. Governing Law. This Note and the obligations of the Executive
hereunder shall be governed by and construed in accordance with the laws of the
State of Tennessee.
------------------------------
RONALD N. HOGE
2
<PAGE> 1
EXHIBIT 10.20
PLEDGE AGREEMENT
This Pledge Agreement (this "Pledge Agreement") is made and entered
into as of May 4, 1999 between Ronald N. Hoge, an individual ("Pledgor"), and
MagneTek, Inc., a Delaware corporation ("MagneTek" or "Pledgee").
W I T N E S S E T H:
A. Pledgor is a party to a Secured Promissory Note dated October 7,
1997 in the amount of $1,000,000.00 (the "1997 Note").
B. Pledgee and Pledgor have agreed to consolidate and extend the
maturity dates of five unsecured promissory notes (the "Unsecured Notes") into
one promissory note in the amount of $1,307,761.68 pursuant to a Secured
Promissory Note dated May 4, 1999 (the "1999 Note" and, collectively with the
1997 Note, the "Notes").
C. Pledgor is the owner of 150,000 shares of MagneTek common stock (the
"Pledged Stock"). Pledgor intends by the execution and delivery of this Pledge
Agreement to secure to Pledgee the performance of the terms, covenants and
agreements hereof and of the Notes and each other document executed by Pledgor
securing, guaranteeing or otherwise relating to the Notes (the Notes and such
other documents, as each of the foregoing may from time to time be amended,
consolidated, renewed or replaced, being collectively referred to herein as the
"Loan Documents").
A G R E E M E N T:
NOW, THEREFORE, in consideration of the foregoing, and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Defined Terms. The following terms shall have the following meanings
(such meanings being equally applicable to both the singular and plural forms of
the terms defined):
"Default" means the occurrence of any event which, but for the giving
of notice or passage of time, or both, would be an Event of Default.
"Event of Default" has the meaning provided in Section 8.
"Lien" means any lien, charge or other encumbrance, whether arising by
contract or by operation of law, or otherwise.
"Proceeds" means all "proceeds," as such term is defined in the UCC
and, to the extent not included in such definition, all proceeds whether cash or
noncash, movable or immovable, tangible or intangible, from the Collateral,
including, without limitation, those from the sale, exchange, transfer,
collection, loss, damage, disposition, substitution or replacement of any of the
<PAGE> 2
Collateral and all income, gain, credit, distributions and similar items from or
with respect to the Collateral.
"Secured Obligations" means the obligations of Pledgor under the Loan
Documents, including, without limitation, the obligations of Pledgor to repay
principal and other amounts under or with respect to, the Notes.
"Transfer" means any conveyance, transfer (including, without
limitation, any transfer of any direct or indirect legal or beneficial
interest), sale, Lien, assignment, pledge, grant of a security interest or
hypothecation, whether by law or otherwise, of, on or affecting the Collateral.
"UCC" means the Uniform Commercial Code, as in effect from time to time
in any applicable jurisdiction.
2. Grant of Security Interest. As security for the full and punctual
payment and performance of the Secured Obligations when due and payable (whether
upon stated maturity, by acceleration or otherwise), Pledgor hereby grants,
pledges, hypothecates, transfers and assigns to Pledgee a first and continuing
lien on and first priority security interest (the "Security Interest") in all
right, title, claim and interest of Pledgor in and to the Pledged Stock,
together with all proceeds thereof, additions thereto and substitutions
therefor, including without limitation any and all new or substituted or
additional shares, other securities, cash or other properties distributed with
respect to the Pledged Stock whether as a result of merger, consolidation,
dissolution, reorganization, recapitalization, interest payment, stock split,
stock dividend, reclassification, redemption or any other change declared or
made in the capital structure of MagneTek, or otherwise (the "Collateral"), any
and all certificates and instruments representing or evidencing the Collateral.
3. Representations and Warranties of Pledgor. Pledgor hereby makes the
following representations and warranties:
(a) Ownership of Collateral. Pledgor is the legal and equitable
owner of the Collateral free and clear of all liens, charges,
encumbrances and security interests of every kind and nature.
(b) Authority to Pledge. Pledgor has good right and lawful authority
to pledge the Collateral in the manner hereby done or contemplated.
(c) Governmental Approval. No consent or approval of any
governmental body or regulatory authority, or of any securities
exchange, will be necessary to the validity of the rights created
hereunder which will not have been obtained.
(d) Validity of Pledge Agreement. This Pledge Agreement constitutes
a legal, valid and binding obligation of Pledgor, enforceable in
accordance with its terms.
(e) No conflict. Neither the execution or delivery of this Pledge
Agreement nor the consummation of the transactions contemplated hereby
(including the extension of the Unsecured Notes) constitute a violation
of, conflict with, or constitute a default
2
<PAGE> 3
under, any contract, commitment, agreement, understanding, arrangement
or other restriction of any kind to which Pledgor is a party or by
which Pledgor is bound.
4. Covenants of Pledgor. Pledgor hereby covenants to Pledgee:
(a) Delivery of Pledged Stock, Etc. Concurrently with the execution
of this Pledge Agreement, Pledgor is delivering to Pledgee the
Collateral consisting of the Pledged Stock. The Collateral shall be
accompanied by duly executed instruments of transfer or assignment in
blank, all in form and substance satisfactory to Pledgee. Without
limitation, Pledgee shall not be deemed to "control" the Collateral for
purposes of any applicable laws (including securities, environmental,
tax, bankruptcy or other laws, other than for purposes of perfection
under the UCC) as a result of the Collateral being registered in the
name of Pledgee. In addition, Pledgee shall have the right at any time
to exchange certificates or instruments representing or evidencing
Collateral for certificates or instruments of smaller or larger
denominations.
(b) No Transfer. Except for the Transfer effected by this Pledge
Agreement, Pledgor will not Transfer any of the Collateral or any
interest therein, or suffer or permit any of the foregoing to occur.
Any Transfer made in violation of the foregoing provisions shall be
void and of no force and effect.
(c) Payment of Charges and Claims. Pledgor shall within 30 days
after Pledgor has actual knowledge thereof (i) pay all charges imposed
by any governmental authority upon the Collateral, (ii) satisfy all
material claims that have become due and payable and, under applicable
law, have or may become Liens upon the Collateral, and (iii) discharge
or cause to be discharged as a Lien of record by payment or filing of
the bond required by applicable law or otherwise, any judgment, tax or
other involuntary Lien filed or otherwise asserted against the
Collateral. If Pledgor fails to pay or obtain the discharge of any
charge, claim or Lien required to be paid or discharged under this
Section 4(c), Pledgee may, but shall not be required to, at any time
and from time to time, to the extent reasonably necessary to obtain or
maintain the priority of the security interest created by this Pledge
Agreement and without waiving or releasing any obligation of Pledgor
under this Pledge Agreement or any other Loan Document, pay or obtain
the discharge of any such charge, claim or Lien or take such other
action with respect thereto as Pledgee deems, in its sole discretion,
advisable. Pledgor shall reimburse Pledgee, upon demand, for any
amounts expended by Pledgee in connection with the provisions of this
Section 4(c), and all amounts expended by Pledgee hereunder shall
become Secured Obligations hereunder.
(d) Additional Collateral. If and to the extent that the aggregate
fair market value of the Collateral on a given date ceases to be at
least equal to the aggregate principal amount due under the Notes on
such date, then upon Pledgee's request Pledgor shall promptly (and in
all events within five days) provide such additional shares of MagneTek
common stock, or other collateral acceptable to Pledgee, as Collateral
such that the aggregate fair market value of the Collateral will be at
least equal to the aggregate
3
<PAGE> 4
principal amount due under the Notes, or prepay the Notes in an amount
sufficient to equalize such balances.
5. Distributions. Whether or not a Default or an Event of Default has
occurred or is continuing, Pledgee shall be entitled to receive directly, and to
apply in accordance herewith, any distributions in respect of the Collateral or
any Proceeds thereof now or at any time hereafter received or retained by
Pledgee pursuant to the provisions of this Pledge Agreement.
6. Voting and other Consensual Rights.
(a) No Default or Event of Default. So long as no Default or Event
of Default shall exist, Pledgor shall be entitled to exercise any and
all voting and other consensual rights pertaining to the Collateral for
any purpose not inconsistent with the terms of this Pledge Agreement
and the other Loan Documents.
(b) Upon Occurrence of Default or Event of Default. So long as a
Default or an Event of Default shall exist, at the sole option of the
Pledgee, any or all rights of Pledgor to exercise voting and other
consensual rights shall cease, at the option of Pledgee, and Pledgee,
if and when it notifies Pledgor of the exercise of such option, shall
have the sole right and power to exercise any or all such voting and
other consensual rights and to receive and to hold as Collateral any or
all such cash and other property.
7. Power-of-Attorney. Pledgor hereby irrevocably authorizes and
empowers Pledgee and assigns and transfers unto Pledgee, and constitutes and
appoints Pledgee and any of its assigns its true and lawful attorney-in-fact,
and as its agent, irrevocably, with full power of substitution for it and in its
name, in order to more fully vest in Pledgee the rights and remedies provided
for herein, and Pledgor further authorizes and empowers Pledgee and any of its
assigns, as its attorney-in-fact, and as its agent, irrevocably, with full power
of substitution for it and in its name, to proceed from time to time in
Pledgor's name in any statutory or non-statutory proceeding affecting Pledgor or
the Collateral. Pledgee shall have no duty to exercise any of the aforesaid
rights, privileges or options and shall not be responsible for any failure to do
so or delay in so doing. The foregoing powers-of-attorney are irrevocable and
coupled with an interest, and any similar or dissimilar powers heretofore
granted, assigned or transferred by Pledgor in respect of the Pledged Interest
to any other Person other than Pledgee are hereby revoked. The power-of-attorney
granted herein shall terminate automatically upon the termination of this Pledge
Agreement in accordance with the terms hereof.
8. Events of Default. The occurrence of any one or more of the
following events shall constitute an "Event of Default" under this Pledge
Agreement:
(a) The voluntary or involuntary commencement of a case under the
United States Bankruptcy Code with respect to Pledgor.
(b) The failure of Pledgor to pay the Notes when fully due and
payable.
(c) The breach of any agreement of Pledgor contained in this Pledge
Agreement.
4
<PAGE> 5
9. Remedies. If an Event of Default shall exist:
(a) Remedies with Respect to Collateral. Pledgee, without obligation
to resort to any other security, right or remedy granted under any
other agreement or instrument, shall have the right to, in addition to
all rights, powers and remedies of a secured party pursuant to the UCC
and, in addition to any and all rights which Pledgee may have at law or
in equity, at any time and from time to time, (i) if applicable, cause
any or all of the Pledged Interest to be registered in or transferred
into the name of Pledgee or into the name of a nominee or nominees, or
designee or designees, of Pledgee, and/or (ii) pursuant to Section 10,
sell, resell, assign and deliver, in its sole discretion, any or all of
the Collateral or any other security for the Secured Obligations
(whether in whole or in part and at the same or different times) and
all right, title and interest, claim and demand therein and right of
redemption thereof, at public or private sale, for cash, upon credit
(by Pledgee only), and in connection therewith Pledgee may grant
options and may impose reasonable conditions, Pledgor hereby waiving
and releasing any and all rights of redemption. If all or any portion
of the Collateral is sold by Pledgee upon credit (by Pledgee only),
Pledgee shall not be liable for the failure of the purchaser to
purchase or pay for the same and, in the event of any such failure,
Pledgee may resell such Collateral. It is expressly agreed that Pledgee
may exercise its rights with respect to less than all of the
Collateral, leaving unexercised its rights with respect to the
remainder of the Collateral; provided, however, that such partial
exercise shall in no way restrict or jeopardize Pledgee's right to
exercise its rights with respect to all or any other portion of the
remainder of the Collateral at a later time or times. Pledgee may
exercise all of the rights and remedies of a secured party under the
UCC. The rights, powers and remedies of Pledgee under this Pledge
Agreement shall be cumulative and not exclusive of any other right,
power or remedy which Pledgee may have against Pledgor or existing at
law or in equity or otherwise.
(b) Cure. Without limiting any other provision of this Pledge
Agreement, and without waiving or releasing Pledgor from any obligation
or default hereunder, Pledgee shall have the right, but not the
obligation, to perform any act or take any appropriate action, as it,
in its reasonable judgment, may deem necessary to cure such Default or
Event of Default or cause any term, covenant, condition or obligation
required under this Pledge Agreement to be performed or observed by
Pledgor to be promptly performed or observed on behalf of Pledgor or to
protect the security of this Pledge Agreement. All reasonable amounts
advanced by, or on behalf of, Pledgee in exercising its rights under
this Section 9(b) (including, but not limited to, reasonable legal
expenses and disbursements incurred in connection therewith) shall be
payable by such Pledgor to Pledgee upon demand therefor and shall
become Secured Obligations hereunder.
10. Sales of the Collateral. No demand, advertisement or notice, all of
which are hereby expressly waived by Pledgor, shall be required in connection
with any sale or other disposition of all or any part of the Collateral, except
that Pledgee shall give Pledgor at least 10 days' prior written notice of the
time and place of any public sale or of the time and the place at which any
private sale or other disposition is to be made, which notice Pledgor hereby
agrees is reasonable, all other demands, advertisements and notices being hereby
waived. To the extent
5
<PAGE> 6
permitted by law, Pledgee shall not be obligated to make any sale of the
Collateral if it shall determine not to do so, regardless of the fact that
notice of sale may have been given, and Pledgee may without notice or
publication adjourn any public or private sale, and such sale may, without
further notice, be made at the time and place to which the same was so
adjourned. Upon each public or private sale of any portion of or all of the
Collateral, unless prohibited by any applicable statute which cannot be waived,
Pledgee (or its nominee or designee) may purchase any or all of the Collateral
being sold, free and clear of and discharged from any trusts, claims, equity or
right of redemption of Pledgor, all of which are hereby waived and released to
the extent permitted by applicable law, and may make payment therefor by credit
against any of the Secured Obligations in lieu of cash or any other obligations.
In the case of any sale, public or private, of any portion of or all of the
Collateral, Pledgor shall be responsible for the payment of all reasonable costs
and expenses of every kind for the sale and delivery, including, without
limitation, brokers' and reasonable attorneys' fees and disbursements and any
tax imposed thereon. The proceeds of the sale of the Collateral shall be
available to cover such costs and expenses and, after deducting such costs and
expenses from the proceeds of the sale, Pledgee shall first apply any residue to
the payment of costs and expenses comprising Secured Obligations and shall apply
any further residue to the payment of any outstanding principal amount with
respect to the Secured Obligations until fully paid.
11. Receipt of Sale Proceeds. Upon any sale of the Collateral, or any
portion thereof, by Pledgee hereunder (whether by virtue of the power of sale
herein granted, pursuant to judicial process or otherwise), the receipt of
Pledgee or the officer making the sale shall be a sufficient discharge to the
purchaser or purchasers of the Collateral so sold, and such purchaser or
purchasers shall not be obligated to see to the application of any part of the
purchase money paid over to Pledgee or such officer or be answerable in any way
for the misapplication or nonapplication thereof.
12. Modification, Waiver in Writing. No modification, amendment,
extension, discharge, termination or waiver of any provision of this Pledge
Agreement or any other Loan Document, or consent to any departure by Pledgor
therefrom, shall in any event be effective unless the same shall be in a writing
signed by the party against whom enforcement is sought, and then such waiver or
consent shall be effective only in the specific instance, and for the purpose,
for which given. Except as otherwise expressly provided herein, no notice to or
demand on Pledgor shall entitle Pledgor to any other or future notice or demand
in the same, similar or other circumstances.
13. Notices. All notices and other communications given hereunder shall
be given in accordance with the Loan Documents.
14. Pledgee Not Bound. Pledgee shall not be obligated to perform or
discharge any obligation of Pledgor as a result of the collateral assignment
hereby effected. The acceptance by Pledgee of this Pledge Agreement, with all
the rights, powers, privileges and authority so created, shall not at any time
or in any event obligate Pledgee to appear in or defend any action or proceeding
relating to the Collateral to which it is not a party, or to take any action
hereunder or thereunder, or to expend any money or incur any expenses or perform
or discharge any obligation, duty or liability under the Collateral.
6
<PAGE> 7
15. No Release, Etc. The obligations of Pledgor under this Pledge
Agreement shall be absolute and unconditional and shall remain in full force and
effect without regard to, and shall not be released, suspended, discharged,
terminated or otherwise affected by, any circumstances or occurrence whatsoever,
including, without limitation: (a) any renewal, extension, amendment or
modification of, or addition or supplement to or deletion from, any of the Loan
Documents or any other instrument or agreement referred to therein, or any
assignment or transfer thereof; (b) any waiver, consent, extension, indulgence
or other action or inaction under or in respect of any such instrument or
agreement or this Pledge Agreement or any exercise or non-exercise of any right,
remedy, power or privilege under or in respect of this Pledge Agreement or any
other Loan Document; (c) any furnishing of any additional security to Pledgee or
any acceptance thereof or any sale, exchange, release, surrender or realization
of or upon any security by Pledgee; or (d) any invalidity, irregularity or
unenforceability of all or part of the Secured Obligations or of any security
therefor.
16. Severability. Wherever possible, each provision of this Pledge
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Pledge Agreement shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Pledge Agreement.
17. Further Assurances. Pledgor agrees to do such further acts and
things and to execute and deliver to Pledgee such additional conveyances,
assignments, agreements and instruments as Pledgee from time to time may
reasonably require or deem reasonably advisable to carry into effect this Pledge
Agreement or to further assure and confirm unto Pledgee the rights, powers and
remedies intended to be granted hereunder or under any other Loan Document.
Pledgor hereby agrees to sign and deliver to Pledgee such documents, in form
acceptable to Pledgee, as Pledgee may from time to time reasonably request or as
are reasonably necessary in the opinion of Pledgee to establish and maintain a
valid and perfected Security Interest in the Collateral and to pay any filing
fees and taxes related thereto.
18. Headings. The Article and Section headings in this Pledge Agreement
are included herein for convenience of reference only and shall not constitute a
part of this Pledge Agreement for any other purpose.
19. Waiver of Defenses; Offset. To the fullest extent permitted by
applicable law, Pledgor waives any defense arising by reason of any disability
or other defense of Pledgor by reason of the cessation from any cause whatsoever
of the liability of Pledgor. To the fullest extent permitted by applicable law,
Pledgor waives any set-off, defense or counterclaim which Pledgor may have or
claim to have against Pledgee. Pledgee has and at all times may exercise,
whether or not a Default exists in respect of the Secured Obligations, a right
of offset in respect thereof, and to the extent such right is exercised, the
Secured Obligations will be reduced accordingly.
20. Waiver of Marshaling of Assets Defense. To the fullest extent that
Pledgor may legally do so, Pledgor waives all rights to a marshaling of the
assets of Pledgor and of the Collateral, or to a sale in inverse order of
alienation in the event of foreclosure of the interests
7
<PAGE> 8
hereby created, and agrees not to assert any right under any laws pertaining to
the marshaling of assets, the sale in inverse order of alienation, homestead
exemption, the administration of estates of decedents, or any other matters
whatsoever to defeat, reduce or affect the right of Pledgee under the Loan
Documents to a sale of the Collateral for the collection of the Secured
Obligations without any prior or different resort for collection, or the right
of Pledgee to the payment of such obligations and liabilities in preference to
every other claimant whatsoever.
21. Counterparts. This Pledge Agreement may be executed in any number
of counterparts, each of which when so executed and delivered shall be an
original, but all of which shall together constitute one and the same
instrument.
22. Governing Law.
(a) THIS PLEDGE AGREEMENT AND THE OBLIGATIONS ARISING HEREUNDER
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH
STATE AND ANY APPLICABLE LAW OF THE UNITED STATES OF AMERICA. TO THE
FULLEST EXTENT PERMITTED BY LAW, PLEDGOR HEREBY UNCONDITIONALLY AND
IRREVOCABLY WAIVES ANY CLAIM TO ASSERT THAT THE LAW OF ANY OTHER
JURISDICTION GOVERNS THIS PLEDGE AGREEMENT AND THIS PLEDGE AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK.
(b) ANY LEGAL SUIT, ACTION OR PROCEEDING AGAINST PLEDGOR ARISING
OUT OF OR RELATING TO THIS PLEDGE AGREEMENT SHALL BE INSTITUTED IN ANY
FEDERAL OR STATE COURT IN NASHVILLE, TENNESSEE AND PLEDGOR WAIVES ANY
OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF
ANY SUCH SUIT, ACTION OR PROCEEDING, AND PLEDGOR HEREBY IRREVOCABLY
SUBMITS TO THE JURISDICTION OF ANY SUCH COURT IN ANY SUIT, ACTION OR
PROCEEDING.
23. TRIAL BY JURY. PLEDGOR AND PLEDGEE, TO THE FULLEST EXTENT THAT THEY
MAY LAWFULLY DO SO, HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING,
INCLUDING, WITHOUT LIMITATION, ANY TORT ACTION, BROUGHT BY ANY PARTY HERETO WITH
RESPECT TO THIS PLEDGE AGREEMENT OR ANY OTHER LOAN DOCUMENTS.
Pledgor hereby acknowledges that he has had the opportunity to consult
with counsel before executing this Pledge Agreement.
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IN WITNESS WHEREOF, Pledgor has caused this Pledge Agreement to be
executed and delivered on the date first set forth above.
PLEDGOR:
-----------------------------------------
RONALD N. HOGE
PLEDGEE:
MAGNETEK, INC.
By:
-------------------------------------
Name:
---------------------------------
Title:
--------------------------------
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EXHIBIT 10.65
LEASE AGREEMENT
ELECTROMOTIVE SYSTEMS, INC.
a Wisconsin corporation
Landlord
AND
MAGNETEK, INC.
a Delaware corporation
Tenant
Property: N50 W13605 Overview Drive
N49 W13650 Campbell Drive
Menomonee Falls, Wisconsin
______________, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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ARTICLE 1. LEASED PROPERTY; TERM................................................................................1
ARTICLE 2. DEFINITIONS..........................................................................................2
ARTICLE 3. RENT.................................................................................................6
3.1 Base Rent.......................................................................................6
3.2 Additional Charges..............................................................................6
3.3 Option Term.....................................................................................7
ARTICLE 4. IMPOSITIONS..........................................................................................7
4.1 Payment of Impositions..........................................................................7
4.2 Adjustment of Impositions.......................................................................8
4.3 Utility Charges.................................................................................8
4.4 Insurance Premiums..............................................................................8
ARTICLE 5. OWNERSHIP OF LEASED PROPERTY AND PERSONAL PROPERTY...................................................8
5.1 Tenant's Personal Property......................................................................8
ARTICLE 6. USE OF LEASED PROPERTY...............................................................................8
6.1 Use of the Leased Property......................................................................8
6.2 Landlord to Grant Easements.....................................................................9
ARTICLE 7. LEGAL AND INSURANCE REQUIREMENTS.....................................................................9
7.1 Compliance with Legal and Insurance Requirements................................................9
7.2 Hazardous Materials.............................................................................9
7.3 Intentionally Omitted..........................................................................10
ARTICLE 8. REPAIRS; ALTERATIONS................................................................................10
8.1 Maintenance and Repair.........................................................................10
8.2 Alterations, Additions and Improvements........................................................11
ARTICLE 9. LIENS...............................................................................................11
ARTICLE 10. PERMITTED CONTESTS.................................................................................12
ARTICLE 11. INSURANCE..........................................................................................12
11.1 General Insurance Requirements.................................................................12
11.2 Replacement Cost...............................................................................13
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<TABLE>
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11.3 Waiver of Subrogation..........................................................................13
11.4 Form of Insurance..............................................................................14
11.5 Blanket Policy.................................................................................14
ARTICLE 12. FIRE AND CASUALTY..................................................................................14
12.1 Insurance Proceeds.............................................................................14
12.2 Reconstruction in the Event of Damage or Destruction Covered by Insurance......................15
12.3 Reconstruction in the Event of Damage or Destruction Not Covered by Insurance..................15
12.4 Tenant's Property..............................................................................15
12.5 Restoration of Tenant's Property...............................................................15
12.6 Abatement of Rent..............................................................................15
12.7 Damage Near End of Term........................................................................15
ARTICLE 13. CONDEMNATION.......................................................................................16
13.1 Definitions....................................................................................16
13.2 Parties' Rights and Obligations................................................................16
13.3 Total Taking...................................................................................16
13.4 Partial Taking.................................................................................16
13.5 Restoration....................................................................................16
13.6 Award Distribution.............................................................................16
ARTICLE 14. DEFAULT............................................................................................17
14.1 Events of Default..............................................................................17
14.2 Additional Expenses............................................................................19
14.3 Application of Funds...........................................................................19
ARTICLE 15. LANDLORD'S RIGHT TO CURE...........................................................................20
ARTICLE 16. INTENTIONALLY OMITTED..............................................................................20
ARTICLE 17. HOLDING OVER.......................................................................................20
ARTICLE 18. INDEMNIFICATION....................................................................................21
18.1 Tenant's Indemnification.......................................................................21
18.2 Landlord's Indemnification Obligation..........................................................21
ARTICLE 19. SUBLETTING AND ASSIGNMENT..........................................................................21
19.1 Subletting and Assignment......................................................................21
19.2 Attornment.....................................................................................22
ARTICLE 20. QUIET ENJOYMENT....................................................................................22
</TABLE>
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<TABLE>
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ARTICLE 21. NOTICES............................................................................................22
ARTICLE 22. DEFAULT BY LANDLORD................................................................................23
22.1 Default by Landlord............................................................................23
22.2 Tenant's Right to Cure.........................................................................24
ARTICLE 23. FINANCING OF THE LEASED PROPERTY...................................................................24
23.1 Financing by Landlord..........................................................................24
ARTICLE 24. SUBORDINATION AND NON-DISTURBANCE..................................................................25
ARTICLE 25. MISCELLANEOUS......................................................................................25
25.1 General........................................................................................25
25.2 Estoppel Certificate...........................................................................25
25.3 Time of Essence................................................................................26
ARTICLE 26. MEMORANDUM OF LEASE................................................................................26
</TABLE>
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<PAGE> 5
LEASE
LEASE (this "Lease") is dated as of July 23, 1999, and is between
ELECTROMOTIVE SYSTEMS, INC. ("Landlord"), a Wisconsin corporation, having its
principal office at 11895 Kemper Springs Drive, Cincinnati, Ohio 45340, and
MAGNETEK, INC., a Delaware corporation ("Tenant"), having its principal office
at 26 Century Boulevard, Suite 600, Nashville, Tennessee 37214.
ARTICLE 1.
LEASED PROPERTY; TERM
Upon and subject to the terms and conditions hereinafter set forth,
Landlord leases to Tenant and Tenant rents from Landlord all of Landlord's
rights and interest in and to the following real property (collectively, the
"Leased Property"):
(a) the real property described on Exhibit A attached hereto
(the "Land");
(b) all buildings, structures, Fixtures (as hereinafter
defined) and other improvements of every kind including, but not
limited to, alleyways and connecting tunnels, sidewalks, utility pipes,
conduits and lines (on-site and off-site), parking areas and roadways
appurtenant to such buildings and structures presently or hereafter
situated upon the Land, and Capital Additions financed by Landlord
(collectively, the "Leased Improvements");
(c) all easements, rights and appurtenances relating to the
Land and the Leased Improvements; and;
(d) all permanently affixed equipment, machinery, fixtures,
and other items of real and/or personal property, including all
components thereof, now and hereafter located in, on or used in
connection with, and permanently affixed to or incorporated into the
Leased Improvements, including, without limitation, all furnaces,
boilers, heaters, electrical equipment, heating, plumbing, lighting,
ventilating, refrigerating, incineration, air and water pollution
control, waste disposal, air-cooling and air-conditioning systems and
apparatus, sprinkler systems and fire and theft protection equipment,
and built-in oxygen and vacuum systems, all of which, to the greatest
extent permitted by law, are hereby deemed-by the parties hereto to
constitute real estate, together with all replacements, modifications,
alterations and additions thereto, but specifically excluding all items
included within the category of Tenant's Personal Property as defined
in Article 2 below (collectively the "Fixtures").
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To have and to hold for a term (the "Term") commencing on the Commencement Date
(as defined herein) and ending at midnight on the day prior to the fifth (5th)
anniversary of the Commencement Date, subject to Tenant's right to extend the
Term as provided herein.
ARTICLE 2.
DEFINITIONS
For all purposes of this Lease, except as otherwise expressly provided
or unless the context otherwise requires, (a) the terms defined in this Article
have the meanings assigned to them in this Article and include the plural as
well as the singular, (b) all accounting terms not otherwise defined herein have
the meanings assigned to them in accordance with generally accepted accounting
principles as at the time applicable, (c) all references in this Lease to
designated "Articles", "Sections" and other subdivisions are to the designated
Articles, Sections and other subdivisions of this Lease, and (d) the words
"herein", "hereof" and "hereunder" and other words of similar import refer to
this Lease as a whole and not to any particular Article, Section or other
subdivision:
Additional Charges: As defined in Section 3.2.
Affiliate: When used with respect to any corporation, limited liability
company, or partnership, the term "Affiliate" shall mean any person,
corporation, limited liability company, partnership or other legal entity,
which, directly or indirectly, controls or is controlled by or is under common
control with such corporation, limited liability company, or partnership. For
the purposes of this definition, "control" (including the correlative meanings
of the terms "controlled by" and "under common control with"), as used with
respect to any person, corporation, limited liability company, partnership or
other legal entity, shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
person, corporation, limited liability company, partnership or other legal
entity, through the ownership of voting securities, partnership interests or
other equity interests.
Award: As defined in Section 13.1.
Base Rent: As defined in Section 3.1.
Building: The two buildings containing approximately 74,400 square
feet, respectively, located on the Land.
Business Day: Each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which national banks in the City of Menomonee Falls,
Wisconsin are authorized, or obligated, by law or executive order, to close.
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Code: The Internal Revenue Code of 1986, as amended.
Commencement Date: Shall mean July 23, 1999.
Condemnation, Condemnor: As defined in Section 13.1.
Date of Taking: As defined in Section 13.1.
Encumbrance: As defined in Article 23
Event of Default: As defined in Section 14.1.
Facility: The Leased Property as defined in Article 1 above.
Fixtures: As defined in Article 1.
Hazardous Materials: Any substance, including without limitation,
asbestos or any substance containing asbestos and deemed hazardous under any
Hazardous Materials Law, the group of organic compounds known as polychlorinated
biphenyls, flammable explosives, radioactive materials, infectious wastes,
biomedical and medical wastes, chemicals known to cause cancer or reproductive
toxicity, pollutants, effluents, contaminants, emissions or related materials
and any items included in the definition of hazardous or toxic wastes, materials
or substances under any Hazardous Materials Law.
Hazardous Materials Law: Any local, state or federal law relating to
environmental conditions and industrial hygiene, including, without limitation,
the Resource Conservation and Recovery Act of 1976 ("RCRA"), the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), as
amended by the Superfund Amendments and Reauthorization Act of 1986 ("SARA"),
the Hazardous Materials Transportation Act, the Federal Water Pollution Control
Act, the Clean Air Act, the Clean Water Act, the Toxic Substances Control Act,
the Safe Drinking Water Act, and all similar federal, state and local
environmental statutes, ordinances and the regulations, orders, or decrees now
or hereafter promulgated thereunder.
Impositions: Collectively, all ad valorem taxes, water, sewer or other
rents and charges, excises, tax levies, fees (including, without limitation,
license, permit, inspection, authorization and similar fees), and all other
governmental charges, in each case whether general or special, ordinary or
extraordinary, or foreseen or unforeseen, of every character in respect of the
Leased Property and/or the Rent (including all interest and penalties thereon
due to any failure in payment by Tenant), which at any time prior to, during or
in respect of the Term hereof may be assessed or imposed on or in respect of or
be a lien upon (a) Landlord or Landlord's interest in the Leased Property, (b)
the Leased Property or any part thereof or any rent therefrom or any estate,
right, title or interest therein, or (c) any occupancy, operation, use or
possession of, sales from, or activity conducted on, or in
3
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connection with, the Leased Property or the leasing or use of the Leased
Property or any part thereof; provided, however, nothing contained in this Lease
shall be construed to require Tenant to pay (1) any tax based on net income
(whether denominated as a franchise or capital stock, financial institutions or
other tax) imposed on Landlord, or (2) any transfer or net revenue tax of
Landlord, or (3) any tax imposed with respect to the sale, exchange or other
disposition by Landlord of any portion of the Leased Property or the proceeds
thereof, or (4) except as expressly provided elsewhere in this Lease, any
principal or interest on any Encumbrance on the Leased Property.
Insurance Requirements. All terms of any insurance policy required by
this Lease and all requirements of the issuer of any such policy.
Land: As defined in Article 1.
Lease: As defined in the Preamble.
Lease Year: A twelve (12) month period commencing on the Commencement
Date or on each anniversary date thereof, as the case may be.
Leased Improvements; Leased Property: Each as defined in Article 1.
Legal Requirements: All federal, state, county, municipal and other
governmental statutes, laws, rules, orders, regulations, ordinances, judgments,
decrees and injunctions affecting either the Leased Property or the
construction, use or alteration thereof, whether now or hereafter enacted and in
force, including any which may (a) require repairs, modifications, or
alterations in or to the Leased Property, or (b) in any way adversely affect the
use and enjoyment thereof, and all permits, licenses, authorizations and
regulations relating thereto.
Lending Institution: Any insurance company, federally insured
commercial or savings bank, national banking association, savings and loan
association, employees' welfare, pension or retirement fund or system, corporate
profit-sharing or pension trust, college or university, or real estate
investment trust, including any corporation qualified to be treated for federal
tax purposes as a real estate investment trust, having a net worth of at least
$50,000,000.
Landlord: Electromotive Systems, Inc., a Wisconsin corporation.
Overdue Rate: On any date, a rate per annum equal to Two Percent (2%)
above the Prime Rate, but in no event greater than the maximum rate then
permitted under applicable law.
Payment Date: Any due date for the payment of the installments of Base
Rent or any other sums payable under this Lease.
Primary Intended Use: As defined in Section 6.1(b).
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Prime Rate: The rate published by The Wall Street Journal as the "Prime
Rate".
Rent: Collectively, the Base Rent and the Additional Charges.
Taking: A taking or voluntary conveyance during the Term hereof of all
or part of the Leased Property, or any interest therein or right accruing
thereto or use thereof, as the result of, or in settlement of, any Condemnation
or other eminent domain proceeding affecting the Leased Property whether or not
the same shall have actually been commenced.
Tenant: MagneTek, Inc., a Delaware corporation, and its successors and
permitted assigns.
Tenant's Personal Property: All machinery, equipment, furniture,
furnishings, movable walls or partitions, computers, trade fixtures or other
personal property, and consumable inventory and supplies, used or useful in
Tenant's business on the Leased Property, including without limitation, all
items of furniture, furnishings, equipment, supplies and inventory, and Tenant's
accounts receivable and operating licenses except items, if any, included within
the definition of Fixtures.
Term: The Term of this Lease, to include any Option Term.
Unavoidable Delays: Delays due to strikes, lockouts, inability to
procure materials, power failure, acts of God, governmental restrictions, enemy
action, civil commotion, fire, unavoidable casualty or other causes beyond the
control of the party responsible for performing an obligation hereunder,
provided that lack of funds shall not be deemed a cause beyond the control of
either party hereto unless such lack of funds is caused by the failure of the
other party hereto, to perform any obligations of such party, under this Lease.
Unsuitable for Its Primary Intended Use: As used anywhere in this
Lease, the term "Unsuitable for Its Primary Intended Use" shall mean that, by
reason of damage or destruction, or a partial Taking by Condemnation, in the
good faith judgment of Tenant, reasonably exercised, the Facility cannot be
operated on a commercially practicable basis for its Primary Intended Use,
taking into account, all relevant factors, and the effect of such damage or
destruction or partial Taking.
Year 2000 Compliant: Shall mean that computerized electrical,
mechanical or other systems serving the Leased Property and installed as of the
Commencement Date can accurately process date/time data (including, but not
limited to, calculations, comparing and sequencing) from, into, and between the
twentieth and twenty-first centuries, and the years 1999 and 2000 and leap year
calculations.
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ARTICLE 3.
RENT
3.1 Base Rent. Tenant shall pay to Landlord without notice or demand,
in advance, in lawful money of the United States of America, at Landlord's
address set forth herein or at such other place or to such other person, firms
or corporations as Landlord from time to time may designate in writing, Base
Rent (as defined below) during the Term, in an amount equal to $319,920.00 per
year ($4.30 psf x 74,400 sf) payable in advance in equal, consecutive monthly
installments of $26,660.00 on the first day of each calendar month of the Term,
commencing on the first day of the month which is not less than thirty (30) days
following the Commencement Date. If the Commencement Date is the first day of a
calendar month, the first monthly installment is due on the Commencement Date;
but if the Commencement Date is a day other than the first day of a calendar
month, then, on the Commencement Date, the Tenant will pay pro-rated Base Rent
(on a per diem basis) for the period from the Commencement Date through the last
day of the month in which the Commencement Date occurs. Similarly, if the last
day of the Term is a day other than the last day of a calendar month, the
monthly installment of Base Rent for such partial month will be prorated on a
per diem basis. The parties acknowledge that for purposes of payment of Base
Rent, the initial square footage measurement of the Building is estimated. A
confirming measurement shall be undertaken pursuant to the BOMA method by a
broker, appraiser, or commercial property manager mutually agreeable to the
parties with the cost of such measurement divided equally among Landlord and
Tenant. If the confirming measurement varies from the initial estimate, the
parties agree to execute an amendment to the Lease confirming the Commencement
Date, the square footage of the Building, and the adjusted annual and monthly
amounts of Base Rent to be paid hereunder based on a rental rate of $4.30 per
square foot per year.
3.2 Additional Charges. In addition to the Base Rent, (a) Tenant will
also pay and discharge as and when due and payable all other amounts,
liabilities, obligations and Impositions which Tenant assumes or agrees to pay
under this Lease, and (b) in the event of any failure on the part of Tenant to
pay any of those items referred to in clause (a) above, Tenant will also
promptly pay and discharge every fine, penalty, interest and cost which may be
added for non-payment or late payment of such items (the items referred to in
clauses (a) and (b) above being referred to herein collectively as the
"Additional Charges"), and Landlord shall have all legal, equitable and
contractual rights, powers and remedies provided in this Lease, by statute or
otherwise, in the case of non-payment of the Additional Charges, as in the case
of the Base Rent. If any installment of Rent or any other sum due from Tenant
shall not be received by Landlord or Landlord's designee within five business
days (5) days after written notice from Landlord that such amount is overdue,
then Tenant shall pay to Landlord a late charge equal to five percent (5%) of
such overdue amount. The parties hereby agree that such late charge represents a
fair and reasonable estimate of the costs Landlord will incur by reason of late
payment by Tenant. To the extent that Tenant pays any Additional Charges to
Landlord pursuant to any requirement of this Lease, Tenant shall be relieved of
its obligation to pay such Additional Charges to the entity to which they would
otherwise be due. Any payment of
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Rent which remains unpaid more than thirty (30) days after it is due shall bear
interest at the Overdue Rate. Unless a payment period is otherwise specified
herein, sums required to be paid by Tenant to Landlord shall be due within
thirty (30) days after receipt of written notice from Landlord.
3.3 Option Term. Provided no Event of Default shall have occurred and
continue beyond any applicable cure period, either at the time of exercise or on
the scheduled commencement of the renewal period, Tenant shall have four (4)
separate options to renew the Lease, under the same terms and conditions as
provided herein, for a consecutive five (5) year term (the "Option Term" or
"Option Terms"), exercisable by providing Landlord written notice (the "Notice")
of Tenant's intent to exercise the renewal option at least one hundred eighty
(180) days prior to the expiration of the Term, or applicable Option Term. Base
Rent for each Option Term shall increased over the Base Rent amount for the
prior five year period by an amount equal to the percentage increase in the
"Consumer Price Index - U.S. Average, All Items" (1982-1984 ' 100) of the Bureau
of Labor Statistics of the United States Department of Commerce for the locale
most specifically encompassing the Facility during the previous five year
period; provided, however, such increase shall in no event exceed 125% of the
prior Base Rent amount.
ARTICLE 4.
IMPOSITIONS
4.1 Payment of Impositions. Subject to Article 10 relating to permitted
contests, Tenant will pay, or cause to be paid, all Impositions before any fine,
penalty, interest or cost may be added for non-payment, such payments to be made
directly to the taxing authorities where feasible, and Tenant will promptly,
upon request, furnish to Landlord copies of official receipts or other
satisfactory proof evidencing such payments. Tenant's obligation to pay such
Impositions shall be deemed absolutely fixed upon the date such Impositions
become a lien upon the Leased Property or any part thereof. If any such
Imposition may, at the option of the taxpayer, lawfully be paid in installments
(whether or not interest shall accrue on the unpaid balance of such Imposition),
Tenant may exercise the option to pay the same (and any accrued interest on the
unpaid balance of such Imposition) in installments and, in such event, shall pay
such installments during the Term hereof (subject to Tenant's right of contest
pursuant to the provisions of Article 10) as the same respectively become due
and before any fine, penalty, premium, further interest or cost may be added
thereto. If any refund shall be due from any taxing authority in respect of any
Imposition paid by Tenant, the same shall be paid over to or retained by Tenant
if no Event of Default shall have occurred hereunder and be continuing. Any such
funds retained by Landlord due to an Event of Default shall be applied as
provided in Article 14. In the event governmental authorities classify any
property covered by this Lease as personal property, Tenant shall file all
personal property tax returns in such jurisdictions where it may legally so
file. Tenant may, upon giving notice to Landlord, at Tenant's option and at
Tenant's sole cost and expense, protest, appeal, or institute such other
proceedings as Tenant may deem appropriate to effect a reduction of real estate
or personal property assessments and Landlord, at Tenant's expense as aforesaid,
shall fully cooperate with Tenant in such protest,
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appeal, or other action. Except as otherwise expressly provided herein, Tenant
shall pay all expenses associated with the operation of the Leased Property
during the term hereof
4.2 Adjustment of Impositions. Impositions imposed in respect of the
tax-fiscal period during which the Term commences or terminates shall be
adjusted and prorated between Landlord and Tenant, whether or not such
Imposition is imposed before or after such termination.
4.3 Utility Charges. Tenant will contract for, in its own name, and
will pay or cause to be paid all charges for electricity, power, gas, oil, water
and other utilities used in the Leased Property during the Term.
4.4 Insurance Premiums. Tenant will contract for in its own name and
will pay or cause to be paid all premiums for the insurance coverage required to
be maintained pursuant to Article 11 during the Term.
ARTICLE 5.
OWNERSHIP OF LEASED PROPERTY AND PERSONAL PROPERTY
5.1 Tenant's Personal Property. Tenant may (and shall as provided
hereinbelow), at its expense, install, affix or assemble or place on any parcels
of the Land or in any of the Leased Improvements, any items of Tenant's Personal
Property, and Tenant shall, subject to the conditions set forth below, remove
the same upon the expiration or any prior termination of the Term. Tenant shall
provide and maintain during the entire Term all such Tenant's Personal Property
as shall be necessary in order to operate the Facility in compliance with all
licensure and certification requirements, in compliance with all material
licensure and certification requirements.
ARTICLE 6.
USE OF LEASED PROPERTY
6.1 Use of the Leased Property.
(a) Tenant covenants that it will obtain and maintain all approvals
needed to use and operate the Leased Property and the Facility for the
Primary Intended Use, as defined below, under applicable Legal
Requirements.
(b) After the Commencement Date and during the entire Term, Tenant
shall use or cause to be used the Leased Property and the improvements
thereon as a manufacturing facility, office, distribution, R & D
center, and for such other uses as may be necessary in connection with
or incidental to Tenant's business (the "Primary Intended Use"). Tenant
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shall not use the Leased Property or any portion thereof for any other
use without the prior written consent of Landlord, which consent shall
not be unreasonably withheld or delayed.
(c) Tenant shall not commit or suffer to be committed any waste on
the Leased Property, or in the Facility, nor shall Tenant cause or
permit any nuisance thereon.
6.2 Landlord to Grant Easements. Landlord will, from time to time so
long as no Event of Default has occurred and is continuing, at the request of
Tenant and at Tenant's cost and expense, but subject to the reasonable approval
of Landlord and any mortgagee holding a lien on the Leased Property (a) grant
easements and other rights in the nature of easements, (b) release existing
easements or other rights in the nature of easements which are for the benefit
of the Leased Property, (c) dedicate or transfer unimproved portions of the
Leased Property for road, highway or other public purposes, (d) execute
petitions to have the Leased Property annexed to any municipal corporation or
utility district, (e) execute amendments to any covenants and restrictions
affecting the Leased Property and (f) execute and deliver to any person any
instrument appropriate to confirm or effect such grants, releases, dedications
and transfers (to the extent of its interest in the Leased Property), but only
upon delivery to Landlord of a certificate of an officer of the Tenant stating
(and such other information as Landlord may reasonably require confirming) that
such grant, release, dedication, transfer, petition or amendment is required for
and not detrimental to the proper conduct of the business of Tenant on the
Leased Property and does not reduce its value.
ARTICLE 7.
LEGAL AND INSURANCE REQUIREMENTS
7.1 Compliance with Legal and Insurance Requirements. Subject to
Article 10 relating to permitted contests, Tenant, at its expense, will promptly
comply with all Legal Requirements and Insurance Requirements in respect of the
use, operation, maintenance, repair and restoration of the Leased Property.
Landlord covenants and represents, as of the date of this Lease, that the Leased
Property is in compliance with all Legal Requirements.
7.2 Hazardous Materials. The parties incorporate herein by reference
those certain covenants, representations, and warranties contained at Section
3.17 in that certain Asset Purchase Agreement executed among the parties on or
about the date hereof. Tenant shall furnish Landlord a copy of any environmental
site assessment or study it causes to be performed with respect to the Leased
Property.
Landlord and Tenant each hereby agrees to indemnify and defend, at
its sole cost and expense, and hold the other, its successors and assigns,
harmless from and against and to reimburse the other with respect to any and all
claims, demands, actions, causes of action, losses, damages, liabilities, costs
and expenses (including, without limitation, reasonable attorney's fees and
court
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costs) of any and every kind or character, known or unknown, fixed or
contingent, asserted against or incurred by the other at any time and from time
to time by reason or arising out of any breach or violation of the above.
7.3 Intentionally Omitted.
ARTICLE 8.
REPAIRS; ALTERATIONS
8.1 Maintenance and Repair.
(a) Tenant, at its expense, will (i) keep the interior spaces of
the Building, Tenant's Personal Property, and Fixtures in good order
and repair, (ii) provide for customary janitorial service and waste
removal in the Building, (iii) provide for routine maintenance and
repair (but not replacement) of mechanical systems such as HVAC,
plumbing, and electrical systems, and (iv) maintain (but not replace)
parking lots, sidewalks, curbs, windows, glass and exterior landscaping
in good order and repair. Tenant shall maintain a standard maintenance
contract, with a company reasonably satisfactory to Landlord, covering
the HVAC system. Landlord shall, at its expense, maintain, repair, or
replace, as necessary, (i) the foundation and structural elements of
the Building and the Leased Property, and (ii) mechanical systems such
as HVAC, plumbing, or electrical systems, but only to the extent such
systems require replacement Landlord shall have no obligation to
maintain, repair or replace any leasehold improvements or other items,
structural or otherwise, installed or constructed by Tenant. All
repairs shall, to the extent reasonably achievable, be at least
equivalent in quality to the original work. Tenant shall reimburse
Landlord for all direct, reasonable costs Landlord may incur, exclusive
of amounts paid by Landlord's insurer(s), in making repairs (which are
required under the Lease to be made by Landlord), which become
necessary as a result of damage caused by the Tenant or its employees,
agents, contractors, licensees, invitees, or subtenants. Landlord
warrants that all computerized electrical, mechanical or other systems
serving the Leased Property and installed as of the Commencement Date
are Year 2000 compliant.
(b) Unless Landlord shall convey any of the Leased Property to
Tenant pursuant to the provisions of this Lease, Tenant will, upon the
expiration or prior termination of this Term, vacate and surrender the
Leased Property to Landlord in the condition in which the Leased
Property was originally received from Landlord, except as repaired,
rebuilt, restored, altered or added to as permitted or required by the
provisions of this Lease and except for ordinary wear and tear, damage
caused by Landlord and damage or destruction described in Article 12 or
resulting from a Taking described in Article 13 which Tenant is not
required by the terms of this Lease to repair or restore.
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8.2 Alterations, Additions and Improvements. Tenant may make any
alterations, additions, improvements or other changes (collectively, the
"Alterations"), structural or otherwise, in or to the Leased Property after
first obtaining the prior written consent of Landlord, which consent shall not
be unreasonably withheld. Any Alterations made by Tenant shall be made: (a) in a
good, workmanlike, first-class and prompt manner and (b) in accordance with all
applicable legal requirements. Notwithstanding the foregoing, Tenant shall have
the right to make Alterations without the Landlord's consent, provided such
Alterations (a) do not adversely affect the structural integrity or exterior of
the Leased Property, (c) do not adversely affect the electrical, heating or
plumbing systems servicing the Leased Property, and (d) do not exceed a cost of
$15,000. All Alterations to the Leased Property made by Tenant shall immediately
become the property of Landlord and shall remain upon and be surrendered with
the Leased Property as a part thereof at the expiration or earlier termination
of the Lease Term; provided, however, that if Tenant is not in default under
this Lease, then Tenant shall remove, prior to the expiration or earlier
termination of the Lease Term, all of Tenant's Personal Property and repair and
restore the Leased Property to the condition it was in immediately prior to the
installation of the item of Tenant's Personal Property so removed, reasonable
wear and tear excepted.
ARTICLE 9.
LIENS
Subject to the provisions of Article 10 relating to permitted contests,
Tenant will not directly or indirectly create or allow to remain and will
promptly discharge at its expense any lien, encumbrance, attachment, title
retention agreement or claim upon the Leased Property or any attachment, levy,
claim or encumbrance in respect of the Rent, not including, however, (a) this
Lease, (b) matters of public record affecting the Leased Property as of the date
of this Lease, (c) restrictions, liens and other encumbrances which are
consented to in writing by Landlord which consent shall not be unreasonably
withheld, or any easements granted pursuant to the provisions of Section 6.2 of
this Lease, (d) liens for those taxes of Landlord which Tenant is not required
to pay hereunder, (e) subleases permitted by Article 19, (f) liens for
Impositions or for sums resulting from noncompliance with Legal Requirements so
long as (1) the same are not yet payable or are payable without the addition of
any fine or penalty or (2) such liens are in the process of being contested as
permitted by Article 10, (g) liens of mechanics, laborers, materialmen,
suppliers or vendors for sums either disputed or not yet due, provided that (1)
the payment of such sums shall not be postponed for more than sixty (60) days
after the completion of the action giving rise to such lien and such reserve or
other appropriate provisions as shall be required by law or generally accepted
accounting principles shall have been made therefor or (2) any such liens are in
the process of being contested as permitted by Article 10, and (h) any liens
which are the responsibility of Landlord pursuant to the provisions of Article
23 of this Lease.
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ARTICLE 10.
PERMITTED CONTESTS
Tenant, on its own or on Landlord's behalf (or in Landlord's name), but
at Tenant's expense, may contest, by appropriate legal proceedings conducted in
good faith and with due diligence, the amount, validity or application, in whole
or in part, of any Imposition, Legal Requirement, Insurance Requirement, lien,
attachment, levy, encumbrance, charge or claim not otherwise permitted by
Article 9, provided that (a) in the case of an unpaid Imposition, lien,
attachment, levy, encumbrance, charge or claim, the commencement and
continuation of such proceedings shall suspend the collection thereof from
Landlord and from the Leased Property, (b) neither the Leased Property nor any
Rent therefrom nor any part thereof or interest therein would be in any
immediate danger of being sold, forfeited, attached or lost, (c) in the case of
a Legal Requirement, Landlord would not be in any immediate danger of civil or
criminal liability for failure to comply therewith pending the outcome of such
proceedings, (d) in the case of a Legal Requirement and/or an Imposition, lien,
encumbrance or charge, Tenant shall give such reasonable security as may be
demanded by Landlord to insure ultimate payment of the same and to prevent any
sale or forfeiture of the affected portion of the Leased Property or the Rent by
reason of such non-payment or non-compliance; provided, however, the provisions
of this Article 10 shall not be construed to permit Tenant to contest the
payment of Rent (except as to contests concerning the method of computation or
the basis of levy of any Imposition or the basis for the assertion of any other
claim) or any other sums payable by Tenant to Landlord hereunder, (e) in the
case of an Insurance Requirement, the coverage required by Article 11 shall be
maintained, and (f) if such contest be finally resolved against Landlord or
Tenant, Tenant shall, as Additional Charges due hereunder, promptly pay the
amount required to be paid, together with all interest and penalties accrued
thereon, or comply with the applicable Legal Requirement or Insurance
Requirement. Landlord, at Tenant's expense, shall execute and deliver to Tenant
such authorizations and other documents as may reasonably be required in any
such contest and, if reasonably requested by Tenant or if Landlord so desires,
Landlord shall join as a party therein.
ARTICLE 11.
INSURANCE
11.1 General Insurance Requirements. During the Term of this Lease,
Tenant shall at all times keep the Leased Property, and all property located in
or on the Leased Property, including Tenant's Personal Property, insured with
the kinds and amounts of insurance described below. This insurance shall be
written by companies authorized to do insurance business in the State of
Wisconsin. The policies must name Landlord, Landlord's mortgagee(s), and any
other persons from time to time having an interest in the Leased Property,
provided their names and addresses have been furnished to Tenant, as an
additional insured and losses shall be payable to Landlord and/or Tenant
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as provided in Article 12. The policies on the Leased Property, including the
Leased Improvements, the Fixtures and Tenant's Personal Property, shall insure
against the following risks:
(a) Loss or damage by fire, vandalism and malicious mischief,
extended coverage perils commonly known as "All Risk" and all physical
loss perils, in an amount not less than one hundred percent (100%) of
the then Full Replacement Cost thereof (as defined below in Section
11.2).
(b) Claims for personal injury or property damage under a policy
of comprehensive general public liability insurance including but not
limited to insurance against assumed or contractual liability including
any indemnities under this Lease with amounts not less than One Million
Dollars ($1,000,000) per occurrence in respect of bodily injury and
death and Five Hundred Thousand Dollars ($500,000) for property damage;
provided, Landlord may require that such limits be increased during the
renewal terms so as to offset the effects of inflation occurring over
the course of the term hereof.
(c) If Tenant shall engage or cause to be engaged any contractor
to perform material work on the Leased Property, Tenant shall require
such contractor to carry and maintain, at no expense to Landlord,
non-deductible comprehensive general liability insurance, including but
not limited to contractor's liability coverage, completed operations
coverage, broad form property damage endorsement and contractor's
protection liability coverage in such amounts and with such companies
as Landlord shall approve, together with worker's compensation
insurance in not less than statutory amounts, and such contractor shall
furnish certificates of such insurance coverages before commencement of
work on the Leased Property.
11.2 Replacement Cost. The term "Full Replacement Cost" as used herein,
shall mean the actual replacement cost thereof from time to time, including
increased cost of construction endorsement, less exclusions provided in the
normal fire insurance policy. In the event either Landlord or Tenant believes
that the Full Replacement Cost has increased or decreased at any time during the
Term, it shall have the right to have such Full Replacement Cost redetermined by
the fire insurance company which is then providing the largest amount of fire
insurance carried on the Leased Property, hereinafter referred to as the
"impartial appraiser". The party desiring to have the Full Replacement Cost so
redetermined shall forthwith, on receipt of such determination by such impartial
appraiser, give written notice thereof to the other party hereto. The
determination of such impartial appraiser shall be final and binding on the
parties hereto, and Tenant shall forthwith increase, or may decrease, the amount
of the insurance carried pursuant to this Article, as the case may be, to the
amount so determined by the impartial appraiser. The party requesting such
reappraisal shall pay the fee, if any, of the impartial appraiser.
11.3 Waiver of Subrogation. All insurance policies carried by either
party, or required to be carried by either party, covering the Leased Property,
the Fixtures, the Facility and/or Tenant's
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Personal Property, including without limitation, contents, fire and casualty
insurance, shall expressly waive any right of subrogation on the part of the
insurer against the other party.
11.4 Form of Insurance. All of the policies of insurance referred to in
this Section shall be written in form satisfactory to Landlord and by insurance
companies licensed to write insurance in the State of Wisconsin. Tenant shall
pay all of the premiums therefor, and upon Landlord's written request, deliver
such policies or certificates thereof to Landlord prior to their effective date
(and, with respect to any renewal policy, at least fifteen (15) days prior to
the expiration of the existing policy) and in the event of the failure of Tenant
either to effect such insurance in the names herein called for or to pay the
premiums therefor, or to deliver such policies or certificates thereof to
Landlord at the times required, Landlord shall be entitled, but shall have no
obligation, to enact such insurance and pay the premiums therefor, which
premiums shall be repayable to Landlord upon written demand therefor, and
failure to repay the same shall constitute an Event of Default within the
meaning of Section 14.1(c). Each insurer mentioned in this Section shall agree,
by endorsement on the policy or policies issued by it, or by independent
instrument furnished to Landlord, that it will give to Landlord thirty (30)
days' written notice before the policy or policies in question shall be altered,
allowed to expire or canceled.
11.5 Blanket Policy. Notwithstanding anything to the contrary contained
in this Section, Tenant's obligations to carry the insurance provided for herein
may be brought within the coverage of a so-called blanket policy or policies of
insurance carried and maintained by Tenant provided that any such blanket policy
or policies shall otherwise satisfy the insurance requirements of this Article
11.
ARTICLE 12.
FIRE AND CASUALTY
12.1 Insurance Proceeds. All proceeds payable by reason of any loss or
damage to the Leased Property, or any portion thereof, and insured under any
policy of insurance required by Article 11 of this Lease shall be paid to
Tenant, and held by Tenant in trust and shall be made available for
reconstruction or repair, as the case may be, of any damage to or destruction of
the Leased Property, or any portion thereof, and shall be paid out by Tenant
from time to time for the reasonable cost of such reconstruction or repair. Any
excess proceeds of insurance remaining after the completion of the restoration
or reconstruction of the Leased Property (or in the event neither Landlord nor
Tenant is required or elects to repair and restore, all such insurance proceeds)
shall be retained by Tenant free and clear upon completion of any such repair
and restoration except as otherwise specifically provided below in this Article
12. All salvage resulting from any risk covered by insurance shall belong to
Landlord except that any salvage relating to Tenant's Personal Property shall
belong to Tenant.
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12.2 Reconstruction in the Event of Damage or Destruction Covered by
Insurance.
(a) Except as provided in Section 12.7, if during the Term, the
Leased Property is totally or partially destroyed from a risk covered
by the insurance described in Article 11 and the Facility thereby is
rendered Unsuitable for Its Primary Intended Use, or if the damage to
the Facility is so extensive that the estimated repair period exceeds
180 days, Tenant shall have the option, by giving notice to Landlord
within sixty (60) days following the date of such destruction, to (i)
restore the Facility to substantially the same condition as existed
immediately before the damage or destruction, or (ii) terminate this
Lease. In the latter event, Landlord shall be entitled to retain the
insurance proceeds covering Landlords interest in the Facility, and
Tenant shall pay to Landlord on demand, the amount of any deductible or
uninsured loss arising in connection therewith.
(b) Except as provided in Section 12.7, if during the Term, the
Leased Improvements and/or the Fixtures are totally or partially
destroyed from a risk covered by the insurance described in Article 11,
but the Facility is not thereby rendered Unsuitable for its Primary
Intended Use and the estimated time for repairs is less than 180 days,
Tenant shall restore the Facility to substantially the same condition
as existed immediately before the damage or destruction. Such damage or
destruction shall not terminate this Lease.
12.3 Reconstruction in the Event of Damage or Destruction Not Covered
by Insurance. Except as provided in Section 12.7 below, if during the Term, the
Facility is totally or materially destroyed from a risk not covered by the
insurance described in Article 11, whether or not such damage or destruction
renders the Facility Unsuitable for Its Primary Intended Use, Tenant at its
option shall restore the Facility to substantially the same condition it was in
immediately before such damage or destruction and such damage or destruction
shall not terminate this Lease.
12.4 Tenant's Property. All insurance proceeds payable by reason of any
loss of or damage to any of Tenant's Personal Property shall be paid to Tenant.
12.5 Restoration of Tenant's Property. If Tenant is required or elects
to restore the Facility as provided in Sections 12.2 or 12.3, Tenant shall also
restore all alterations and improvements made by Tenant and Tenant's Personal
Property.
12.6 Abatement of Rent. This Lease shall remain in full force and
effect, and Tenant's obligation to make rental payments and to pay all other
charges required by this Lease shall not abate during any period required for
repair and restoration.
12.7 Damage Near End of Term. Notwithstanding any provisions of
Sections 12.2 or 12.3 to the contrary, if damage to or destruction of the
Facility occurs during the last twelve months (12) months of the Term, and if
such damage or destruction cannot be fully repaired and restored within three
(3) months immediately following the date of loss, either party shall have the
right to terminate
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this Lease by giving notice to the other within thirty (30) days after the date
of damage or destruction, in which event Landlord shall be entitled to retain
the insurance proceeds.
ARTICLE 13.
CONDEMNATION
13.1 Definitions.
(a) "Condemnation" means (i) the exercise of any governmental
power, whether by legal proceedings or otherwise, by a Condemnor or
(ii) a voluntary sale or transfer by Landlord to any Condemnor, either
under threat of Condemnation or while legal proceedings for
Condemnation are pending.
(b) "Date of Taking" means the date the Condemnor has the right to
possession of the property being condemned.
(c) "Award" means all compensation, sums or anything of value
awarded, paid or received on a total or partial Condemnation.
(d) "Condemnor" means any public or quasi-public authority, or
private corporation or individual, having the power of Condemnation.
13.2 Parties' Rights and Obligations. If during the Term there is any
Taking of all or any part of the Leased Property or any interest in this Lease
by Condemnation, the rights and obligations of the parties shall be determined
by this Article 13.
13.3 Total Taking. If there is a Taking of all of the Leased Property
by Condemnation, this Lease shall terminate on the Date of Taking.
13.4 Partial Taking. If there is a Taking of a portion of the Leased
Property by Condemnation, this Lease shall remain in effect if the Facility is
not thereby rendered Unsuitable for Its Primary Intended Use. If, however, the
Facility is thereby rendered Unsuitable for Its Primary Intended Use, Tenant
shall have the option (a) to restore the Facility, at its own expense, to the
extent possible, to substantially the same condition as existed immediately
before the partial Taking, or (b) to terminate this Lease by written notice to
Landlord.
13.5 Restoration. If there is a partial Taking of the Leased Property
and this Lease remains in full force and effect pursuant to Section 13.4, Tenant
shall accomplish all necessary restoration.
13.6 Award Distribution. Subject to the rights of Landlord's
mortgagee(s), the entire Award shall belong to and be paid to Landlord, except
that, if this Lease is terminated, Tenant shall
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be entitled to receive from the Award, if and to the extent such Award
specifically includes such items, the following:
(a) A sum attributable to the value, if any, of the leasehold
interest of Tenant under this Lease; and
(b) A sum attributable to Tenant's Personal Property and any
reasonable removal and relocation costs included in the Award.
If Tenant is required or elects to restore the Facility, Landlord agrees that,
subject to the rights of the Facility Mortgagees, Landlord's portion of the
Award shall be used for such restoration and it shall hold such portion of the
Award in trust, for application to the cost of the restoration.
ARTICLE 14.
DEFAULT
14.1 Events of Default. The occurrence of any one or more of the
following events (individually, an "Event of Default") shall constitute Events
of Default hereunder:
(a) if Tenant shall fail to make a payment of the Rent payable by
Tenant under this Lease when the same becomes due and payable and such
failure is not cured by Tenant within a period of ten business (10)
days after receipt by Tenant of notice thereof from Landlord, or
(b) if Tenant shall fail to observe or perform any material term,
covenant or condition of this Lease and such failure is not cured by
Tenant within a period of thirty (30) days after receipt by Tenant of
notice thereof from Landlord, unless such failure cannot with due
diligence be cured within a period of thirty (30) days, in which case
such failure shall not be deemed to continue if Tenant, within said
thirty (30) day period, proceeds promptly and with due diligence to
cure the failure and diligently completes the curing thereof, or
(c) if Tenant shall:
(i) admit in writing its inability to pay its debts generally
as they become due,
(ii) file a petition in bankruptcy or a petition to take
advantage of any insolvency act,
(iii) make an assignment for the benefit of its creditors,
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(iv) consent to the appointment of a receiver of itself or of
the whole or any substantial part of its property, or
(v) file a petition or answer seeking reorganization or
arrangement under the Federal bankruptcy laws or any other
applicable law or statute of the United States of America or any
state thereof, or
(d) if the Tenant shall, after a petition in bankruptcy is filed
against it, be adjudicated a bankrupt or if a court of competent
jurisdiction shall enter an order or decree appointing, without the
consent of Tenant, as the case may be, a receiver of Tenant or of the
whole or substantially all of its property, or approving a petition
filed against it seeking reorganization or arrangement of Tenant under
the federal bankruptcy laws or any other applicable law or statute of
the United States of America or any state thereof, and such judgment,
order or decree shall not be vacated or set aside or stayed within
ninety (90) days from the date of the entry thereof, or
(e) if the estate or interest of Tenant in the Leased Property or
any part thereof shall be levied upon or attached in any proceeding and
the same shall not be vacated or discharged within the later of ninety
(90) days after commencement thereof or thirty (30) days after receipt
by Tenant of notice thereof from Landlord (unless Tenant shall be
contesting such lien or attachment in good faith in accordance with
Article 10 hereof).
If an Event of Default shall have occurred, Landlord shall have the right at its
election, then or at any time thereafter, to pursue any one or more of the
following remedies, in addition to any remedies which may be permitted by law or
by other provisions of this Lease:
A. Landlord may take any one or more of the actions permissible at
law to insure performance by Tenant of Tenant's covenants and
obligations under this Lease. In this regard, it is agreed that if
Tenant deserts or vacates the Leased Property, Landlord may enter upon
and take possession of such Leased Property in order to protect it from
deterioration and continue to demand from Tenant the monthly rentals
and other charges provided in this Lease, and shall use commercially
reasonable efforts to relet; but that if Landlord does relet all or any
portion of the Leased Property, such action by Landlord shall not be
deemed as an acceptance of Tenant's surrender of the Leased Property
unless Landlord expressly notifies Tenant of such acceptance in writing
pursuant to subsection B of this Section 14.1., Tenant hereby
acknowledging that Landlord shall otherwise be reletting as Tenant's
agent and Tenant furthermore hereby agreeing to pay to Landlord on
demand any deficiency that may arise between the monthly rentals and
other charges provided in this Lease and that actually collected by
Landlord. It is further agreed in this regard that in the event of any
default described in this Section 14.1, Landlord shall have the right
to enter upon the Leased Property, without being liable for prosecution
or any claim for damages therefor, and do whatever Tenant is obligated
to do under the terms of this Lease; and Tenant agrees to
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reimburse Landlord on demand for any expenses which Landlord may incur
in thus effecting compliance with Tenant's obligations under this
Lease.
B. Landlord may terminate this Lease by written notice to Tenant,
or, if permitted by law, terminate Tenant's right of possession of the
Leased Property without terminating this Lease, in which event Tenant
shall immediately surrender the Leased Property to Landlord, and if
Tenant fails to do so, Landlord may, without prejudice to any other
remedy which Landlord may have for possession or arrearages in rent,
enter upon and take possession of the Leased Property and expel or
remove Tenant and any other person who may be occupying said premises
or any part thereof, without being liable of prosecution or any claim
for damages therefor. In addition, Tenant shall pay to Landlord on or
before the first day of each calendar month, the monthly rentals and
other charges provided in this Lease. After the Leased Property have
been relet by Landlord, Tenant shall pay to Landlord on the 10th day of
each calendar month the difference between the monthly rentals and
other charges provided in this Lease for the preceding calendar month
and that actually collected by Landlord for such month. If it is
necessary for Landlord to bring suit in order to collect any
deficiency, Landlord shall have a right to allow such deficiencies to
accumulate and to bring an action on several or all of the accrued
deficiencies at one time. Any such suit shall not prejudice in any way
the right of Landlord to bring a similar action for any subsequent
deficiency or deficiencies. Any amount collected by Landlord from
subsequent tenants for any calendar month, in excess of the monthly
rentals and other charges provided in this Lease, shall be credited to
Tenant in reduction of Tenant's liability for any calendar month for
which the amount collected by Landlord will be less than the monthly
rentals and other charges provided in this Lease; but Tenant shall have
no right to such excess other than the above-described credit.
C. Landlord may bring an action to recover an amount equal to the
value of the Rent to be paid for the remainder of the Term (not to
include any yet unexercised Option Term), less the fair market rental
value of the Leased Property for said period, all reduced to present
value using the interest rate on unpaid judgments as a discount rate.
Landlord and Tenant agree that such amount shall be considered as
liquidated damages and not as a penalty, actual damages being difficult
to ascertain.
14.2 Additional Expenses. It is further agreed that, in addition to
payments required pursuant to Section 14.1. above, Tenant shall compensate
Landlord for (i) all expenses incurred by Landlord in repossessing the Leased
Property, (ii) all expenses incurred by Landlord in reletting (including among
other expenses, repairs, remodeling, replacements, advertisements and brokerage
fees), and (iii) Landlord's reasonable legal fees.
14.3 Application of Funds. Any payments otherwise payable to Tenant
which are received by Landlord under any of the provisions of this Lease during
the existence or continuance of any
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Event of Default shall be applied first, to costs incurred by Landlord in
connection with Tenant's default, second, to past due Rent, and third, to
current Rent.
ARTICLE 15.
LANDLORD'S RIGHT TO CURE
If Tenant shall fail to make any payment, or to perform any act
required to be made or performed under this Lease and to cure the same within
the relevant time periods provided in Section 14.1, Landlord, without waiving or
releasing any obligation or Event of Default, may (but shall be under no
obligation to) at any time thereafter make such payment or perform such act for
the account and at the expense of Tenant, and may, to the extent permitted by
law, enter upon the Leased Property for such purpose and take all such action
thereon as, in Landlord's opinion, may be necessary or appropriate therefor. In
the event of emergency, Landlord may take such reasonable action as is necessary
to avoid imminent danger to persons or damage to property without the required
notice provided in Section 14.1 in the event Tenant fails to promptly take such
action as may be required hereunder. No such entry shall be deemed an eviction
of Tenant. All sums so paid by Landlord and all costs and expenses (including,
without limitation, reasonable attorneys' fees and expense, in each case, to the
extent permitted by law) so incurred, together with a late charge thereon (to
the extent permitted by law) at the Overdue Rate from the date on which such
sums or expenses are paid or incurred by Landlord, shall be paid by Tenant to
Landlord on demand. The obligations of Tenant and rights of Landlord contained
in this Article shall survive the expiration or earlier termination of this
Lease.
ARTICLE 16.
INTENTIONALLY OMITTED
ARTICLE 17.
HOLDING OVER
If Tenant shall for any reason remain in possession of the Leased
Property after the expiration of the Term or any earlier termination of the Term
hereof, such possession shall be as a tenancy from month-to-month during which
time Tenant shall pay as rental each month, the aggregate of (a) 125% of the
Base Rent payable with respect to the last complete Lease Year prior to the
expiration of the Term; (b) all Additional Charges accruing during the month,
(c) all other sums, if any, payable by Tenant pursuant to the provisions of this
Lease with respect to the Leased Property and (d) any direct, but not
consequential, damages and expenses suffered or incurred by Landlord in
connection with such holdover by Tenant. During such period of tenancy, Tenant
shall be obligated to perform and observe all of the terms, covenants and
conditions of this Lease, but shall have no rights
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hereunder other than the right, to the extent given by law to tenancies from
month-to-month, to continue its occupancy and use of the Leased Property.
ARTICLE 18.
INDEMNIFICATION
18.1 Tenant's Indemnification. Tenant (or anyone claiming under Tenant)
will protect, indemnify, save harmless and defend Landlord from and against all
liabilities, obligations, claims, damages, penalties, causes of action, costs
and expenses (including, without limitation, reasonable attorneys' fees and
expenses), to the extent permitted by law, imposed upon or incurred by or
asserted against Landlord (unless resulting from the actions, failure to act,
negligence or misconduct of Landlord, its agents, employees, or invitees) by
reason of: (a) any accident, injury to or death of persons or loss or damage to
property occurring on or about the Leased Property, (b) any use, misuse,
condition, maintenance or repair by Tenant of the Leased Property, (c) any
Impositions (which are the obligations of Tenant to pay pursuant to the
applicable provisions of this Lease), and (d) any failure on the part of Tenant
to perform or comply with any of the terms of this Lease.
18.2 Landlord's Indemnification Obligation. Landlord shall protect,
indemnify, defend and hold Tenant harmless from and against all costs, damages,
claims, liabilities and expenses (including, without limitation, attorneys' fees
and expenses) suffered by or claimed against Tenant (unless resulting from the
negligence or misconduct of Tenant, Tenant's agents, employees or invitees),
directly or indirectly, based on, arising out of or resulting from (i) repair or
maintenance of the Leased Property which are the obligations of Landlord, (ii)
any act or omission by Landlord or Landlord's employees, agents, contractors,
licensees or invitees, or (iii) any breach or default in the performance or
observance of Landlord's covenants or obligations under this Lease.
ARTICLE 19.
SUBLETTING AND ASSIGNMENT
19.1 Subletting and Assignment. Tenant may, without the consent of but
with notice to Landlord, (a) assign this Lease or sublet all or any part of the
Leased Property to any Affiliate of Tenant or to any purchaser of all or
substantially all of the assets of Tenant's drives division, or (b) sublet not
more than twenty-five percent (25%) of the Building in the normal course of the
Primary Intended Use. Any further assignment or subletting shall require
Landlord's consent. Landlord shall not unreasonably withhold its consent to any
other or further subletting or assignment. In all cases of assignment or
subletting, (a) the sublessee shall comply with the provisions of Section 19.2,
(b) the assignee shall assume in writing and agree to keep and perform all of
the terms of this Lease on the part of Tenant to be kept and performed and shall
be and become jointly and severally liable with Tenant for the performance
thereof, (c) an original counterpart of each such sublease and assignment and
assumption, duly executed by Tenant and such sublessee or assignee, as the case
may be, in form
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and substance satisfactory to Landlord, shall be delivered to Landlord prior to
the effective date of such assignment or subletting.
19.2 Attornment. Tenant shall insert in each sublease permitted under
Section 19.1 provisions to the effect that (a) such sublease is subject and
subordinate to all of the terms and provisions of this Lease and to the rights
of Landlord hereunder, (b) that sublessee shall from time to time upon request
of Tenant or Landlord furnish within ten (10) days an estoppel certificate
relating to the sublease, and (c) in the event the sublessee receives a written
notice from Landlord or Landlord's assignees, if any, stating that Tenant is in
default under this Lease, the sublessee shall thereafter be obligated to pay all
rentals accruing under said sublease directly to the party giving such notice,
or as such party may direct. All rentals received from the sublessee by Landlord
or Landlord's assignees, if any, as the case may be, shall be credited against
the amounts owing by Tenant under this Lease.
ARTICLE 20.
QUIET ENJOYMENT
So long as Tenant shall pay all Rent as the same becomes due and shall
fully comply with all of the terms of this Lease and fully perform its
obligations hereunder, Tenant shall peaceably and quietly have, hold and enjoy
the Leased Property for the Term hereof, free of any claim or other action by
Landlord or anyone claiming by, through or under Landlord.
ARTICLE 21.
NOTICES
All notices, demands, consents, approvals, requests and other
communications under this agreement shall be in writing and shall be either (a)
delivered in person, (b) sent by certified mail, return receipt requested, (c)
delivered by a recognized delivery service or (d) sent by facsimile transmission
and addressed as follows:
(a) if to Tenant: MagneTek, Inc.
26 Century Boulevard
Suite 600
Nashville, TN 37214
Attention: Dennis Hatfield
22
<PAGE> 27
with a copy to: MagneTek, Inc.
16555 W. Ryerson Road
New Berlin, WI 53151
(b) if to Landlord: Electromotive Systems, Inc.
11895 Kemper Springs Drive
Cincinnati, Ohio 45340
Attention: Richard Pratt
with a copy to: Philip F. Schultz, Esq.
Taft, Stettinius & Hollister LLP
1800 Firstar Tower
425 Walnut Street
Cincinnati, OH 45202-3597
or to such other address as either party may hereafter designate, and shall be
effective upon receipt; provided that if delivery by certified mail is refused,
notice shall be deemed given on the date that delivery was attempted. A notice,
demand, consent, approval, request and other communication shall be deemed to be
duly received if delivered in person or by a recognized delivery service, when
left at the address of the recipient and if send by facsimile, upon receipt by
the sender of an acknowledgment or transmission report generated by the machine
from which the facsimile was sent indicating that the facsimile was sent in its
entirety to the recipient's facsimile number; provided that if a notice, demand,
consent, approval, request or other communication is served by hand or is
received by facsimile on a day which is not a business day, or after 5:00 p.m.
on any business day at the addressee's location, such notice or communication
shall be deemed to be duly received by the recipient at 9:00 a.m. on the first
business day thereafter.
ARTICLE 22.
DEFAULT BY LANDLORD
22.1 Default by Landlord. Landlord shall be in default of its
obligations under this Lease if Landlord shall fail to observe or perform any
term, covenant or condition of this Lease on its part to be performed and such
failure shall continue for a period of thirty (30) days after notice thereof
from Tenant, unless such failure cannot with due diligence be cured within a
period of thirty (30) days, in which case such failure shall not be deemed to
continue if Landlord, within said thirty (30) day period, proceeds promptly and
with due diligence to cure the failure and diligently completes the curing
thereof. The time within which Landlord shall be obligated to cure any such
failure shall also be subject to extension of time due to the occurrence of any
Unavoidable Delay.
23
<PAGE> 28
22.2 Tenant's Right to Cure. Subject to the provisions of Section 22.1,
if Landlord shall breach any covenant to be performed by it under this Lease,
Tenant, after notice to and demand upon Landlord in accordance with Section
22.1, without waiving or releasing any obligation of Landlord hereunder, and in
addition to all other remedies available hereunder and at law or in equity to
Tenant, may (but shall be under no obligation at any time thereafter to) make
such payment or perform such act for the account and at the expense of Landlord.
All sums so paid by Tenant and all costs and expenses (including without
limitation, reasonable attorneys' fees) so incurred, together with interest
thereon at the Overdue Rate from the date on which such sums or expenses are
paid or incurred by Tenant, shall be paid by Landlord to Tenant on demand. If
Landlord fails to promptly pay such sums or expenses, Tenant may offset such
amounts from Base Rent until the full amount has been accounted for. The rights
of Tenant hereunder to cure and to secure payment from Landlord in accordance
with this Section 22.2 shall survive the termination of this Lease.
ARTICLE 23.
FINANCING OF THE LEASED PROPERTY
23.1 Financing by Landlord. Landlord agrees that, if it grants or
creates any mortgage, lien, encumbrance or other title retention agreement
("Encumbrances") upon the Leased Property, Landlord shall simultaneously obtain
an agreement from the holder of each such Encumbrance (a) to give Tenant the
same notice, if any, given to Landlord of any default or acceleration of any
obligation underlying any such Encumbrance or any sale in foreclosure of such
Encumbrance, (b) to permit Tenant to cure any such default on Landlord's behalf
within any applicable cure period, in which event Landlord agrees to reimburse
Tenant for any and all out-of-pocket costs and expenses incurred to effect any
such cure (including reasonable attorneys' fees), (c) to permit Tenant to appear
with its representatives and to bid at any foreclosure sale with respect to any
such Encumbrance, (d) that, if subordination by Tenant is requested by the
holder of each such Encumbrance, to enter into an agreement with Tenant
containing the provisions described in Article 24 of this Lease, and (e)
Landlord and Landlord's successor and assigns, further agrees that no such
Encumbrance shall in any way prohibit, derogate from, or interfere with Tenant's
right and privilege to collaterally assign its leasehold and contract rights
hereunder provided such collateral assignment and rights granted to the assignee
thereunder shall be subordinate to the rights of the holder of an Encumbrance as
provided in Article 24 hereof.
24
<PAGE> 29
ARTICLE 24.
SUBORDINATION AND NON-DISTURBANCE
At the request from time to time by one or more institutional holders
of a mortgage or deed of trust that may hereafter be placed by the Landlord upon
the Leased Property or any part thereof, and any and all renewals, replacements,
modifications, consolidations, spreaders and extensions thereof, Tenant shall
subordinate this Lease and all of Tenant's rights and estate hereunder to each
such mortgage or deed of trust and agree with each such institutional holder
that Tenant will attorn to and recognize such holder or the purchaser at any
foreclosure sale or any sale under a power of sale contained in any such
mortgage or deed of trust, as the case may be, as Landlord under this Lease for
the balance of the Term then remaining, subject to all of the terms and
provisions of this Lease; provided, however, that each such institutional holder
simultaneously executes and delivers a written agreement consenting to this
Lease and agreeing that, notwithstanding any such other lease, mortgage, deed of
trust, right, title or interest, or any default, expiration, termination,
foreclosure, sale, entry or other act or omission under, pursuant to or
affecting any of the foregoing, Tenant shall not be disturbed in peaceful
enjoyment of the Leased Property nor shall this Lease be terminated or canceled
at any time, except in the event Landlord shall have the right to terminate this
Lease under the terms and provisions expressly set forth herein.
ARTICLE 25.
MISCELLANEOUS
25.1 General. Anything contained in this Lease to the contrary
notwithstanding, all claims against, and liabilities of, Tenant or Landlord
arising prior to any date of termination of this Lease shall survive such
termination. If any term or provision of this Lease or any application thereof
shall be invalid or unenforceable, the remainder of this Lease and any other
application of such term or provision shall not be affected thereby. If any late
charges provided for in any provision of this Lease are based upon a rate in
excess of the maximum rate permitted by applicable law, the parties agree that
such charges shall be fixed at the maximum permissible rate. Neither this Lease
nor any provision hereof may be changed, waived, discharged or terminated except
by an instrument in writing and in recordable form signed by Landlord and
Tenant. All the terms and provisions of this Lease shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns. The headings in this Lease are for convenience of reference only and
shall not limit or otherwise affect the meaning hereof. In the event of any
non-performance or non-observance of any covenants or condition of the Lease by
either party, no failure to act by the other party shall be deemed a waiver of
any right under the Lease unless such waiver shall be in writing and signed by
the waiving party.
25.2 Estoppel Certificate. Tenant shall at any time, upon not less than
twenty (20) days prior written request, execute and deliver an estoppel
certificate to Landlord and any potential
25
<PAGE> 30
purchaser of the Leased Property, which estoppel certificate shall be in form
and substance reasonably acceptable to Tenant.
25.3 Time of Essence. Time is of the essence with respect to the
performance of all obligations to be performed or observed by the Landlord and
Tenant under this Lease.
ARTICLE 26.
MEMORANDUM OF LEASE
Landlord and Tenant shall, promptly upon the request of either, enter
into a short form memorandum of this Lease, in form suitable for recording under
the laws of the state in which the Leased Property is located in which reference
to this Lease, and all options contained herein, shall be made.
IN WITNESS WHEREOF, the parties have caused this Lease to be executed
and their respective corporate seals to be hereunto affixed and attested by
their respective officers thereunto duly authorized.
LANDLORD:
ELECTROMOTIVE SYSTEMS, INC.
By:
----------------------------------------
Its:
---------------------------------------
TENANT:
MAGNETEK, INC.
By:
----------------------------------------
Its:
---------------------------------------
26
<PAGE> 31
EXHIBIT A
PROPERTY DESCRIPTION
27
<PAGE> 1
EXHIBIT 10.66
ASSIGNMENT OF LEASE
AND
AMENDMENT OF LEASE
THIS ASSIGNMENT OF LEASE AND AMENDMENT TO LEASE ("ASSIGNMENT") is made
by and between ELECTRIC MOTOR SYSTEMS, INC. (incorrectly referred to in the
Lease as Electric Motor Services, Inc.), an Ohio corporation (herein referred to
as "EMS"), AND MAGNETEK, INC., a Delaware corporation (hereinafter referred to
as "MagneTek"), under the following circumstances:
A. EMS is the tenant under a certain Lease Agreement dated April 19,
1995 (the LEASE") by and between REGINA B. PRATT (herein, the "LESSOR") and EMS
pursuant to which EMS leases from Lessor the property located at 11895 Kemper
Springs Drive, Cincinnati, Ohio (the "LEASED PREMISES").
B. In connection with MagneTek's purchase of the assets of EMS, EMS has
agreed to assign its interests in the Lease to MagneTek, and MagneTek has agreed
to assume the obligations of EMS under the Lease.
C. As a condition of such assignment and assumption of the Lease,
Lessor and MagneTek desire to make certain amendments to the Lease as set forth
in this Assignment.
NOW THEREFORE, in consideration of the covenants and agreements
contained herein and other valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as follows:
1. ASSIGNMENT. Effective as of the Effective Date (as defined below),
EMS assigns and transfers to MagneTek all of EMS's right, title and interest
under and in the Lease. EMS covenants that EMS has performed all of its
obligations under the Lease which are to be performed before the Effective Date,
and EMS further agrees to indemnify and hold harmless MagneTek from any and all
such obligations.
2. ASSUMPTION. Effective as of the Effective Date, MagneTek assumes all
of the obligations of EMS under the Lease which, pursuant to the terms and
provisions of the Lease, are to be performed on and after the Effective Date,
and MagneTek further agrees to indemnify and hold harmless EMS from any and all
such obligations.
3. EFFECTIVE DATE. The effective date of this Assignment ("EFFECTIVE
DATE") shall be the date that the closing of the asset purchase transaction
occurs, which the parties presently anticipate will occur on or about JULY 23,
1999. At the request of either party, upon such closing, the parties shall sign
a letter confirming the Effective Date. If the closing does not occur on or
before August 31, 1999, this Assignment shall automatically become null and
void.
<PAGE> 2
4. AMENDMENTS TO THE LEASE. Lessor and MagneTek agree to the following
amendments to the Lease, which amendments shall become effective on the
Effective Date:
(A) Renewal Option. The parties acknowledge that, pursuant to section 2
of the Lease, the present term of the Lease is scheduled to expire on April 18,
2000. All but the first sentence of section 2 of the Lease is deleted and the
following is inserted in its place:
"Provided that, at the time of Lessee's exercise of the renewal
option and at the commencement of the renewal period, Lessee is not
in default under this Lease beyond any applicable notice or grace
period, Lessee shall have one (1) option to extend the term of this
Lease for a renewal period of five (5) years (being the period from
April 19, 2000 through April 18, 2005). The renewal shall be on the
same terms and conditions as set forth in this Lease, except that
(i) rent payable during the renewal period shall be adjusted as
described in section 3 of this Lease, and (ii) upon the expiration
of the renewal term, Lessee shall have no further renewal options.
To exercise the renewal option, Lessee must notify the Lessor in
writing no less than one hundred twenty (120) days prior to the
date that the initial term of this Lease would otherwise have
expired. If Lessee does not exercise its renewal option, Lessor
shall have the right to place one or more "for rent" signs on the
Leased Premises during the last six (6) months of the term and to
exhibit the Leased Premises to prospective tenants."
(B) Rent for Current Term. Paragraph 3.B. of the Lease is revised to
provide that, effective as of the Effective Date and continuing through the
remainder of the current term of the Lease, rent payable by Lessee under section
3 of the Lease shall be equal to Seventy-Eight Thousand Dollars ($78,000.00),
payable in advance on the first day of each month, without demand or set off, in
equal monthly installments of Six Thousand Five Hundred Dollars ($6,500.00)
each. Rent for any partial calendar month falling within the term shall be
prorated on a per diem basis.
(C) Rent for Renewal Period. Paragraph 3.C. of the Lease is revised to
provide that, if Lessee timely exercises the renewal option, rent payable by
Lessee under section 3 of the Lease during the renewal period shall be equal to
the then Fair Market Rental Rate (as defined below) of the Leased Premises,
determined as follows:
(i) Within thirty (30) days after Lessor receives Lessee's notice
of exercise of its renewal option, Lessee shall furnish to Lessee written notice
of Lessor's determination of the Fair Market Rental Rate. If Lessee does not
accept Lessor's determination of the Fair Market Rental Rate and lessor and
Lessee are unable to agree upon same, then Lessee shall, within thirty (30) days
after Lessee's receipt of written notice of Lessor's determination of the Fair
Market Rental Rate, notify Lessor in writing that either (a) Lessee elects to
rescind its exercise of the renewal option, whereupon such exercise shall become
immediately null and void, or (b) Lessee
2
<PAGE> 3
elects to invoke the Fair Market Rental Rate determination procedure described
in the following subparagraph (iii).
(ii) If Lessee elects (b) above, Lessor and Lessee shall each
designate a local, disinterested, professional real estate appraiser who is a
member of the American Institute of Real Estate Appraisers ("MAI") and who has
at least seven (7) years experience appraising similar properties in the
geographical are in which the Leased Premises is located. Each such appraiser
shall have thirty (30) days (after being designated) within which to determine
the Fair Market Rental Rate. If the two (2) appraisers agree on the Fair Market
Rental Rate, or if the higher of the two Fair Market Rental Rates is not more
than five percent (5%) higher than the lower of the two Fair Market Rental
Rates, the agreed upon rate (or the average of the two rates, whichever is
applicable) will become the Fair Market Rental Rate and will be binding upon
Lessor and Lessee. If the higher of the two Fair Market Rental Rates is more
than five percent (5%) higher than the lower of the two Fair Market Rental
Rates, the highest ranking officer of the local chapter of the American
Institute of Real Estate Appraisers who is not related to either of the parties
or the MAIs previously designated shall select a third MAI, and the third
appraiser shall have thirty (30) days after being designated within which to
determine the Fair Market Rental Rate. The agreement of two (or of all three) of
the appraisers as to the Fair Market Rental Rate will be binding upon Lessor and
Lessee. If no two appraisers agree, the average of the Fair Market Rental Rates
determined by the three appraisers will become the Fair Market Rental Rate and
will be binding upon Lessor and Lessee. Each party shall pay the fee and any
associated expenses charged by the MAI which it selects, and the fee and any
associated expenses charged by the third MAI shall be split evenly between the
parties.
(iii) Promptly after the Fair Market Rental Rate has been
determined in accordance with this paragraph (C), Lessor shall provide Lessee,
and the parties shall promptly execute, a Lease extension agreement which
memorializes the extension of the term of the Lease and the rent payable during
the renewal period.
(iv) The term "FAIR MARKET RENTAL RATE", as used herein, shall mean
the amount of rent that a willing tenant would pay and a willing landlord would
accept for the Leased Premises, in an open market and on an arms-length basis,
taking into consideration the then existing age and condition of the building
and other improvements on the leased Premises, the location of the Leased
Premises, and other relevant factors, and assuming that the other terms and
conditions of such tenant's lease of the Leased Premises were comparable to
those set forth in the Lease.
D. Permitted Use. Lessee shall use the Leased Premises for the
following purposes and for no other p purpose without the Lessor's prior written
consent, which consent shall not be unreasonably withheld: Manufacturing
facility, office, distribution, R & D center, and for such other uses as may be
necessary in connection with or incidental to Lessee's business. Lessee shall
ensure that its use of the Leased Premises complies at all times with applicable
zoning, building, environmental and other laws.
3
<PAGE> 4
E. Alterations and Improvements. The first sentence of section 9 of the
Lease is revised to provide that Lessee may, with our receiving Lessor's prior
written consent, make alterations and improvements to the Leased Premises
costing, in the aggregate (per construction project), Ten Thousand Dollars
($10,000.00) or less. Lessee shall not make any alterations or improvements to
the Leased Premises costing, in the aggregate (per construction project), in
excess of Ten Thousand Dollars ($10,000.00) without the prior written consent of
Lessor, which consent Lessor agrees shall not be unreasonably withheld.
F. Notice. With reference to section 25 of the Lease, the address of
Lessee, for purposes of receiving notices from Lessor under the Lease, is
changed to the following:
MagneTek, Inc.
26 Century Blvd., Suite 600
Nashville, TN 37214
Attention: Dennis Hatfield
G. No Purchase Option. Section 21 of the Lease is deleted.
All terms of the Lease not amended hereby or not inconsistent herewith shall
remain in full force and effect.
5. SUCCESSORS AND ASSIGNS. This Assignment shall be binding upon and
shall operate to the benefit of the parties hereto and their respective
successors, assigns, heirs and legal representatives.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Assignment.
Signed and acknowledged Assignor:
in the presence of: ELECTRIC MOTOR SYSTEMS, INC.
By:
- ------------------------------------ --------------------------------
Richard Pratt
President
Printed Name:
-----------------------
(witness 1 as to Assignor)
Assignee:
MAGNETEK, INC.
By:
- ------------------------------------ --------------------------------
Printed Name: Printed Name:
----------------------- -----------------------
(witness 1 as to Assignee)
Title:
------------------------------
- ------------------------------------
Printed Name:
-----------------------
(witness 2 as to Assignee)
STATE OF OHIO )
) SS:
COUNTY OF HAMILTON )
The foregoing instrument was acknowledged before me this ___ day of
July, 1999, by Richard Pratt, President of ELECTRIC MOTOR SYSTEMS, INC., an Ohio
corporation, on behalf of the corporation.
-----------------------------------
Notary Public
5
<PAGE> 6
STATE OF ____________ )
) SS:
COUNTY OF __________ )
The foregoing instrument was acknowledged before me this ___ day of
July, 1999 by ___________________, the _________________ of MAGNETEK, INC., a
Delaware corporation, on behalf of the corporation.
-----------------------------------
Notary Public
LESSOR'S CONSENT
The undersigned, REGINA B. PRATT, the Lessor under the Lease referred
to in the foregoing Assignment, hereby consents to the assignment of the Lease
and agrees to the amendments to the Lease as hereinabove set forth. Effective as
of the Effective Date, EMS is released from all liability under the Lease.
Lessor:
-----------------------------------
Regina B. Pratt
Date: July , 1999
-----------
6
<PAGE> 1
EXHIBIT 10.90
ASSET PURCHASE AGREEMENT
BY AND AMONG
ELECTRIC MOTOR SYSTEMS, INC.,
ELECTROMOTIVE SYSTEMS, INC.,
EMS/ROSA AUTOMATION ENGINEERING, INC.
ROBERT G. FRIEDRICH
STEVEN J. BADINGHAUS
AND
MAGNETEK, INC.
DATED JULY 23, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1 SALE AND PURCHASE OF ASSETS.............................................................................1
1.1 Sale and Purchase of Assets.....................................................................1
1.2 Assumption of Liabilities.......................................................................2
1.3 Excluded Liabilities............................................................................2
1.4 Purchase Price..................................................................................2
1.5 Purchase Price Adjustment.......................................................................2
1.6 Payment of Purchase Price ......................................................................4
1.7 Allocation of Purchase Price ...................................................................4
ARTICLE 2 CLOSING.................................................................................................4
2.1 Closing Date....................................................................................4
2.2 Transfer of Possession..........................................................................5
2.3 Instruments of Transfer and Assumption..........................................................5
2.4 Other Matters...................................................................................5
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER................................................................6
3.1 Organization and Standing.......................................................................6
3.2 Power and Authority.............................................................................6
3.3 No Violation of Law and Agreements..............................................................6
3.4 Consents Required...............................................................................7
3.5 Subsidiaries....................................................................................7
3.6 (a) Accounts Receivable....................................................................7
(b) Accounts Payable and Inventory ........................................................8
3.7 Order Backlog; Major Customers .................................................................8
3.8 Financial Statements............................................................................8
3.9 Books and Records...............................................................................9
3.10 No Undisclosed Liabilities......................................................................9
3.11 Title to Assets.................................................................................9
3.12 Real Estate....................................................................................10
3.13 Absence of Certain Changes.....................................................................11
3.14 Taxes..........................................................................................13
3.15 Compliance with Laws...........................................................................14
3.16 Contracts and Other Agreements.................................................................15
3.17 Environmental Matters..........................................................................16
3.18 Intellectual Property..........................................................................19
3.19 Permits........................................................................................20
3.20 Labor and Employment Matters...................................................................21
3.21 Employees......................................................................................21
3.22 Employee Benefit Plans.........................................................................21
3.23 Other Employee Benefit Plans...................................................................24
3.24 Litigation.....................................................................................24
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
3.25 Insurance......................................................................................24
3.26 Brokerage......................................................................................24
3.27 Powers of Attorney; Guarantees.................................................................24
3.28 Relations with Suppliers and Customers.........................................................25
3.29 Transactions with Affiliates...................................................................25
3.30 Absence of Certain Business Practices..........................................................25
3.31 Condition of Tangible Assets and Inventories...................................................25
3.32 Product Liability..............................................................................26
3.33 Operation of Business .........................................................................26
3.34 Year 2000 Compliance ..........................................................................26
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER................................................................27
4.1 Due Incorporation..............................................................................27
4.2 Authority......................................................................................27
4.3 Consents and Approvals.........................................................................28
4.4 No Breach......................................................................................28
4.5 Brokerage......................................................................................28
4.6 Buyer's Disclosures ...........................................................................28
ARTICLE 5 COVENANTS AND AGREEMENTS OF SELLERS....................................................................28
5.1 Further Assurances.............................................................................28
5.2 Assignment of Leaseholds.......................................................................29
5.3 Tax Returns....................................................................................29
5.4 Transfer Taxes.................................................................................29
5.5 Expenses ......................................................................................29
5.6 Employees and Benefit Plans ...................................................................29
5.7 Purchase of Delinquent Account Receivables ....................................................30
ARTICLE 6 COVENANTS AND AGREEMENTS OF BUYER......................................................................30
6.1 Expenses.......................................................................................30
6.2 Further Assurances.............................................................................30
6.3 Records........................................................................................30
6.4 Employees of Seller............................................................................30
6.5 Transfer Taxes ................................................................................31
6.6 Excess Accounts Receivable Collections ........................................................31
ARTICLE 7 SURVIVAL OF REPRESENTATIONS AND WARRANTIES.............................................................32
7.1 Survival.......................................................................................32
ARTICLE 8 INDEMNIFICATION........................................................................................32
8.1 Obligation to Indemnify........................................................................32
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
8.2 Notice of Asserted Liability...................................................................34
8.3 Opportunity to Defend..........................................................................34
8.4 Escrow Remedies................................................................................34
8.5 Limitation of Remedies.........................................................................35
ARTICLE 9 MISCELLANEOUS..........................................................................................35
9.1 Notices........................................................................................35
9.2 Entire Agreement...............................................................................36
9.3 Waivers and Amendments; Non-Contractual Remedies; Preservation
of Remedies....................................................................................36
9.4 Governing Law; Reference to U.S. Dollars.......................................................36
9.5 Expenses; Attorneys' Fees......................................................................37
9.6 Binding Effect; Assignment.....................................................................37
9.7 No Third Party Beneficiaries...................................................................37
9.8 Counterparts...................................................................................37
9.9 Headings.......................................................................................37
9.10 Publicity......................................................................................37
9.11 Severability...................................................................................37
9.12 Time of Essence................................................................................38
ARTICLE 10 DEFINITIONS...........................................................................................38
10.1 Defined Terms..................................................................................38
Schedule 10.1....................................................................................................52
Annex to Schedule ...............................................................................................58
</TABLE>
EXHIBIT INDEX
Exhibit A Calculation Methodology for Closing Date Balance Sheet
Exhibit B Form of Escrow Agreement
Exhibit C Form of Lease
Exhibit D Form of Bill of Sale
Exhibit E Form of Assignment and Assumption Agreement
Exhibit F Form of Assignment
Exhibit G Form of Non-Competition Agreement
Exhibit H Form of Guaranty Agreement
Exhibit I Amendment to EMS's Lease
iii
<PAGE> 5
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT ("Agreement"), dated as of July 23, 1999,
is entered into by and among MagneTek, Inc., a Delaware corporation ("Buyer"),
Electric Motor Systems, Inc., an Ohio corporation ("EMS"), Electromotive
Systems, Inc., a Wisconsin corporation ("ESI"), and EMS/Rosa Automation
Engineering, Inc., an Ohio corporation ("EMS/Rosa") (each of EMS, ESI and
EMS/Rosa is sometimes referred to individually as "Seller" and collectively as
"Sellers"), Robert G. Friedrich, an individual ("Friedrich") and Steven J.
Badinghaus, an individual ("Badinghaus" and, together with Friedrich, the
"Individual Sellers").
RECITALS
A. Sellers are engaged in the business of the manufacture and design of
AC/DC drives (the "Business").
B. Sellers desire to sell, and Buyer desires to purchase, substantially
all of the assets of Sellers and, in connection therewith, Buyer shall assume
certain enumerated obligations and liabilities related to such assets, in
accordance with the terms and conditions set forth in this Agreement.
C. The Individual Sellers have developed personal reputations,
relationships, knowledge and other personal assets and attributes that are
useful in the Business, and the Individual Sellers desire to sell, and the Buyer
desires to purchase, certain of the foregoing.
AGREEMENT
NOW THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereinafter set forth, the parties hereby agree as
follows:
ARTICLE 1
SALE AND PURCHASE OF ASSETS
1.1 Sale and Purchase of Assets. Subject to the terms and conditions
set forth in this Agreement, on the Closing Date, Sellers shall sell, convey,
transfer, assign and deliver to Buyer, and Buyer shall purchase from Sellers,
the Assets. Notwithstanding anything contained herein to the contrary, the
Excluded Assets are specifically excluded from the Assets and shall be retained
by Sellers. In addition, and subject to the terms and conditions set forth in
this Agreement, on the Closing Date, the Individual Sellers will sell and the
Buyer will purchase the Personal Goodwill.
1
<PAGE> 6
1.2 Assumption of Liabilities. Upon the terms and subject to the
conditions contained herein, on the Closing Date, Buyer shall assume the Assumed
Liabilities.
1.3 Excluded Liabilities. Notwithstanding any other provision of this
Agreement, except for the Assumed Liabilities, Buyer shall not assume, or
otherwise be responsible for, any Excluded Liabilities.
1.4 Purchase Price. The purchase price (the "Purchase Price") for the
sale, transfer and assignment of the Assets, the Assumed Contracts, the Leases
and the Ancillary Agreements, and for the assumption of the Assumed Liabilities,
will be the sum of ______________________ Dollars ($____________), as adjusted
pursuant to Section 1.5 below. In addition, the Buyer shall assume the Assumed
Liabilities as provided in Section 1.2 above. The Purchase Price and the Assumed
Liabilities shall be allocated among the Sellers, the Assets and the parties to
the Ancillary Agreements in accordance with Section 1.7 below.
1.5 Purchase Price Adjustment.
(a) Within sixty (60) days after the Closing Date, Sellers
shall prepare and deliver to Buyer a balance sheet of the Business dated the
Closing Date (the "Closing Date Balance Sheet"), which balance sheet shall
include only (1) the Assets and the Assumed Liabilities and (2) reserves
calculated consistently in accordance with the amounts and methodology set forth
in Exhibit A attached hereto. Subject to the foregoing, the Closing Date Balance
Sheet shall be prepared in accordance with GAAP as historically applied in
preparation of the balance sheets included in Sellers' Financial Statements,
copies of which have been delivered to Buyer pursuant to Section 3.8 below. The
Buyer shall cause relevant employees to reasonably assist Sellers and shall give
Sellers and their agents reasonable access to the relevant employees and the
Books and Records following the Closing, as reasonably necessary for Sellers to
prepare the Closing Date Balance Sheet within the sixty (60) day period referred
to above.
(b) The Purchase Price shall be subject to appropriate
adjustment after the Closing Date based upon the calculation of the Closing
Equity (as hereinafter defined) on the Closing Date. The "Closing Equity" will
be the difference between the value of the Assets and the Assumed Liabilities as
shown on the Closing Date Balance Sheet. If the Closing Equity is determined to
be less than $16,420,073, then the Purchase Price will be reduced by the amount
of the deficiency. If the Closing Equity is determined to be greater than
$16,420,073, then the Purchase Price will be increased by the amount of the
excess. The Purchase Price shall also be subject to adjustment after the Closing
Date on account of the proration of water, electricity, gas, sewage and other
utility charges and taxes applicable to the Business to the extent such items
were not included as assets or liabilities in the Closing Date Balance Sheet.
The Purchase Price shall also be decreased by $100,000 in the event that the
Sellers fail to deliver to Buyer the Closing Date Balance Sheet within sixty
(60) days following the Closing Date, or, with Buyer's consent, which shall not
be unreasonably withheld, such longer period as Sellers may request, unless
Buyer has materially contributed to such failure by denying or unreasonably
hindering
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Sellers' access to (and assistance from) employees and the Books and Records as
provided in Section 1.5(a), in which case no adjustment shall be made pursuant
to this sentence. The Purchase Price as adjusted shall be hereinafter referred
to as the "Adjusted Purchase Price."
(c) Within thirty (30) days after the date the Closing Date
Balance Sheet is delivered to Buyer by Sellers, or, with Seller's consent, which
shall not be unreasonably withheld, such longer period as Buyer may request,
Buyer shall complete its examination of the Closing Date Balance Sheet and shall
deliver to Sellers either the written acknowledgment of Buyer's acceptance of
the Closing Date Balance Sheet or a written report of Buyer's accountants
setting forth with reasonable specificity and in reasonable detail any proposed
adjustments to the Closing Date Balance Sheet (the "Adjustment Report"). Upon
Buyer's acceptance of the Closing Date Balance Sheet or Buyer's failure to
deliver such acknowledgment or the Adjustment Report in a timely manner, the
Closing Date Balance Sheet shall be deemed to be correct and to have been
finally determined for purposes of Section 1.5(d) hereof.
(d) In the event that, within ten (10) days after Sellers
receive the Adjustment Report, Sellers and Buyer fail to agree on any or all of
the Buyer's proposed adjustments contained in the Adjustment Report, then the
parties shall notify the certified public accounting firm of Arthur Andersen LLP
of the need for their services as independent auditors and not for Sellers or
Buyer ("Independent Auditors"). The Independent Auditors shall make the final
determination with respect to the correctness of the proposed adjustments in the
Adjustment Report in light of the terms and provisions of this Agreement. In the
event Arthur Andersen LLP declines to act as Independent Auditors, then the
parties agree that the certified public accounting firm of KPMG LLP shall act as
the Independent Auditors. In the event the Independent Auditors are retained to
resolve any disputes concerning adjustments to the Closing Date Balance Sheet
proposed by Buyer in the Adjustment Report (the "Contested Adjustments"), then
(i) Sellers and Buyer shall each submit to the Independent Auditors in writing
within 30 days after the Independent Auditors are retained their respective
proposals with respect to the Contested Adjustments, which shall specify those
items or amounts constituting Contested Adjustments, together with such
supporting documentation as they deem necessary or as the Independent Auditors
request and (ii) Sellers and Buyer shall instruct the Independent Auditors to
make, within 30 days after receiving the proposals of both Sellers and Buyer and
all supplementary supporting documentation requested by the Independent
Auditors, the adjustments that should be made to the Closing Date Balance Sheet
(the "Final Adjustments"). The Independent Auditors' decision as the Final
Adjustments shall be final and binding on Sellers and Buyer. The Final
Adjustments shall be included in the Final Closing Balance Sheet (as defined
below). Buyer and Sellers shall share equally in the fees and expenses of the
Independent Auditors.
(e) The term "Final Closing Balance Sheet" shall mean the
Closing Date Balance Sheet delivered pursuant to Section 1.5(a), as adjusted
pursuant to Section 1.5 (b) through (d). The date on which the Closing Date
Balance Sheet is finally determined pursuant to this Section shall hereinafter
be referred to as the "Settlement Date."
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(f) (i) In the event the purchase price, as determined from
the Final Closing Balance Sheet ("Final Adjusted Purchase Price"), exceeds
$_______________ by at least $100,000, then Buyer shall deliver to Sellers cash
in an amount equal to such excess.
(ii) In the event the Final Adjusted Purchase Price is at
least $100,000 less than $__________, Sellers shall deliver to Buyer cash in an
amount equal to such deficiency.
(g) Any payments required pursuant to Section 1.5(f)(i) or
(ii) hereof shall be payable in U.S. dollars by wire transfer of immediately
available funds to an account designated by the recipient. In the event payment
is not made by a party for any reason within five (5) days of the date on which
the Final Adjustment Purchase Price is determined, such party shall pay interest
on the amount due from the due date until payment is made at a rate of six
percent (6%) per annum.
1.6 Payment of Purchase Price. At the Closing, Buyer shall pay (a) to
Sellers in U.S. dollars by wire transfer of immediately available funds to an
account designated by Sellers an amount equal to $______________, and (b)
$2,000,000 in U.S. dollars into the escrow account established pursuant to an
Escrow Agreement of even date herewith among Buyer, Sellers, and First Tennessee
Bank National Association, as escrow agent, in the form attached as Exhibit B
hereto (the "Escrow Agreement"). Sellers shall pay to Friedrich and Badinghaus,
respectively, on behalf of Buyers and out of the funds paid to Sellers pursuant
to clause (a) above, $3,115,000 and $300,000 respectively.
1.7 Allocation of Purchase Price. The Purchase Price shall be allocated
among the Assets and the Noncompetition Agreements as set forth on Schedule 1.7.
Sellers and Buyer shall so allocate the Purchase Price on all Tax Returns filed
by them and shall not take any position on any Tax Return inconsistent with such
allocation. The Final Adjusted Purchase Price shall be proportionately allocated
as set forth on Schedule 1.7.
ARTICLE 2
CLOSING
2.1 Closing Date. The closing of the transactions provided for herein
shall take place at the offices of Baker, Donelson, Bearman & Caldwell, 511
Union Street, Suite 1700, Nashville, Tennessee 37219, at 9:00 a.m. on July 19,
1999, or at such other place, time or date as the parties may mutually agree to
in writing, such date being referred to herein as the "Closing Date" or the
"Closing".
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2.2 Transfer of Possession. On the Closing Date, Sellers, through their
respective managers, officers, agents and employees, will relinquish to Buyer
and its managers, officers, agents and employees possession and control of the
Assets.
2.3 Instruments of Transfer and Assumption. At the Closing, Buyer and
Sellers will execute and deliver to each other, as appropriate:
(a) one or more "Bills of Sale" in the form of Exhibit C
attached hereto, conveying in the aggregate all of Sellers' owned personal
property included in the Assets;
(b) a "Lease of ESI's Property" in the form attached as
Exhibit D hereto, with respect to the Sellers' real property and improvements
located at N50 W13605 Overview Drive and N49 W13650 Campbell Drive, in Menomonee
Falls, Wisconsin; conveying good and marketable fee simple title to any Owned
Property included in the Assets;
(c) an "Assignment and Assumption Agreement" in the form of
Exhibit E attached hereto, with respect to the Assumed Contracts and Leases and
evidencing Buyer's assumption of the Assumed Liabilities;
(d) one or more "Assignments" of patents and trademarks and
other proprietary rights each substantially in the form of Exhibit F attached
hereto, in recordable form to the extent necessary to assign such rights;
(e) "Noncompetition Agreements" for Richard Pratt, Frederick
Lach, and Robert Friedrich, substantially in the form of Exhibit G attached
hereto;
(f) a "Guaranty Agreement", substantially in the form of
Exhibit H attached hereto, respecting Sellers' indemnification obligations
hereunder, executed by each of Richard L. Pratt and Robert G. Friedrich.
(g) an "Amendment to EMS's Lease," substantially in the form
of Exhibit I attached hereto; and
(h) such other endorsements, assignments, assumptions and
other instruments of transfer in form and substance reasonably satisfactory to
Buyer and Sellers, in each case, with such other appropriate instruments of
title as may be reasonably necessary to effectively transfer the Assets, the
Assumed Liabilities and the Assumed Contracts.
2.4 Other Matters. Each of the Ancillary Agreements shall be executed
and delivered to the parties thereto. Buyer and Sellers shall deliver such
certificates, opinions of counsel and other matters as the other party may
reasonably request in order to consummate the transactions contemplated by this
Agreement. Sellers shall deliver to Buyer the Books and Records. Buyer shall
make the payments and deliveries required in Section 1.6.
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ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLER
Except as otherwise set forth in the Disclosure Letter, EMS, ESI and
EMS/Rosa jointly and severally represent and warrant to Buyer as follows:
3.1 Organization and Standing.
Each of the Sellers is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation. Each of the Sellers has all necessary corporate power and
authority to carry on the Business as it is now being conducted, to own or use
the properties and assets that it purports to own or use, and to execute and
deliver this Agreement and the Ancillary Agreements to which it is a party and
to perform its obligations thereunder. Each of the Sellers is duly qualified as
a foreign corporation in good standing in each jurisdiction where the character
of its properties owned or leased or the nature of its activities make such
qualification necessary, except where the failure to be so qualified or licensed
does not have a material adverse effect on the Business. Copies of the Articles
of Incorporation (certified by the Secretary of States) and Bylaws (certified by
the corporate secretary) of each of the Sellers, and all amendments thereto,
heretofore delivered to Buyer are accurate and complete as of the date hereof.
The Disclosure Letter contains a complete and accurate list (i) of each
jurisdiction in which each of the Sellers is qualified to do business as a
foreign corporation and (ii) each jurisdiction in which each of the Sellers has
(A) any sales office or leases any real estate or (B) has any distributor.
3.2 Power and Authority.
Each of the Sellers has all requisite corporate power and
authority, and has taken all corporate action necessary, to execute and deliver
this Agreement and the Ancillary Agreements to which it is a party, to
consummate the transactions contemplated hereby and thereby and to perform its
obligations hereunder and thereunder. Each of this Agreement and the Ancillary
Agreements has been duly authorized, executed and delivered by each of the
Sellers and constitutes the legal, valid and binding obligations of each of the
Sellers, enforceable against each of the Sellers in accordance with its terms.
3.3 No Violation of Law and Agreements. Except as set forth in the
Disclosure Letter, the execution, delivery and performance of this Agreement
does not and will not, directly or indirectly (with or without notice or lapse
of time), conflict with or violate any provision of the Articles of
Incorporation, Bylaws or other organizational documents of any Seller and does
not and will not (a) conflict with, violate, result in a breach of, or cause a
default under (i) any provision of any order, arbitration award, judgment or
decree to which any Seller is subject, or (ii) any provision of any material
agreement or instrument to which any Seller or its respective assets or
properties are subject or (iii) any other material restriction of any kind or
character to
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which any Seller or its respective assets or properties are subject; (b) give
any person the right to declare a default or exercise any remedy under, or to
accelerate the maturity or performance of, or to cancel, terminate or modify,
any Assumed Contract or Lease; or (c) result in the imposition or creation of
any encumbrance upon or with respect to any of the Assets, except, in each case,
for such violations and defaults that individually or in the aggregate (A) have
not materially impaired and shall not materially impair the ability of Sellers
to perform their obligations under this Agreement and (B) would not reasonably
be expected to result in a Material Adverse Effect.
3.4 Consents Required. Except as set forth in the Disclosure Letter,
the execution, delivery and performance of this Agreement and the Ancillary
Agreements by each Seller, and the consummation of the transactions contemplated
hereby or thereby, do not require any Seller to obtain any consent, approval or
action of, or make any filing with or give notice to, any corporation,
partnership, Person, firm or other entity or any public, governmental or
judicial authority (other than filings pursuant to the HSR Act) for any reason
including, without limitation, in order to avoid (i) the loss of any permit or
license or other governmental authorization, including any environmental,
building or subdivision permit, held in connection with the Business, (ii) the
violation or breach of, or a default under, any lease, commitment, note,
indenture, mortgage, lien, instrument, plan, license, contract or agreement
relating to the Assets, the Assumed Contracts or any other agreement to which
any Seller is party or subject, or (iii) giving to others any interests or
rights, including rights of termination, acceleration or cancellation, in or
with respect to any of the Assets, the Assumed Contracts or any Lease except for
such consents, approvals, actions, filings or notice which, if not given, made
or obtained, would not reasonably be expected to result in a Material Adverse
Effect.
3.5 Subsidiaries. Except as set forth in the Disclosure Letter, the
Sellers do not have any Subsidiaries.
3.6 (a) Accounts Receivable. Except as set forth in the Disclosure
Letter, all accounts receivable of each Seller are reflected properly on its
books and records, and represent valid and enforceable obligations arising from
bona fide transactions in the ordinary course of business. Except as set forth
in the Disclosure Letter, such accounts receivable are subject to no valid
defenses, claims or rights of set off, except to the extent of the appropriate
reserves for bad debts as shown on the EMS Interim Balance Sheet, the ESI
Interim Balance Sheet or the EMS/Rosa Interim Balance Sheet, as the case may be,
and, in the case of accounts receivable arising since the EMS Interim Balance
Sheet Date, the ESI Interim Balance Sheet Date or the EMS/Rosa Interim Balance
Sheet Date, as the case may be, to the extent of a reasonable reserve for bad
debts which is not greater than the rate reflected by the reserve for bad debts
on the EMS Interim Balance Sheet, the ESI Interim Balance Sheet or the EMS/Rosa
Interim Balance Sheet, as the case may be. Except as set forth in the Disclosure
Letter, (i) no account debtor has communicated to Sellers that it has refused or
threatened to refuse to pay its obligations for any reasons, and (ii) no account
receivable is pledged to any third party.
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(b) Accounts Payable and Inventory. Except as disclosed in the
Disclosure Letter, each Seller has (i) discharged its accounts payable and other
current liabilities and obligations relating to its business and operations in
accordance with past practice, but in any event in all cases before materially
past due (except when in bona fide dispute) and (ii) purchased and maintained
inventory in an amount and of a type and character consistent with past
practices taking into consideration the seasonal requirements of the business
and operations of such Seller and the sound operation of the business of such
Seller with regard to its current requirements and expectations.
3.7 Order Backlog; Major Customers. The Order Backlog of EMS and ESI as
of March 31, 1999 and of EMS/Rosa as of February 10, 1999 is set forth in the
Disclosure Letter. Except as otherwise disclosed in the Disclosure Letter, no
Seller has received notice of any purchaser's intent to cancel or terminate any
order included in Sellers' Order Backlog as itemized in the Disclosure Letter.
The Disclosure Letter identifies the five (5) largest customers of the Sellers
and the amount of purchases by each of such customers during calendar year 1998.
3.8 Financial Statements. (a) EMS has delivered to Buyer: (i) true,
complete and correct copies of the unaudited balance sheet of EMS (the "EMS
Balance Sheet") as at December 31, 1998 (the "EMS Balance Sheet Date"), and the
related statements of income and retained earnings and cash flow for the fiscal
year then ended (collectively, the "EMS Year-End Financial Statements"); and
(ii) true, complete and correct copies of EMS's interim balance sheet (the "EMS
Interim Balance Sheet"), dated March 31, 1999 (the "EMS Interim Balance Sheet
Date"), and the related statements of income and retained earnings and cash flow
for the period ended on the EMS Interim Balance Sheet Date (collectively, the
"EMS Interim Financial Statements"; and together with the EMS Year-End Financial
Statements, the "EMS Financial Statements").
(b) ESI has delivered to Buyer: (i) true, complete and correct copies
of the audited balance sheet of ESI (the "ESI Balance Sheet") for the nine
months ended September 30, 1998 (the "ESI Balance Sheet Date"), including the
notes thereto, and the related audited statements of income and retained
earnings and cash flow for the fiscal period then ended, together with the
report thereon of Von Lehman, CPA, and the unaudited balance sheet as at
December 31, 1998, and the related unaudited statements of income and retained
earnings and cash flow for the period then ended (collectively, the "ESI
Year-End Financial Statements"); and (ii) true, complete and correct copies of
ESI's interim balance sheets (the "ESI Interim Balance Sheet"), dated March 31,
1999 (the "ESI Interim Balance Sheet Date"), and the related statements of
income and retained earnings and cash flow for the period ended on the ESI
Interim Balance Sheet Date (collectively, the "ESI Interim Financial
Statements"; and together with the ESI Year-End Financial Statements, the "ESI
Financial Statements").
(c) EMS/Rosa has delivered to Buyer: (i) true, complete and correct
copies of the unaudited balance sheet of EMS/Rosa (the "EMS/Rosa Balance
Sheet"),as at December 31, 1998 (the "EMS/Rosa Balance Sheet Date"), and the
related unaudited statements of income and retained earnings and cash flow for
each of the fiscal years then ended (the "EMS/Rosa Year-Ended Financial
Statements"), and (ii) true, complete and correct copies of EMS/Rosa's interim
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balance sheet (the "EMS/Rosa Interim Balance Sheet"), dated March 31, 1999 (the
"EMS/Rosa Interim Balance Sheet Date"), and the related statements of income and
retained earnings and cash flow for the period ended on the EMS/Rosa Interim
Balance Sheet Date (collectively, the "EMS/Rosa Interim Financial Statements";
and together with the EMS/Rosa Year-End Financial Statements, the "EMS/Rosa
Financial Statements").
The EMS Financial Statements, the ESI Financial Statements and the EMS/Rosa
Financial Statements are collectively referred to as the "Financial Statements".
Except as set forth in the Disclosure Letter, the Financial Statements (i) are
in accordance with the books and records of each Seller, (ii) have been prepared
in accordance with GAAP consistently applied throughout the periods covered
thereby, and (iii) fairly present in all material respects the assets,
liabilities (including all reserves) and financial position of the Business as
of the respective dates thereof and the results of operations and changes in
stockholders' equity and cash flow for the periods then ended, subject, in the
case of all unaudited statements, to normal recurring year-end adjustments (the
effect of which will not, individually or in the aggregate, be materially
adverse) and the absence of notes; provided, however, that Sellers shall not be
deemed to have violated the foregoing representations and warranties with
respect to inventory and related reserves if Buyer and Sellers have agreed on
the values thereof on the Closing Date Balance Sheet.
3.9 Books and Records. Except as set forth in the Disclosure Letter,
each Seller has maintained (and given Buyer and its agents access to) Books and
Records and accounts, which are complete and correct and accurately reflect the
activities of each Seller relating to the Business in all material respects, and
which have been kept in accordance with sound business practices. Except as set
forth in the Disclosure Letter, the copies of the minute books and similar
records of each Seller previously delivered to Buyer contain accurate and
complete records of all actions previously taken by the shareholders, members,
board of directors and committees of the board of directors and managers of each
Seller relating to the Business.
3.10 No Undisclosed Liabilities. Except as set forth in the Disclosure
Letter, the Buyer will assume from the Sellers upon the Closing, no material
liabilities, obligations or commitments of any nature relating to the Business
(whether known or unknown, and whether absolute, accrued, contingent or
otherwise, and whether matured or unmatured), except liabilities the amounts of
which are disclosed or reserved against on the EMS Interim Balance Sheet, the
ESI Interim Balance Sheet or the EMS/Rosa Interim Balance Sheet, as the case may
be, and liabilities incurred in the ordinary course of business and consistent
with past practice, none of which has or would reasonably be expected to have a
Material Adverse Effect on the Business or the Assets.
3.11 Title to Assets. With respect to the Assets other than the Owned
Property and the Leases, Sellers have and will transfer to Buyer, good and
marketable title to or other right to use all of the Assets, in each case free
and clear of all liens or encumbrances of any kind and liens for taxes or other
statutory or governmental charges not yet due, except for those set forth in the
Disclosure Letter and except for such imperfections of title and Encumbrances,
if any, as are not
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substantial in character, amount or extent, or do not materially detract from
the value, or interfere with the present use, of property subject thereto or
affected thereby, or otherwise materially impair the business operations of
Sellers considered as a whole. The Assets include all assets necessary for the
operation of the Business as currently conducted by Sellers other than the
Excluded Assets.
3.12 Real Estate
(a) The Disclosure Letter contains a complete and accurate
list of the following:
(i) all real property and the buildings, structures
and improvements thereon (the "Owned Property") owned by the Sellers, or which
any of the Sellers is contractually obligated to purchase;
(ii) all leases (the "Leases") of real property and
the buildings, structures and improvements thereon (the "Leased Property")
pursuant to which any Seller is the lessee;
(iii) all contracts or options (and all amendments,
extensions and modifications thereto) held by the Sellers, or contractual
obligations (and all amendments, extensions and modifications thereto) on the
part of the Sellers, to purchase or acquire any interest in Owned Property or
Leased Property;
(iv) all contracts or options (and all amendments,
extensions and modifications thereto) granted by the Sellers, or contractual
obligations (and all amendments, extensions and modifications thereto) on the
part of any of Sellers, to sell or dispose of any interest in Owned Property or
Leased Property; and
(v) all policies of title insurance issued to the
Sellers with respect to the Facilities.
Except as set forth in the Disclosure Letter, Sellers have the right under valid
and existing leases or other agreements to occupy and use all Leased Property
which they use in the conduct of the Business. Neither the whole nor any
material portion of the Facilities has been condemned, requisitioned or
otherwise taken by any Governmental Authority, and none of the Sellers has
received any written notice that any such condemnation, requisition or taking is
threatened, which condemnation, requisition or taking would preclude or
materially impair the current use thereof. Except as set forth in the Disclosure
Letter, all buildings, structures and appurtenances comprising part of the
Facilities which are currently being used in the conduct of the Business are in
satisfactory condition and have been reasonably maintained, normal wear and tear
excepted. All Facilities have received all required approvals of Governmental
Authorities (including, without limitation, permits and a certificate of
occupancy or other similar certificate
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permitted lawful occupancy of the Facilities) required in connection with the
operation thereof and have been operated and maintained in material compliance
with applicable laws, rules and regulations. All Facilities are supplied with
utilities (including, without limitation, water, sewage, disposal, electricity,
gas and telephone) and other services necessary for the operation of such
Facilities as currently operated. Except as set forth in the Disclosure Letter,
the improvements constructed on the Facilities, including, without limitation,
all Leasehold Improvements, and all Fixtures and Equipment and other tangible
assets owned, leased or used by the Sellers at the Facilities are (i) insured to
the extent and in a manner customary in the industry, (ii) structurally sound
with no known material defects, (iii) in good operating condition and repair,
subject to ordinary wear and tear, (iv) not in need of maintenance or repair
except for ordinary routine maintenance and repair, the cost of which would not
be material, and (v) in material conformity with all applicable laws,
ordinances, orders, regulations and other requirements relating thereto
currently in effect.
(b) Each Seller has good and marketable title to the Owned
Property owned by it, subject to no mortgage, pledge, lien, security interest,
conditional sale agreement, encumbrance or charge, and there are no
encroachments by any Seller on abutting property and no encroachments by others
on either Seller's properties, except: (i) as reflected in the Balance Sheet;
(ii) tax, materialmen's or like liens for obligations not yet due or payable or
being contested in good faith by appropriate proceedings described in the
Disclosure Letter; (iii) such imperfections of title and encumbrances which do
not detract materially from the value thereof for the conduct of the Business as
conducted by Sellers during the periods covered by the Financial Statements, or
materially interfere with the use thereof for the conduct of the Business as
conducted by Sellers; (iv) zoning ordinances, recorded building use and other
restrictions and easements of record which do not materially interfere with the
use thereof for the conduct of the Business as conducted by Sellers during the
periods covered by the Financial Statements; and (v) mortgages, deeds of trust
or other claims and encumbrances as set forth in the Disclosure Letter. Except
as set forth in the Disclosure Letter, no Seller has received any written notice
that, and no Seller has any knowledge that, it is in violation of any zoning,
use, occupancy, building, wetlands or environmental regulation, ordinance or
other law, order, regulation or requirement relating to the Facilities,
including without limitation the Americans With Disabilities Act and
Environmental Laws.
(c) Except as set forth in the Disclosure Letter, (i) each
Lease is in full force and effect, (ii) no Seller is in default in any material
respect of its obligations under any Lease, and (iii) no Lease is subject to or
encumbered by any Encumbrance or other restriction granted by any Seller which
substantially impairs the use of the property to which it relates in the
Business of any Seller as now conducted.
3.13 Absence of Certain Changes. Except as set forth in the Disclosure
Letter, since the EMS Interim Balance Sheet Date, the ESI Interim Balance Sheet
Date or the EMS/Rosa Interim Balance Sheet Date, as the case may be, none of the
Sellers has:
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(a) entered into any transaction, contract or commitment or
incurred any obligation or liability (fixed or contingent) which is not in the
ordinary course of business and which is material to the Business or financial
condition of Sellers taken as a whole;
(b) waived or released any rights of material value except in
the ordinary course of business;
(c) accelerated receivables, delayed payables or liquidated
Inventory, except in accordance with prior practices;
(d) transferred or granted any material rights under any
concessions, leases, licenses, agreements, patents, inventions, trade names,
trademarks, service marks, brand marks, brand names or copyrights, or
registrations or licenses thereof or applications therefor, or with respect to
any know-how or other proprietary or trade rights;
(e) (i) made or granted any wage or salary increase except in
the ordinary course of business consistent with past practices, (ii) entered
into or begun negotiations with respect to any employment contract which is not
terminable with no penalty upon not more than thirty (30) days notice with any
officer or employee or (iii) made any loan (excluding advances for normal
reimbursable business expenses) to, or entered into any transaction of any other
nature with, any Affiliate of any Seller and Sellers have no knowledge of any
plans of any key employee or employees to terminate their employment, the
absence of whom would have a Material Adverse Effect;
(f) suffered any Material Adverse Change;
(g) made any changes in accounting methods or practices;
(h) incurred any indebtedness for borrowed money or committed
to borrow money, or guaranteed any indebtedness;
(i) paid, discharged or satisfied any liabilities other than
in the ordinary course of the Business and consistent with such Seller's past
practice;
(j) suffered any material damage to or loss of any asset or
property related to the Business, whether or not covered by insurance;
(k) suffered any change in employee relations which has or is
reasonably likely to have an adverse effect on the business, prospects,
financial condition or results of operations of the Business or the
relationships between the employees and management of the Business;
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(l) sold, leased, mortgaged or pledged any capital asset of
the Business having a value in excess of $50,000;
(m) committed to any capital expenditures in excess of
$50,000; or
(n) entered into any negotiation or agreement to do any of the
things described in this Section 3.13.
Except as set forth in the Disclosure Letter, since the EMS Balance
Sheet Date, the ESI Balance Sheet Date or the EMS/Rosa Balance Sheet Date, as
the case may be, each of the Sellers has operated the Business substantially in
the ordinary course consistent with its past practice so as to preserve the
Business intact, to keep available to Sellers the services of Sellers'
employees, and to preserve the Business and the goodwill of Sellers' suppliers,
customers, distributors and others having business relations with it.
3.14 Taxes. Except as set forth on the Disclosure Letter and except as
would not reasonably be expected to have a Material Adverse Effect:
(a) all Returns (as defined below) required to be file with
respect to each Seller have been properly and accurately prepared and have been
filed in a timely manner (taking into account all valid extensions of due
dates); each Seller has timely paid all Taxes shown on such returns as required
to be paid;
(b) no federal income Tax Returns filed by any Seller have
been audited by the Internal Revenue Service (the "IRS");
(c) no waivers of statutes of limitation granted by any Seller
are in effect with respect to Taxes of such Seller;
(d) there are no Returns that are presently under examination
with respect to Taxes, and there are no outstanding notices of proposed or
actual audit, examination or investigation with respect to Taxes of any Seller;
(e) no deficiencies for any Taxes have been proposed, asserted
or assessed against any Seller which remain unpaid;
(f) no Seller has any potential liability, whether contingent
or otherwise, for Taxes of any other person or entity (including but not limited
to by reason of Treasury Regulation 1.1502-6);
(g) no Seller has made an election under Section 341(f) of the
Code;
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(h) no liability for Taxes has been incurred by any Seller
since December 31, 1996 other than in the ordinary course of such Seller's
business;
(i) no manager, director, officer or employee of any Seller
having responsibility for Tax matters has reason to believe that any Tax
authority has valid grounds to claim or assess any additional Tax with respect
to any Seller in excess of the amounts shown on the EMS Interim Balance Sheet,
the ESI Interim Balance Sheet or the EMS/Rosa Balance Sheet, as the case may be,
and amounts incurred in the ordinary course of business since the date thereof;
(j) no Seller is a party to an agreement or arrangement
(including but not limited to this Agreement) that could give rise to an "excess
parachute payment" within the meaning of Section 280G of the Code;
(k) no Seller is party to a closing agreement or similar
agreement with any Tax authority; and
(l) to Sellers' knowledge, no tax authority has contended that
any purchases and sales between Sellers have been priced on other than an
arm's-length basis.
As used herein, the term "Taxes" means (i) all federal, state, local,
foreign and other net income, gross income, gross receipts, franchise,
estimated, sales, use, withholding, employment, property, value added, license,
capital, duty, import tariff or other taxes, fees, assessments or charges of any
kind whatsoever, together with any interest and any penalties, additional to tax
or additional amounts with respect thereto, (ii) any liability for payment of
amounts described in clause (i) whether as a result of transferee liability, of
being a member of an affiliated, consolidated, combined or unitary or other
similar group for any period, or otherwise through operation of law and (iii)
any liability for the payment of amounts described in clauses (i) or (ii) as a
result of any written tax sharing, tax indemnity or tax allocation agreement or
other express agreement to indemnify any other person in respect of taxes; and
the term "Returns" means all returns, declarations, reports, statements and
other documents required to be filed with a governmental authority in respect of
Taxes.
3.15 Compliance with Laws. Except as set forth in the Disclosure
Letter, Sellers have not violated and are in compliance with all laws, statutes,
ordinances, regulations, rules and orders of any foreign, federal, state or
local government and any other governmental department or agency, and any
judgment, decision, decree or order of any court or governmental agency,
department or authority, the failure to comply with which would have a Material
Adverse Effect on the Business or the Assets of Sellers. To the best knowledge
of the Sellers, except as set forth in the Disclosure Letter, Sellers are in
conformity with all energy, public utility, zoning, building and health codes,
regulations and ordinances, the federal Occupational Safety & Health Act
("OSHA") and all other foreign, federal, state, and local governmental and
regulatory requirements. Except as set forth in the Disclosure Letter, Sellers
have not received any written
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notice which remains outstanding to the effect that any one of the Sellers is
not in compliance with any such statutes, regulations, rules, judgments,
decrees, orders, ordinances or other laws, and no Seller is aware of any
existing circumstances which (with or without notice or lapse of time) are
likely to result in violations of any of the foregoing.
3.16 Contracts and Other Agreements.
(a) The Disclosure Letter sets forth all of the contracts and
other agreements hereinafter referred to in this Section 3.16, which are
currently in effect and to which any Seller is a party or by or to which it or
its assets or properties are bound or subject:
(i) written agreements with any current or former
officer, director, employee, consultant, agent or other representative having
more than six months to run from the date hereof or providing for an obligation
to pay and/or accrue compensation of $50,000 or more per annum or providing for
the payment of fees or other consideration in excess of $50,000;
(ii) agreements with any labor union or association
representing any employee;
(iii) agreements for the purchase or sale of
inventory, equipment or services that contain an escalation, renegotiation or
redetermination clause or which cannot be canceled without liability, premium or
penalty if written notice is given thirty days prior to the effective date of
the notice;
(iv) agreements for the sale of any of its assets or
properties other than in the ordinary course of business and for a sale price
exceeding $50,000 in any one case (or in the aggregate, in the case of any
series of related agreements) or for the grant to any person of any preferential
rights to purchase any of its or their assets or properties;
(v) agreements (including, without limitation, leases
of real property) calling for an aggregate purchase price or aggregate payments
in any one year of more than $50,000 in any one case (or in the aggregate, in
the case of any series of related agreements);
(vi) joint venture agreements;
(vii) contracts or other agreements under which it
agrees to indemnify any party other than in the ordinary course of business;
(viii) agreements containing covenants of any Seller
not to compete in any line of business or with any person in any geographical
area or covenants of any other person not to compete with such Seller in any
line of business or in any geographical area;
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(ix) agreements relating to the making of any loan by
the Sellers except for advances to employees for normal reimbursable business
expenses;
(x) agreements relating to the borrowing of money by
any Seller (including mortgages, deeds of trust, indentures or other similar
documents), or the direct or indirect guaranty by such Seller of any obligation
for, or an agreement by such Seller to service, the repayment of borrowed money,
or any other contingent obligation in respect of indebtedness of any other
person or governmental or regulatory body;
(xi) material agreements for or relating to
computers, computer equipment, computer software or computer services;
(xii) any other contracts requiring payments in
excess of $50,000 in any year.
(b) Except as set forth in the Disclosure Letter, there have
been delivered or made available to Buyer true and complete copies of all of the
contracts and other agreements set forth in the Disclosure Letter. Except as
described in the Disclosure Letter, there is no default by any Seller under any
contract or other agreement set forth in the Disclosure Letter (including any
Lease), and no Seller has knowledge of any breach or anticipatory branch by any
other party thereto. Except as provided in the Disclosure Letter, the
consummation of the transactions contemplated by this Agreement will not result
in a default under any contract or agreement set forth in the Disclosure Letter
(including any Lease) or the right to terminate any such contract or agreement.
3.17 Environmental Matters. Except as set forth in the Disclosure
Letter:
(a) Definitions; Construction. For purposes of this Section,
the term "Company" shall include (i) each Seller, (ii) all Affiliates of
Sellers, (iii) all partnerships, joint ventures and other entities or
organizations in which any Seller was at any time or is a partner, joint
venturer, member or participant, and (iv) all predecessor or former
corporations, partnerships, joint ventures, organizations, businesses or other
entities, whether in existence as of the date hereof or at any time prior to the
date hereof, the assets or obligations of which have been acquired or assumed by
Sellers or to which Sellers have succeeded; and the term "Rosa Facility" shall
mean the Facility at 18020 Santa Fe Avenue, Compton, California, which is leased
by EMS/Rosa. References in this Section 3.17 to the "Facilities" shall include
the Rosa Facility only with respect to acts or omissions by a Seller during the
period in which it has been leased or used by a Seller, without regard to
language specifying or implying a longer period of time or acts or omissions by
any other person or entity, or the existence or occurrence of any circumstance,
condition or state or facts which existed or occurred prior to Sellers'
occupancy of the Rosa Facility.
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(b) Compliance With Environmental Laws. The Facilities have
been maintained in material compliance with all federal, state, local or foreign
laws, statutes, ordinances, regulations, rules, judgments, orders, notice
requirements, court decisions, agency guidelines or principles of law,
restrictions and licenses, which (i) regulate or relate to the protection or
clean-up of the environment, including but not limited to, the use, treatment,
storage, transportation, handling, disposal or Release of Hazardous Substances,
the preservation or protection of waterways, groundwater, drinking water, air,
wildlife, plants or other natural resources; or the health and safety of persons
or property, including without limitation protection of the health and safety of
employees; or (ii) impose liability with respect to any of the foregoing,
including without limitation the Federal Water Pollution Control Act (33 U.S.C.
ss. 1251 et seq.), Solid Waste Disposal Act, which incorporates the Resource
Conservation and Recovery Act (42 U.S.C. ss. 6901 et seq.) ("RCRA"), Safe
Drinking Water Act (21 U.S.C. ss. 349, 42 U.S.C. ss. 300f-300j-26), Toxic
Substances Control Act (15 U.S.C. ss. 2601 et seq.), Clean Air Act (42 U.S.C.
ss. 7401 et seq.), Comprehensive Environmental Response, Compensation and
Liability Act (42 U.S.C. ss. 9601 et seq.) ("CERCLA"), Emergency Planning and
Community Right-to-Know Act, 42 U.S.C. ss. 11--1 et seq., analogue statutes of
the states of California, Ohio and Wisconsin, respectively, or any other similar
or applicable federal, state or local law of similar effect, each as amended.
(All of the above are, collectively, referred to herein as the "Environmental
Laws.")
(c) Facilities. The Facilities are, and at all times have
been, and all Former Facilities were at all times when owned, leased or operated
by the Company, owned, leased and/or operated in material compliance with all
Environmental Laws and in a manner that will not give rise to any material
liability under any Environmental Laws.
(d) Permits. The Company has, and at all times have had, all
Permits required under any Environmental Law and each Facility is, and at all
times has been, in material compliance with all such Permits, all of which are
listed in the Disclosure Letter.
(e) Notice of Violation. The Company has not received any
notice which remains outstanding that it is or was claimed to be in violation of
or in non-compliance with the conditions of any Permit required under any
Environmental Law or the provisions of any Environmental Law.
(f) Pending Actions. There is not now pending or, to the
Sellers' knowledge, threatened, nor, to the Sellers' knowledge, any basis for,
nor, to the Sellers' knowledge, has there ever been, any Action against the
Company under any Environmental Law or otherwise with respect to any Release or
mishandling of any Hazardous Substance.
(g) Judgments. There are no consent decrees, judgments,
judicial or administrative orders or agreements with, or liens by, any
governmental authority or quasi-governmental entity relating to the
Environmental Law which regulate, obligate, bind or in any way affect the
Company or any Facility or Former Facility.
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(h) Hazardous Substances. There is not and has not been any
Hazardous Substance used, generated, treated, stored, transported, disposed of,
handled or otherwise existing on, under, about or from any Facility or any
Former Facility, except for quantities of any such Hazardous Substances stored
or otherwise held on, under or about any such Facility in material compliance
with all Environmental Laws.
(i) Handling of Hazardous Substances. The Company has at all
times used, generated, treated, stored, transported, disposed of or otherwise
handled its Hazardous Substances in material compliance with all Environmental
Laws and in a manner that will not result in material liability of the Company
under any Environmental Law, including without limitation liability for response
actions, costs, or damages at any sites or facilities not owned, leased or
operated by Sellers.
(j) Environmental Conditions. There are no present or, to
Sellers' knowledge past Environmental Conditions (as defined below) in any way
relating to the Company or the Facilities. "Environmental Conditions" means the
introduction into the environment at any location by any Person of any
pollution, including without limitation any contaminant, irritant or pollutant
or other Hazardous Substance (whether or not upon the Facilities or other
property of the Company and whether or not such pollution constituted at the
time thereof a violation of any Environmental Law as a result of any Release of
any kind whatsoever of any Hazardous Substance) as a result of which the Company
has or may become materially liable to any person or by reason of which the
Facilities may suffer or be subjected to any lien.
(k) CERCLA or RCRA. No current or, to Sellers' knowledge, past
use, generation, treatment, transportation, storage, disposal or handling
practice of the Company with respect to any Hazardous Substance has or will
result in any material liability under CERCLA or RCRA or any state or local law
of similar effect.
(l) Storage Tank or Pipeline. There is not now and has not
been at any time in the past any underground or above-ground storage tank or
pipeline at any Facility where the installation, use, maintenance, repair,
testing, closure or removal of such tank or pipeline was not in compliance with
all Environmental Laws and there has been no Release from or rupture of any such
tank or pipeline, including without limitation any Release from or in connection
with the filling or emptying of such tank.
(m) Environmental Audits or Assessments. True, complete and
correct copies of the written reports in the possession or control of the
Sellers or, if reasonably available to Sellers, of which the Sellers have
knowledge, of all environmental audits, or assessments, or compliance reviews,
which have been conducted at any Facility or Former Facility within the past ten
years, either by the Company or any attorney, environmental consultant or
engineer engaged for such purpose by any Person or entity (if such reports
prepared for others are in the possession of Sellers), have been delivered to
Buyer and a list of all such reports, audits,
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assessments and reviews and any other similar report, audit, assessment or
review of which the Seller has knowledge is included in the Disclosure Letter.
(n) Proposition 65. No Seller manufactures or distributes any
product in the State of California which requires that warning mandated by the
California Safe Drinking Water and Toxic Enforcement Act of 1986 ("Proposition
65"), California Health and Safety Code ss.25249.5 et seq.
(o) Indemnification Agreements. The Company is not a party,
whether as a direct signatory or as successor, assign or third party
beneficiary, or otherwise bound, to any Lease or other Contract (excluding
insurance policies disclosed in the Disclosure Letter) under which the Company
is obligated by or entitled to the benefits of, directly or indirectly, any
representation, warranty, indemnification, covenant, restriction or other
undertaking concerning Environmental Conditions.
(p) Releases or Waivers. The Company has not released any
other person from any claim under any Environmental Law or waived any rights
concerning any Environmental Condition.
(q) Notices, Warnings and Records. The Company has given all
notices and warnings, made all reports, and has kept and maintained all records
required by and in material compliance with all Environmental Laws.
3.18 Intellectual Property.
(a) The Disclosure Letter lists all United States and foreign
registered trademarks, service marks, trade names, logos, brand marks, brand
names, patents (other than patents that have expired), patent applications and
employee invention disclosures, copyrights, and custom computer software
(collectively, the "Intangible Assets") owned by any Seller or any Affiliate
thereof or used in connection with the Business, together with a listing of all
licenses, franchises, licensing agreements (whether as licensor or licensee) to
which any Seller is a party, and any other arrangement with respect to such
Intangible Assets. The Disclosure Letter also lists all unregistered trademarks,
service marks, logos, brand marks and brand names used by any Seller in
connection with the Business (collectively, the "Unregistered Marks"). Except as
disclosed in the Disclosure Letter, Sellers have full ownership of or rights to
use all Intangible Assets, trade secrets, technology and know-how so used in the
Business (collectively, the "Intellectual Property Rights") without any
infringement of the rights of others. All of the Intangible Assets owned by
Sellers are free and clear of any and all Encumbrances, except as set forth in
the Disclosure Letter. None of the Sellers has received any notice that is use
of any of the Unregistered Marks infringes any rights of others. Except as
disclosed in the Disclosure Letter, no Seller has granted any lien or other
encumbrance upon, or transferred to any other party any interest in, any of the
Unregistered Marks.
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(b) Except as set forth in the Disclosure Letter, all
Intangible Assets are valid, subsisting, unexpired and enforceable and have not
been abandoned. Except as set forth in the Disclosure Letter, all licenses, if
any, of Intangible Assets of Sellers are in force and, to the best knowledge of
Sellers, neither in default nor in arrears in the payment of any royalty
obligation.
(c) Except as set forth in the Disclosure Letter, no
proceedings are pending against any Seller or, to the best knowledge of Sellers,
threatened, that challenge the rights of any Seller to use or register, or
maintain any registration of, any of the Intellectual Property Rights, or to use
any of the Unregistered Marks. None of the products, processes, software (except
for third party software), machines or services made or furnished by any Seller
infringes any valid patent, copyright, registered trademark or other legally
recognized intellectual property rights owned by others. No holding, decision or
judgment has been rendered by any Governmental Authority which would limit,
cancel or question the validity of any Intellectual Property Right. Each Seller
has used and currently uses its commercially reasonable efforts to prevent any
infringement by third parties of its Intangible Assets. Except as disclosed in
the Disclosure Letter, no Seller has received a notice of conflict with the
asserted rights of others with regard to any Intangible Assets or Unregistered
Marks. No Seller is aware of any event that has occurred, or is likely to occur,
that would give rise to any present or future liability under any agreement to
provide indemnification for infringement of any third-party rights.
(d) Except as set forth in the Disclosure Letter, no Seller is
making or has made use of any confidential information of third parties nor any
confidential information in which any of its present or past employees or other
service providers have claimed a proprietary interest, other than information
which such Seller is authorized to use or may otherwise lawfully use, and no
Seller is aware of any facts that would give rise to such a claim.
(e) Except as set forth in the Disclosure Letter, all past and
present employees who have been employed in research and development for any
Seller have executed an instrument assigning to such Seller all of such
employees' right, title and interest in and to any inventions created or
developed during, and within the scope of, his or her employment by such Seller,
and obligating him or her to disclose to such Seller all such inventions. Except
as set forth in the Disclosure Letter, Sellers have provided Buyer with copies
of such instruments.
3.19 Permits. The Disclosure Letter sets forth all Permits held by
Sellers. No Permit other than those listed in the Disclosure Letter is necessary
for the transaction of the Business as currently conducted by Seller. Except as
set forth in the Disclosure Letter, all such Permits of Sellers are transferable
to Buyer, except for those Permits specifically listed as non-transferable in
the Disclosure Letter. All such Permits are currently in force. Except as set
forth in the Disclosure Letter, no notice of any violation has been received in
respect of any such Permit and Sellers have no knowledge of any proceeding which
is pending or threatened that would suspend or revoke or limit any such Permit.
3.20 Labor and Employment Matters.
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(a) Except as set forth in the Disclosure Letter, each Seller
(i) has withheld and paid to the appropriate Governmental Authorities, or is
withholding for payment not yet due to such authorities, all amounts required to
be withheld from its employees, (ii) is not liable for any arrears of wages,
Taxes, penalties or other sums for failure to comply with any of the foregoing;
and (iii) has complied in all material respects with all Applicable Laws, rules
and regulations relating to the employment of labor, including Title VII of the
Federal Civil Rights Act of 1964, as amended, OSHA, and those relating to hours,
wages, collective bargaining and the payment and withholding of Taxes and other
sums as required by appropriate authorities.
(b) Except as set forth in the Disclosure Letter, no Seller is
a party to any collective bargaining agreement or other labor contract
applicable to the employees of any Seller; there has been no breach by Seller or
other failure by Seller to comply with any material provision of such agreement
or contract to which any Seller is a party; and no Seller is currently a party
to any (i) unfair labor practice complaint pending before the National Labor
Relations Board or any other federal, state, local or foreign agency, (ii)
pending or, to the Sellers' knowledge, threatened labor strike, slowdown, work
stoppage, lockout, or other organized labor disturbance, (iii) pending grievance
proceeding, (iv) pending representation question respecting the employees of
such Seller, (v) pending arbitration proceeding arising out of or under any
collective bargaining agreement or (vi) attempt by any union to represent
employees of such Seller as a collective bargaining agent.
3.21 Employees. The Disclosure Letter sets forth a list of the names of
all employees of Sellers currently employed in connection with the Business (the
"Employees") and indicates the current salary or wage rate of each Employee. The
Disclosure Letter sets forth a list of all Employees whose employment with any
Seller terminated since the date ninety (90) days prior to the date of this
Agreement.
3.22 Employee Benefit Plans.
(a) The Disclosure Letter sets forth a true and complete list
of all Benefit Plans and identifies as such each Benefit Plan that is an
"employee welfare benefit plan", as defined in ERISA Section 3(1) (a "Welfare
Plan") or an "employee pension benefit plan", as defined in ERISA Section 3(2)
(a "Pension Plan"); provided, however, that the term "Pension Plan" shall not
include any Benefit Plan that is "multiemployer plan" within the meaning of
ERISA Section 3(37) (a "Multiemployer Plan").
(b) Each Seller has delivered to Buyer true and complete
copies of: (i) all plan texts, agreements and material employee communications
relating to each Benefit Plan; (ii) all summary plan descriptions (whether or
not required to be furnished pursuant to ERISA), the most recent annual report
(including all schedules thereto) and the most recent annual and periodic
accounting and financial statements of related plan assets with respect to each
Pension Plan and Welfare Plan; and (iii) the most recent determination letter
received from the Internal Revenue Service with respect to each Pension Plan.
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(c) No event has occurred (and there exists no condition or
set of circumstances) in connection with any Benefit Plan that could subject
either Sellers, Buyer, or any Benefit Plan, directly or indirectly, to any
liability under ERISA, the Code or any other law, regulation or governmental
order applicable to any Benefit Plan.
(d) Each Benefit Plan (other than any Multiemployer Plan)
conforms to, and its administration is in compliance with, all applicable laws
and regulations, including but not limited to, ERISA and the Code, and no
fiduciary of any Benefit Plan has taken any action that could result in such
fiduciary being liable for the payment of damages under ERISA Section 409 and
that would result in any liability for Sellers or Buyer.
(e) Each Pension Plan that is intended to qualify under
Section 401(a) or 403(a) of the Code is so qualified and has received a
favorable determination letter from the Internal Revenue Service with respect to
such qualification, its related trust has been determined to be exempt from
taxation under Section 501(a) of the Code, and nothing has occurred since the
date of such letter that could adversely affect such qualification or exemption.
(f) Each Benefit Plan (other than any Multiemployer Plan) has
been maintained in accordance with its terms, and there are no pending or
threatened claims, lawsuits or arbitrations (other than routine claims for
benefits) that have been asserted or instituted against or with respect to any
such Benefit Plan or the assets of any of the trusts under any such Benefit
Plan.
(g) There has been no failure to comply with applicable ERISA
or other requirements as to the filing of reports, documents and notices with
the Secretary of Labor, the Secretary of the Treasury and the Pension Benefit
Guaranty Corporation ("PBGC") that could subject any Benefit Plan (other than
any Multiemployer Plan), any fiduciary thereof, any Seller or Buyer to a
penalty, and any requirement of the furnishing of such documents to participants
or beneficiaries, due before the Closing Date, has been or will be complied with
by all of the Benefit Plans prior to the Closing.
(h) No "prohibited transaction," as such term is defined in
Code Section 4975 and ERISA Section 406, has occurred with respect to any
Pension Plan or Welfare Plan that could subject such Plan, any fiduciary
thereof, either Sellers or Buyer to a penalty for such prohibited transaction
imposed by ERISA Section 502 or a material tax imposed by Code Section 4975.
(i) Any bond required by applicable provisions of ERISA with
respect to any Pension Plan or Welfare Plan has been obtained and is in full
force and effect.
(j) No "reportable event," as such term is defined in ERISA
Section 4043, has occurred or is continuing with respect to any Pension Plan.
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(k) No Pension Plan that is or was subject to Title IV of
ERISA has been terminated; no proceeding has been initiated to terminate any
such Plan; and no Seller has incurred, or does reasonably expect to incur, any
liability, whether to the PBGC or otherwise, except for required premium
payments, which payments have been made when due, with respect to the
termination of any Pension Plan. No event has occurred (and there exists no
condition or set of circumstances) that presents a material risk of the partial
termination of any Pension Plan.
(l) No Benefit Plan provides medical or death benefits
(whether or not insured) with respect to current or former employees of Sellers
beyond their retirement or other termination of service (other than (i) coverage
mandated by law or (ii) death benefits under any Pension Plan).
(m) There are no unfunded benefit obligations arising in any
jurisdiction.
(n) The consummation of the transactions contemplated hereby
will not (i) entitle any current or former employee of Sellers to severance pay,
unemployment compensation or any similar payment, or (ii) accelerate the time of
payment or vesting, or increase the amount of any compensation due to any such
employee or former employee.
(o) Each Seller has provided (or has caused the applicable
Benefit Plans to provide) and will continue to provide (or cause the applicable
Benefit Plans to provide) for "continuation coverage" to or for the benefit of
each "covered employee" and each "qualified beneficiary" entitled thereto (as
such terms are defined in Code Section 4980B) and shall otherwise comply in all
respects with the requirements (including, but not limited to, notice
requirements) of Code Section 4980B as to each such covered employee and each
such qualified beneficiary with respect to whom a "qualifying event" (as defined
in Code Section 4980B) has occurred through the Closing.
(p) The Disclosure Letter sets forth a true and correct list
of all Multiemployer Plans to which any Seller has contributed, or is required
to contribute. To the best knowledge of Sellers, each Multiemployer Plan has
been maintained in substantial compliance with the requirements prescribed by
any and all applicable statutes, orders, rules and regulations, including, but
not limited to, ERISA and the Code. To the best knowledge of Sellers, no
"prohibited transaction," as defined in ERISA Section 406 or Code Section 4975,
has occurred in connection with any Multiemployer Plan. Sellers have made all
contributions required to be made to each Multiemployer Plan.
(q) The Disclosure Letter sets forth accurately, for each
Multiemployer Plan, (i) the amount of contributions by any Seller to such plan
for the prior two plan years and (ii) the amount of withdrawal liability as
determined under Section 4201 of ERISA that Seller would incur if it withdrew
from such plan in a complete withdrawal as of the date listed in the Disclosure
Letter. With respect to any Multiemployer Plan, no Seller has incurred or
otherwise become liable for and is not reasonably expected to incur or become
liable for a "complete
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withdrawal" or "partial withdrawal," as such terms are defined in Sections 4203
and 4205 of ERISA, respectively, with respect to events that have occurred
before or as of the Closing. Sellers will furnish to Buyer complete and correct
summaries, based upon information reasonably available to such Seller, of
Sellers' contribution history with respect to each of the Multiemployer Plans
set forth in the Disclosure Letter prior to the execution of this Agreement.
3.23 Other Employee Benefit Plans. Except as set forth in the
Disclosure Letter, no Seller has any medical, dental, disability or life
insurance program, or stock option, incentive and deferred compensation plans or
other similar fringe or employee benefit plans, programs or arrangements for the
benefit of employees of the Business.
3.24 Litigation. Except as shown in the Disclosure Letter and except as
would not reasonably be expected to have a Material Adverse Effect, there is no
litigation, action, suit, arbitration, workers' compensation claim, proceeding
or investigation (collectively, "Actions") presently pending before any court or
governmental authority against any Seller or, to any Seller's knowledge
affecting their respective assets or property or the Business, nor does any
Seller have any knowledge of any Actions threatened against it or affecting its
properties or restricting or seeking to prohibit the consummation of the
transactions contemplated by this Agreement before any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign.
3.25 Insurance. The Disclosure Letter sets forth a list and brief
description of all policies or binders of fire, liability, product liability,
worker's compensation, vehicular and other insurance held by or on behalf of
each Seller. All premiums on all such policies have been paid to date to the
extent due and each Seller has materially complied with all conditions of such
policies and has received no notice of any failure to comply with the terms of
such policies. In addition, the Disclosure Letter sets forth in respect of such
policies and binders (i) the type and amount of coverage provided thereby, (ii)
their respective effective dates, and (iii) claims made or occurrences reported
during the past two years with respect to products liability and workers
compensation.
3.26 Brokerage. No broker or finder has acted, directly or indirectly,
for any Seller, nor has any Seller incurred any obligation to pay any brokerage
or finder's fee or other commission or similar fee in connection with the
transactions contemplated by this Agreement. Sellers jointly and severally agree
to indemnify and hold Buyer harmless with respect to any and all claims for
brokers' fees, commissions, or other similar fees arising out of the conduct of
any Seller.
3.27 Powers of Attorney; Guarantees. Except as set forth in the
Disclosure Letter, no Seller has any obligation to act under any outstanding
power of attorney or any obligation or liability, either accrued, accruing or
contingent, as guarantor, surety, consignor, endorser (other than for purposes
of collection in the ordinary course of business of Sellers), co-maker or
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indemnitor in respect of the obligation of any person, corporation, partnership,
joint venture, association, organization or other entity.
3.28 Relations with Suppliers and Customers. Except as set forth in the
Disclosure Letter, no supplier or significant customer has canceled any
contract, and, to the best knowledge of any Seller, there has been no threat by
any supplier not to provide, products, supplies, or services (including
utilities) to any Seller within the 12 months prior to the date of this
Agreement. Except as set forth in the Disclosure Letter, each Seller's
relationships with its customers and suppliers, and the relationships of each
such supplier to its suppliers, are good, and no Seller is aware of anything
that would lead it to conclude that any such relationship may be in jeopardy.
3.29 Transactions with Affiliates. Set forth in the Disclosure Letter
is a true, correct and complete list of all business relationships previously or
currently existing between any Seller and any of its Affiliates, officers,
directors, managers, members or shareholders or any of such Affiliates',
officers', directors', managers', members' or shareholders' Affiliates since
December 31, 1997.
3.30 Absence of Certain Business Practices. To Sellers' knowledge,
neither Sellers nor any officer, employee or agent of Sellers acting on their
behalf has, directly or indirectly, (a) given or agreed to give any gift or
similar benefit of more than nominal value to any customer, supplier, competitor
or governmental employee or official which would subject any Seller to any
damage or penalty in any civil, criminal or governmental litigation or
proceeding, (b) acted in any other unlawful manner with, to, or in connection
with such Seller's customers, suppliers, or competitors or (c) used any
corporate or other funds for unlawful contributions, payments, gifts or
entertainment, or made any unlawful expenditures relating to political activity
to governmental officials or others or established or maintained any unlawful or
unrecorded funds. Sellers have not accepted or received any unlawful
contributions, payments, gifts or expenditures.
3.31 Condition of Tangible Assets and Inventories.
(a) Except as set forth in the Disclosure Letter, all items of
machinery, equipment, and other tangible assets of Sellers are in good
operational condition, have been regularly and properly serviced and maintained
in a manner that would not void or limit the coverage of any warranty thereon,
other than items currently under, or scheduled for, repair or construction, and
are adequate and fit to be used for the purposes for which they are currently
used in the manner they are currently used.
(b) Except as set forth in the Disclosure Letter, the
Inventory consists of items of merchantable quality and quantity usable or
saleable in the ordinary course of the Business, and are salable at prevailing
market prices not less than the book value amounts thereof, and are not
obsolete, damaged, slow-moving or defective. No item included in the Inventory
is currently
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the subject of a recall by a government agency, and to Sellers' knowledge there
is no valid basis for any item included in the Inventory to become the subject
of such a recall. Except as set forth in the Disclosure Letter, the value at
which Inventories are carried on the EMS Balance Sheet, ESI Balance Sheet or
EMS/Rosa Balance Sheet, as the case may be, reflects the customary inventory
valuation policy of Sellers (which fairly reflects the value of obsolete or
excess inventory) for stating Inventory in accordance with GAAP consistently
applied, except to the extent Buyer and Sellers have otherwise agreed with
respect to the Closing Date Balance Sheet.
3.32 Product Liability.
(a) Product Design. Except as set forth in the Disclosure
Letter, there is no action, suit, inquiry, proceeding or, to the best knowledge
of any Seller, investigation by or before any court or governmental body pending
or, to the best knowledge of any Seller, threatened against or involving any
Seller relating to any product alleged to have been manufactured or sold by such
Seller and alleged to have been defective, unsafe or improperly designed or
manufactured.
(b) Product Recalls. Except as set forth in the Disclosure
Letter, there has not been any product recall, or post-sale warning or similar
action (collectively, "Recalls") conducted with respect to any product
manufactured, shipped, delivered or sold by any Seller, or to the best knowledge
of Sellers, any investigation or consideration of whether or not to undertake
any Recall. No Seller has received written notice of any statement, citation or
decision by any governmental regulatory or law enforcement authority stating
that any product made by such Seller is defective or unsafe or fails to meet any
standards promulgated by such authority, or has received written notice of any
Recall ordered by any such authority, nor, to the best knowledge of any Seller,
is there any valid basis for notice of any Recall.
3.33 Operation of Business. Except as set forth in the Disclosure
Letter, from the EMS Interim Balance Sheet Date, ESI Interim Balance Sheet Date
or the EMS/Rosa Interim Balance Sheet Date, as the case may be, to the date
hereof, each of the Sellers has conducted the Business substantially in the
manner in which it was conducted prior to the EMS Interim Balance Sheet Date,
the ESI Interim Balance Sheet Date or the EMS/Rosa Interim Balance Sheet Date,
as the case may be. Except as otherwise described in the Disclosure Letter,
since the EMS Interim Balance Sheet Date, the ESI Interim Balance Sheet Date or
the EMS/Rosa Interim Balance Sheet Date, as the case may be, there have not been
any Material Adverse Changes in the Business, and the Business has not sustained
any material loss or damages, whether or not insured.
3.34 Year 2000 Compliance. Except as set forth in the Disclosure
Letter, each of the Sellers' software and hardware systems, which impact or
affect in any material way such Seller's business operations, and all computer
hardware and software that are components of or embedded in products
manufactured and sold by any of the Sellers (collectively, the "Sellers'
Micro-Technology") are "Year 2000 Compliant and Ready" (as hereinafter defined).
No Seller has any warranty or other obligation to correct, repair or replace any
product manufactured and
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sold by any Seller due to such product not being Year 2000 Compliant and Ready.
To the best knowledge of Sellers, all software and hardware used by Sellers and
supplied by other vendors is Year 2000 Compliant and Ready. As used herein,
"Year 2000 Compliant and Ready" means that the Sellers' Micro-Technology will
(a) handle date information involving any and all dates before, during and/or
after January 1, 2000 (including specifically but without limitation February
29, 2000), including accepting input, providing output and performing date
calculations in whole or in part; (b) operate accurately without interruption on
and in respect of any and all dates before, during and/or after January 1, 2000
and without any change in performance; (c) respond to and process two digit year
input without creating any ambiguity as to the century; and (d) store and
provide date input information without creating any ambiguity as to the century.
Except as set forth in the Disclosure Letter, each of the Sellers has inquired
of its suppliers of software and hardware systems regarding whether such systems
are Year 2000 Compliant and Ready and has been informed that such systems are
Year 2000 Compliant and Ready, except where failure of such systems to be Year
2000 Compliant and Ready would not reasonably be expected to have a Material
Adverse Effect. In the event that any of the Sellers' Micro-Technology (other
than portions thereof which Buyer shall replace with the "Oracle Enterprise
System") is not Year 2000 Compliant and Ready, whether or not disclosed in the
Disclosure Letter, the Sellers, promptly upon receipt of notice from Buyer,
shall correct, repair or replace such portions of Sellers' Micro-Technology as
are not Year 2000 Compliant and Ready.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Sellers as follows:
4.1 Due Incorporation. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
the requisite power to own, lease and operate its assets, properties and
business and to carry on its business as now being and as heretofore conducted.
4.2 Authority. Buyer has all requisite corporate power and authority,
and has taken all corporate action necessary, to execute and deliver this
Agreement and the Ancillary Agreements to which it is a party, to consummate the
transactions contemplated hereby and thereby and to perform its obligations
hereunder and thereunder. Each of this Agreement and the Ancillary Agreements to
which it is a party has been duly authorized, executed and delivered by Buyer
and constitutes the legal, valid and binding obligations of Buyer enforceable
against Buyer in accordance with its terms.
4.3 Consents and Approvals. Except for consents, approvals, actions,
filings and notices that have heretofore been obtained, taken, made or given,
the execution and delivery by Buyer of this Agreement, the performance by Buyer
of its obligations hereunder and the
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consummation by Buyer of the transactions contemplated hereby do not require
Buyer to obtain any consent, approval or action of, or make any filing with or
give any notice to, any corporation, partnership, person, firm or other entity
or any public, governmental or judicial authority.
4.4 No Breach. The execution, delivery and performance by the Buyer of
this Agreement and the consummation of the transactions contemplated hereby in
accordance with the terms and conditions hereof will not (i) violate any
provision of the Buyer's Articles of Incorporation or Bylaws; (ii) violate,
conflict with or result in the breach of any of the terms of, result in any
modification of the effect of, otherwise give any other contracting party the
right to terminate, or constitute (or with notice or lapse of time or both
constitute) a default under, any material contract or other agreement to which
Buyer is a party or by or to which its assets or properties may be bound or
subject; (iii) violate (a) any order, judgment, injunction, award or decree of a
court, arbitrator or governmental or regulatory body, or (b) any agreement with,
or condition imposed by, any governmental or regulatory body, foreign or
domestic, against or binding upon Buyer or upon the securities, assets or
business of Buyer; or (iv) violate any statute, law or regulation of any
jurisdiction as such statute, law or regulation relates to Buyer or to the
securities, properties or business of Buyer.
4.5 Brokerage. No broker or finder has acted, directly or indirectly,
for Buyer, nor has Buyer incurred any obligation to pay any brokerage, finder's
fee or other commission in connection with the transactions contemplated by this
Agreement. Buyer agrees to indemnify and hold Sellers harmless with respect to
any and all claims for brokers' fees, commissions or other similar fees arising
out of the conduct of Buyer.
4.6 Buyer's Disclosures. Buyer has delivered to Seller copies of
Buyer's Annual Report to shareholders with respect to the fiscal year ended June
30, 1998 and Buyer's quarterly report in Form 10-Q with respect to the quarter
ended March 31, 1999, as filed with the Securities and Exchange Commission. From
March 31, 1999 to the date hereof, there has been no Material Adverse Change in
the Buyer's financial condition or results of operations.
ARTICLE 5
COVENANTS AND AGREEMENTS OF SELLERS
5.1 Further Assurances. Each Seller shall execute such documents and
other papers and take such further actions as may be reasonably required or
desirable to carry out the provisions hereof and the transactions contemplated
hereby.
5.2 Assignment of Leaseholds. Each Seller shall use its commercially
reasonable efforts to obtain from the lessors or sublessors of the Leased
Property, as Buyer shall request, (i) landlords' consents as may be required by
lease terms and (ii) estoppel certificates addressed to Buyer and Sellers
stating (a) that the applicable lease is and will continue to be in full force
and
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effect and has not been modified or amended except as indicated in such
certificate and neither the Landlord nor any Seller is in default thereunder,
(b) the expiration date of the term thereunder, (c) the rent and other charges
payable thereunder, and (d) the date through which rent and other charges have
been paid thereunder.
5.3 Tax Returns. Each Seller shall pay any and all federal, state and
other Taxes imposed or assessed at any time upon any of the Business or any of
its assets or with respect to any receipts, income, sales, transactions or other
business activities of any of the Business with respect to the period through
the close of the Closing Date and any period ended before that time. Any amount
owed by a Seller pursuant to the immediately preceding sentence shall be paid
within the later of fifteen (15) days after Buyer's request for such payment and
five (5) days prior to the date on which the Buyer is required to pay or cause
to be paid any such Tax.
5.4 Transfer Taxes. Sellers shall pay one-half of all sales, use,
transfer, real property gains, documentary and stamp taxes and recording and
filing fees applicable to any transaction contemplated by this Agreement.
5.5 Expenses. Sellers shall bear their expenses incurred in the
preparation, execution and performance of this Agreement and the transactions
contemplated hereby, including, without limitation, all fees and expenses of its
agents, representatives, counsel, actuaries and accountants.
5.6 Employees and Benefit Plans. Within a reasonable time following the
Closing Date, Seller shall terminate all of its Benefit Plans that are intended
to be qualified under Section 401(a) of the Code. All costs, charges and
expenses associated with such terminations, including, without limitation, costs
incurred in obtaining favorable determination letters from the Internal Revenue
Service and any investment fund market value adjustments or liquidation charges,
shall be borne solely by Seller, and not by the plans, the plans' participants
or Buyer. Except for Seller's liability to pay benefits with respect to the
health care reimbursement accounts under Seller's ss.125 plan, amounts relating
to continuation of medical insurance coverage as provided in Section 6.4, and
accrued vacation and paid time off, which liabilities are being assumed by Buyer
pursuant to Section 6.4, Seller shall remain solely responsible for all
liabilities relating to the period prior to the Closing Date it may have to its
employees and former employees, including their beneficiaries, for compensation,
benefits and all other claims of any nature, including, without limitation,
claims for workers compensation, claims and liabilities arising under or based
upon the Workers Adjustment and Retraining Notification Act and the Consolidated
Omnibus Budget Reconciliation Act of 1985, and Seller shall fully indemnify and
hold Buyer harmless against any and all such claims, obligations and
liabilities.
5.7. Purchase of Delinquent Account Receivables. Sellers agree to
purchase from Buyer, at the face value thereof, all "Delinquent Accounts
Receivable," as such term is defined below, and upon the terms set forth below.
The term "Delinquent Accounts Receivable" shall mean Accounts Receivable, if
any, in excess of the reserves therefor in the Final Closing Balance
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Sheet, which remain uncollected one (1) year following the Closing Date,
provided that Buyer has made good faith efforts to collect the same in
accordance with its customary collection policies. For purposes of determining
the Accounts Receivable which remain unpaid, customer payments received by Buyer
after the Closing Date shall be applied to unpaid invoices as designated by the
customer at the time of payment, and, in the absence of any designation,
payments shall be applied to unpaid invoices in direct order of the dates of
such invoices. Sellers shall purchase the Delinquent Accounts Receivable for
cash equal to the face value thereof, not later than five (5) business days
following notice from Buyer requesting such purchase and specifying the
aggregate amount of the Delinquent Accounts Receivable. Buyer's sale of the
Delinquent Accounts Receivable shall be without recourse. Sellers' obligations
under this Section 5.7 shall not be subject to the limitations on their
indemnification obligations provided in Section 8.1(a).
ARTICLE 6
COVENANTS AND AGREEMENTS OF BUYER
6.1 Expenses. Buyer shall bear its expenses incurred in connection with
the preparation, execution and performance of this Agreement and the
transactions contemplated hereby, including, without limitation, all fees and
expenses of its agents, representatives, counsel, actuaries and accountants.
6.2 Further Assurances. Buyer shall execute such documents and other
papers and take such further actions as may be reasonably required or desirable
to carry out the provisions hereof and the transactions contemplated hereby.
6.3 Records. After the Closing, the Business shall maintain, and Buyer
shall cause the Business to maintain, all books and records in an orderly and
businesslike fashion and shall permit Sellers to have reasonable access at
Sellers' expense to such books, records and data of which any Seller has no copy
in connection with the preparation of Sellers' financial reports, tax returns,
tax audits, the defense or prosecution of litigation (including arbitration), or
any other reasonable need of any Seller to consult such records and data in
order to satisfy its obligations herein.
6.4 Employees of Seller. Buyer shall offer employment beginning on the
Closing Date to all Employees who at the Closing Date are actively at work, on
vacation or on jury duty (and, to all other Employees who return to active
employment within 120 days of the Closing Date, employment effective as of the
date they return to active employment), as employees-at-will, at salaries and
wages commensurate with the responsibilities such employees will have following
the Closing, as determined by Buyer, and, in the case of hourly wage Employees,
at salaries substantially the same as currently paid by Sellers, excluding only
those employees of Sellers specifically identified in writing by Buyer prior to
the date hereof; provided, however,
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that nothing in this Section 6.4 shall be deemed to make any such employee a
third-party beneficiary of this Agreement or otherwise give any such employee
any rights against Buyer. Buyer will give all such employees who accept its
offer of employment credit for their service with Sellers (to the extent
recognized at the Closing Date by a similar Seller benefit plan or program) for
purposes of determining eligibility and vesting (but not benefit accrual) in
Buyer's applicable benefit plans or programs, including Buyer's Flexicare Plus
pension plan and 401(k) plan. Other than assuming the sponsorship of Sellers'
ss.125 plan and assuming Sellers' obligations to employees with respect to
vacations, holidays and paid time off, Buyer is not assuming any Benefit Plan of
Seller or any liability thereunder or based upon or related to any such Benefit
Plan, including, without limitation, Seller's ss.125 plan (other than benefits
payable under the health care reimbursement account) . Notwithstanding the
foregoing, Buyer shall provide coverage under its health care plan or another
plan selected by Buyer, for the period of time required under COBRA, to all
eligible former employees of Sellers, including without limitation the employees
of Sellers identified on Schedule 6.4, who constitute all former employees who,
to Sellers' knowledge, are eligible for such coverage as of the date hereof;
provided, however, that Sellers shall reimburse Buyer for its expenses incurred
in providing such coverage, in excess of amounts paid by any such employee under
COBRA, up to a maximum reimbursement by Sellers of $500,000 in the aggregate,
and such reimbursement obligation shall not be subject to the "Basket," but
shall be included in computation of the "Ceiling," as such terms are defined in
Section 8.1(a).
6.5. Transfer Taxes. Buyer shall pay one-half of all sales, use,
transfer, real property gains, documentary and stamp taxes and recording and
filing fees applicable to any transaction contemplated by this Agreement.
6.6. Excess Accounts Receivable Collections. Buyer shall use its good
faith efforts, consistent with its customary collection policies, to collect the
Accounts Receivable. Buyer shall not compromise or otherwise waive any rights to
collect or enforce any portion of the Accounts Receivable without the prior
written consent of the Sellers, nor shall Buyer give rise to any defense to
payment of any Account Receivable, which defense did not exist prior to the
Closing Date. Buyer shall provide to Sellers monthly, as soon as reasonably
practicable after the end of the preceding calendar month, reports regarding the
Accounts Receivable, including aging and other customary matters indicating
collectibility of the Accounts Receivable, and shall notify Sellers reasonably
promptly following receipt of notice of any bankruptcy or similar proceeding
involving any Account Receivable obligor. Upon any Seller's request, Buyer shall
convey to such Seller, for face value, any Account Receivable which such Seller
reasonably deems doubtful of collection. In the event that Buyer's collections
of Accounts Receivable during the one (1) year period following the Closing Date
exceed, in the aggregate, the value of the Accounts Receivable (net of
applicable reserves) on the Final Closing Balance Sheet, then Buyer shall
promptly pay to Seller(s) the amount of such excess, and such payment shall be
deemed to be an addition to the Purchase Price hereunder. For purposes of
determining the Accounts Receivable which have been collected, customer payments
received by Buyer shall be applied as provided in Section 5.7.
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ARTICLE 7
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
7.1 Survival. Except as otherwise expressly provided herein, all of the
representations, warranties, covenants and agreements of the parties hereto
shall survive the execution and delivery of this Agreement and the Closing Date,
and shall in no way be affected by any investigation of the subject matter
thereof made by or on behalf of any other party. The representations and
warranties contained in Sections 3.14 (Taxes), 3.17 (Environmental Matters) and
3.22 (Employee Benefit Plans) shall survive for the period of the applicable
statute of limitations (with extensions) with respect to the matters addressed
in such sections. All other representations and warranties shall expire at 5:00
p.m. eastern standard time on the second anniversary of the Closing Date. The
termination of the representations and warranties provided herein shall not
affect the rights of a party in respect of any General Claim made by such party
in a writing received by the other party prior to the expiration of the
applicable survival period provided herein.
ARTICLE 8
INDEMNIFICATION
8.1 Obligation to Indemnify.
(a) Sellers jointly and severally agree to indemnify, defend
and hold harmless Buyer (and its directors, officers, employees,
Representatives, stockholders and assigns) from and against all Losses resulting
from or arising out of (i) any inaccuracy in or any breach of any
representation, warranty, covenant or agreement of any Seller contained in this
Agreement, other than the representations set forth in Section 3.32(b) and
Section 3.33; (ii) obligations arising from the conduct of the Business prior to
the Closing which were not expressly assumed by Buyer, including without
limitation, Losses sustained as a result of any claim by any employee of Sellers
based upon any employment contract, salary or bonus arrangement, fringe benefit,
or other employment policy to which any Seller is a party or by which it is
bound; (iii) any Excluded Liability; (iv) except in compliance with applicable
Environmental Laws and any licenses or permits related thereto, the generation,
use, treatment, storage, transfer, disposal, Release or threatened Release in,
at, under, from, to or into, or on the Owned Properties or the Leased Properties
of toxic or hazardous substances during the ownership or occupancy thereof by
any of the Sellers; or (v) any Losses arising our of or resulting from the
failure of EMS/Rosa to prepare or maintain corporate minutes and other records
of corporate actions. Notwithstanding the foregoing, (Y) Sellers shall not have
any liability under clause (i) of this Section 8.1(a) unless the aggregate of
all Losses relating thereto exceeds, on a cumulative basis, One Hundred Fifty
Thousand Dollars ($150,000) (the "Basket"), and then only to the extent of such
excess, and (Z) Sellers' aggregate liability under this Section 8.1(a), and for
reimbursement of Buyer's costs in
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providing continuation insurance coverage pursuant to Section 6.4, shall in no
event exceed Ten Million Dollars ($10,000,000) (the "Ceiling").
(b) In addition to Sellers' indemnification obligations under
Section 8.1(a), Sellers jointly and severally agree to indemnify, defend and
hold harmless Buyer (and its directors, officers, employees, Representatives,
stockholders and assigns) from and against all Losses resulting from or arising
out of Losses pertaining to product and warranty liability, and Losses resulting
from or arising out of any failure by Sellers to provide or make available to
their former employees continuation insurance coverage as required by COBRA,
subject to the following: (i) Sellers' indemnification obligations with respect
to product liability shall include all obligations and liabilities of whatever
kind, nature or description relating, directly or indirectly, to product
liability, litigation or claims against Buyer in connection with, arising out
of, or relating to products manufactured prior to the Closing and sold or
shipped from the Facilities prior to or following the Closing by Buyer or any
Seller, provided, however, that Sellers shall have no liability under this
clause (i) with respect to any third-party claim that is first asserted more
than two (2) years following the Closing Date; and, provided further, that
Sellers' aggregate liability with respect to product liability shall in no event
exceed $1,000,000 during any consecutive twelve month period; and (ii) Sellers
shall have no liability with respect to product warranty costs except to the
extent such costs exceed, in the aggregate, the amount of reserves therefor on
the Final Closing Balance Sheet and amounts received by Buyer from third parties
in respect of product warranty costs and obligations, and only then up to an
amount equal to the excess of $300,000 over such reserves.
(c) Buyer agrees to indemnify, defend and hold harmless
Sellers (and their respective directors, officers, managers, employees,
Representatives, stockholders and assigns) from and against all Losses resulting
from or arising out of (i) any inaccuracy in or any breach of any
representation, warranty, covenant or agreement of Buyer contained in this
Agreement; (ii) obligations arising from the conduct of the Business subsequent
to the Closing; (iii) from and after the Closing, any Assumed Liability; or (iv)
except (A) in compliance with applicable Environmental Laws and any licenses or
permits related thereto, or (B) to the extent resulting from Environmental
Conditions existing prior to Closing, the generation, use, treatment, storage,
transfer, disposal, release or the related release in, at, under, from, to or
into, or on the Owned Properties or the Leased Properties other than those which
are Excluded Assets, of toxic or hazardous substances during the occupancy
thereof by Buyer or any of Buyer's affiliates. Notwithstanding the foregoing,
Buyer shall not have any liability under clause (i) of this Section 8.1(c)
unless the aggregate of all Losses relating thereto exceeds, on a cumulative
basis, One Hundred and Fifty Thousand Dollars ($150,000), and then only to the
extent of such excess.
(d) The term "Losses" as used in this Section 8.1 is not
limited to matters asserted by third parties against Sellers or Buyer, but
includes Losses incurred or sustained by any of them in the absence of third
party claims. Payments by a party of amounts for which such party is indemnified
hereunder shall not be a condition precedent to recovery.
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8.2 Notice of Asserted Liability. Promptly after Buyer or any Seller
becomes aware of any fact, condition or event that may give rise to Losses for
which indemnification may be sought under this Article 8, the party entitled to
indemnification ("Indemnitee") shall give notice thereof in the manner provided
in this Section 8.2 of this Agreement (the "Claims Notice") to the other party
("Indemnitor"). The Claims Notice shall include a description in reasonable
detail of any claim or the commencement (or threatened commencement) of any
action, proceeding or investigation (an "Asserted Liability") against
Indemnitee, and shall indicate the amount (estimated, if necessary) of the
Losses that have been or may be suffered by Indemnitee. Failure of Indemnitee to
promptly give notice hereunder shall not affect rights to indemnification
hereunder, except to the extent that Indemnitor demonstrates actual damage
caused by such failure. Upon Indemnitor's request, Indemnitee shall provide
Indemnitor with such reasonable documentation as Indemnitor shall request
pertaining to any General Claim(s) made by Indemnitee.
8.3 Opportunity to Defend. Indemnitor may elect to compromise or
defend, at its own expense and by its own counsel, any Asserted Liability;
provided, however, that Indemnitor may not compromise or settle any Asserted
Liability without the consent of Indemnitee, such consent not to be unreasonably
withheld, unless such compromise or settlement requires no more than a monetary
payment for which Indemnitee and any other indemnifiable parties hereunder are
fully indemnified or involves other matters not binding upon Indemnitee or such
other indemnifiable parties. If Indemnitor elects to compromise or defend such
Asserted Liability, it shall within 15 days (or sooner, if the nature of the
Asserted Liability so requires) notify Indemnitee of its intent to do so and
Indemnitee shall cooperate in the compromise of, or defense against, such
Asserted Liability. If Indemnitor elects not to compromise or defend any
Asserted Liability, fails to notify Indemnitee of its election as herein
provided or contests its obligation to indemnify, Indemnitee may pay, compromise
or defend such Asserted Liability without prejudice to any right it may have
hereunder. In any event, each of Buyer and Seller may participate, at its own
expense, in the defense of any Asserted Liability in respect of which it may
have an indemnification obligation under Section 8.1. If either party chooses to
defend or participate in the defense of any Asserted Liability, it shall have
the right to receive from the other party any books, records or other documents
within such party's control that are necessary or appropriate for such defense.
8.4 Escrow Remedies. If and to the extent any Seller is obligated to
indemnify Buyer pursuant to any section of this Article 8, Buyer may notify the
escrow agent and such Seller of Buyer's claim for indemnification, including the
amount thereof, as provided in the Escrow Agreement. The provisions of the
Escrow Agreement shall then govern such claim and the disbursement of funds by
the Escrow Agreement.
8.5 Limitation of Remedies. Notwithstanding anything in this Agreement
(other than Section 5.7) or any of the Ancillary Agreements, the remedies set
forth in this Article 8, the Escrow Agreement, and, as applicable, in Section
5.7, shall be the sole remedies to which any party hereto is entitled for breach
or noncompliance with the provisions of this Agreement, and
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Ancillary Agreement or any other agreement, instrument or document delivered in
connection herewith or therewith; provided, however, that the foregoing shall
not limit the right of any party to obtain injunctive relief, specific
performance or similar equitable relief. In no event shall any party hereto be
entitled to recover, or be liable to any other party for special, indirect,
consequential, exemplary or punitive damages, except to the extent the
Indemnitee has been held liable to a third-party for such damages, in which case
the Indemnitor's liability shall include the full amount of Indemnitee's losses
in respect of such third-party claim. The parties to this Agreement shall be
obligated to use commercially reasonable efforts to mitigate the amount of
Losses otherwise recoverable hereunder.
ARTICLE 9
MISCELLANEOUS
9.1 Notices. Any notice or other communication required or permitted
hereunder shall be in writing and shall be delivered personally, telegraphed,
telexed or sent by facsimile transmission or other means and shall be deemed
given when so delivered personally, or when received by the intended recipient
at the following addresses:
(i) If to Buyer to:
Samuel A. Miley, Esq., General Counsel
MagneTek, Inc.
26 Century Boulevard
Nashville, Tennessee 37214
Telecopier: (615) 316-5192
with a copy to:
James L. McElroy, Esquire
Baker, Donelson, Bearman & Caldwell
511 Union Street, Suite 1700
Nashville, Tennessee 37219
Telecopier: (615) 726-0464
(ii) If to Sellers to:
Electric Motor Systems, Inc.
11895 Kemper Springs Drive
Cincinnati, OH 45340
Attention: Mr. Richard Pratt
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with a copy to:
Philip F. Schultz, Esquire
Taft, Stettinius & Hollister LLP
1800 Firstar Tower
425 Walnut Street
Cincinnati, OH 45202-3597
Any party may by notice given in accordance with this Section 9.1 to
the other parties designate another address or person for receipt of notices
hereunder.
9.2 Entire Agreement. This Agreement (along with all documents referred
to in this Agreement) contains the entire agreement of the parties with respect
to the purchase of the Assets and related transactions, and supersedes all prior
agreements written or oral with respect thereto.
9.3 Waivers and Amendments; Non-Contractual Remedies; Preservation of
Remedies. This Agreement may be amended, superseded, canceled, renewed or
extended, and the terms hereof may be waived, only by a written instrument
signed by each of the parties or, in the case of a waiver, by the party waiving
compliance. The failure of any party to insist, in any one or more instances,
upon performance of the terms or conditions of this Agreement shall not be
construed as a waiver or relinquishment of any right granted hereunder or of the
future performance of any such term, covenant or condition. No waiver on the
part of any party of any right, power or privilege, nor any single or partial
exercise of any such right, power or privilege, shall preclude any further
exercise thereof or the exercise of any other such right, power or privilege.
The rights and remedies of any party based upon, arising out of or otherwise in
respect of any inaccuracy in or breach of any representation, warranty, covenant
or agreement contained in this Agreement shall in no way be limited by the fact
that the act, omission, occurrence or other state of facts upon which any claim
of any such inaccuracy or breach is based may also be the subject matter of any
other representation, warranty, covenant or agreement contained in this
Agreement (or in any other agreement between the parties) as to which there is
no inaccuracy or breach.
9.4 Governing Law; Reference to U.S. Dollars. This Agreement shall be
governed by and construed in accordance with the substantive and procedural laws
of the State of Ohio applicable to agreements made and to be performed entirely
within such State. All references in this Agreement to amounts of money
expressed in dollars are references to United States dollars, unless express
reference is made to currency of another country.
9.5 Expenses; Attorneys' Fees. All costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall be
paid by the party incurring such expenses. Notwithstanding the foregoing, should
any litigation be commenced concerning this Agreement or the rights and duties
of any party with respect to it, the party prevailing shall
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be entitled, in addition to such other relief as may be granted, to a reasonable
sum for such party's attorneys' fees and expenses determined by the court in
such litigation.
9.6 Binding Effect; Assignment. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors and
assigns and legal representatives. The Buyer may assign this Agreement in
connection with the sale of substantially all assets of its drives division, and
otherwise neither this Agreement nor any right hereunder may be assigned by any
party without the written consent of the other party hereto. Any non-permitted
assignment or attempted assignment shall be void.
9.7 No Third Party Beneficiaries. Nothing in this Agreement is intended
or shall be construed to give any person any legal or equitable right, remedy or
claim under or in respect of this Agreement or any provision contained herein.
Without limiting the generality of the foregoing, no provision in this Agreement
shall create any third party beneficiary or other right in any employee or
former employee of Sellers (including any beneficiary or dependent thereof) in
respect of continued employment (or resumed employment) with Buyer or Sellers or
in respect of any benefits that may be provided, directly or indirectly, under
any Benefit Plan.
9.8 Counterparts. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto.
9.9 Headings. The headings in this Agreement are for reference only,
and shall not affect the interpretation of this Agreement.
9.10 Publicity. All notices to third parties and all other publicity
concerning the transactions contemplated by this Agreement shall be jointly
planned and coordinated by Buyer and Sellers.
9.11 Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity without invalidating the remainder
of such provision or the remaining provisions of this Agreement.
9.12 Time of Essence. Time is of the essence for each and every
provision of this Agreement.
ARTICLE 10
DEFINITIONS
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10.1 Defined Terms. As used herein, the terms below shall have the
following meanings. Any of such terms, unless the context otherwise requires,
may be used in the singular or plural, depending upon the reference.
"Accounts Receivable" shall mean all accounts and notes receivable
(whether current or noncurrent), arising out of sales in the ordinary course of
Seller's Business or included in accounts receivable on the EMS Interim Balance
Sheet, ESI Interim Balance Sheet or the EMS/Rosa Interim Balance Sheet, as the
case may be;
"Actions" has the meaning set forth in Section 3.24.
"Adjusted Purchase Price" has the meaning set forth in Section 1.5(b).
"Adjustment Report" has the meaning set forth in Section 1.5(c).
"Affiliate" has the meaning set forth in the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder.
"Affiliated Group" means any affiliated group within the meaning of IRC
ss.1504, and any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" has the meaning set forth in the preamble hereto.
"Ancillary Agreements" means all agreements, certificates, instruments
or other documents to be executed and delivered by any of the parties under this
Agreement including, but not limited to, the following: (i) an Escrow Agreement,
substantially in the form of Exhibit B hereto, (ii) one or more Bills of Sale,
substantially in the form of Exhibit C hereto, (iii) a Lease of ESI's Property,
substantially in the form of Exhibit D hereto, (iv) an Assignment and Assumption
Agreement substantially in the form of Exhibit E hereto, (v) Assignments
substantially in the form of Exhibit F hereto, (vi) Noncompetition Agreements
substantially in the form of Exhibit G hereto, (vii) a Guaranty Agreement,
substantially in the form of Exhibit H hereto, respecting Sellers'
indemnification obligations hereunder, executed by each of Richard L. Pratt and
Robert G. Friedrich, (viii) an Amendment to EMS's Lease, substantially in the
form attached hereto as Exhibit I, (ix) such deeds, lease assignments and other
instruments of conveyance as may be necessary or appropriate to convey the
Assets to Buyer, and (x) incumbency and such other certificates as either party
may reasonably request.
"Applicable Law" means, with respect to any Person, any valid and
enforceable domestic or foreign, federal, state or local statute, law,
ordinance, rule, administrative interpretation, regulation, order, writ,
injunction, directive, judgment, decree or other requirement of any Governmental
Authority (including any Environmental Law) applicable to such Person.
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"Asserted Liability" has the meaning set forth in Section 8.2.
"Assets" shall mean all of the right, title and interest of Sellers in
and to the business, properties, assets and rights of any kind, whether tangible
or intangible, real or personal, and constituting, or used or useful in
connection with, or related to, the Business, including without limitation all
of Seller's right, title and interest in and to the following:
(a) all cash and cash equivalents;
(b) all Inventory;
(c) all Accounts Receivable;
(d) all Contract Rights;
(e) all Leases listed in the Disclosure Letter;
(f) all Leasehold Improvements;
(g) all Owned Property;
(h) all Fixtures and Equipment;
(i) all Intangible Assets and Intellectual Property Rights;
(j) all Books and Records;
(k) all of Seller's prepaid expenses and deposits (including
any prepaid insurance premiums);
(l) all computers and software;
(m) all supplies, sales literature, promotional literature,
customer, supplier and distributor lists, display units, telephone and fax
numbers and purchasing records;
(n) all rights under or pursuant to all warranties,
representations and guarantees made by suppliers in connection with the Assets
or services furnished to Sellers or affecting the Assets;
(o) all claims, causes of action, chooses in action, rights of
recovery and rights of set-off of any kind, against any person or entity,
including, without limitation, any liens, security interests, pledges or other
rights to payment or to enforce payment in connection with products delivered by
Sellers on or prior to the Closing Date;
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(p) all Permits, to the extent transferable; and
(q) all goodwill relating to the foregoing;
but excluding therefrom the Excluded Assets.
"Assumed Contracts" means (i) all Contracts of Sellers listed in
Schedule 10.1, as attached hereto and (ii) any other Contracts which Buyer, in
its sole discretion, elects to accept and assume. No Contract which relates to
Excluded Assets shall be an Assumed Contract pursuant to the above sentence.
"Assumed Liabilities" means the following (without duplication)
specifically listed liabilities relating to the Assets:
(b) all Liabilities of Sellers relating to the period on and
after the Closing Date under all Permits assigned to Buyer on the Closing Date;
(c) all Liabilities, arising from the ordinary course
operations of the Business, under customer orders and purchase orders that are
unfilled as of , and as to which no Seller has received the benefits prior to,
the Closing Date;
(c) all Liabilities (which shall not include any portion of
funded debt) on the Closing Date Balance Sheet;
(d) the obligations and liabilities accruing, arising out of,
or relating to events or occurrences happening on or after the Closing Date
under the Assumed Contracts and Leases, but not including any obligations or
liability for any breach of any such Assumed Contract or Lease occurring on or
prior to the Closing Date;
(e) Sellers' ss.125 Plan;
(f) Sellers' obligations to employees for vacation, holidays,
and paid time off, and to former employees for continuation medical coverage
required by COBRA (subject, however, to Sellers' reimbursement obligations under
Section 6.4); and
(g) Sellers' product warranty obligations.
"Balance Sheet" means, with respect to each Seller, such Sellers'
balance sheet identified in Section 3.8.
"Balance Sheet Date" has the meaning as set forth in Section 3.8.
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"Benefit Plan" means any plan, agreement, arrangement or commitment
(whether provided by insurance, self-insurance or otherwise) that is an
employment, consulting or deferred compensation agreement; or an executive
compensation, incentive, bonus, employee pension, profit-sharing, savings,
retirement, stock option, stock purchase, or severance pay plan; or a life,
health, post-retirement benefit, worker's compensation, unemployment benefit,
disability or accident plan; or a holiday, vacation, leave of absence, Christmas
or other bonus practice; or expense reimbursement, automobile or other
transportation allowance; or other employee benefit plan, agreement, arrangement
or commitment, including, without limitation, any "employee benefit plan," as
defined in section 3(3) of ERISA, maintained by any Seller or with respect to
which any Seller has or in the future may have, any contribution or other
liability or obligation with respect to any of its current or former employees,
directors or independent contractors or any beneficiaries thereof.
"Books and Records" means originals or copies of all of Sellers' books
and records relating to the Business, including books of account and accounting
records, sales data, customer lists, employee files and records, information
relating to customers, supplier lists, mailing lists, brochures, advertising
materials, business and marketing plans, and operating records of every kind,
but excluding corporate minute books, stock ledgers, and similar records.
"Business" has the meaning set forth in the first recital hereto.
"Buyer" has the meaning set forth in the preamble hereto.
"CERCLA" has the meaning set forth in Section 3.17(b).
"Claims Notice" has the meaning set forth in Section 8.2.
"Closing" or "Closing Date" has the meaning set forth in Section 2.1.
"Closing Date Balance Sheet" has the meaning set forth in Section
1.5(a).
"Closing Equity" has the meaning set forth in Section 1.5(b).
"Code" shall mean the Internal Revenue Code of 1986, as amended, and
the rules and regulations thereunder.
"Company" has the meaning set forth in Section 3.17(a).
"Contested Adjustments" has the meaning set forth in Section 1.5(d).
"Contract" means any agreement, contract, note, loan, evidence of
indebtedness, purchase order, letter of credit, franchise agreement,
undertaking, covenant not to compete, employment
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agreement, license, instrument, obligation or commitment to which any Seller is
a party or is bound, whether oral or written, but excluding all Leases.
"Contract Rights" means all of Sellers' rights and obligations under
the Assumed Contracts.
"Disclosure Letter" means the disclosure letter (including the Parts
attached thereto) delivered by Sellers to Buyer concurrently with the execution
and delivery of this Agreement.
"EMS" has the meaning set forth in the preamble hereto.
"EMS Balance Sheet" has the meaning set forth in Section 3.8(a).
"EMS Balance Sheet Date" has the meaning set forth in Section 3.8(a).
"EMS Financial Statements" has the meaning set forth in Section 3.8(a).
"EMS Interim Balance Sheet" has the meaning set forth in Section
3.8(a).
"EMS Interim Balance Sheet Date" has the meaning set forth in Section
3.8(a).
"EMS Interim Financial Statements" has the meaning set forth in Section
3.8(a).
"EMS Year-End Financial Statements" has the meaning set forth in
Section 3.8(a).
"EMS/Rosa" has the meaning set forth in the preamble hereto.
"EMS/Rosa Balance Sheet" has the meaning set forth in Section 3.8(c).
"EMS/Rosa Balance Sheet Date" has the meaning set forth in Section
3.8(c).
"EMS/Rosa Financial Statements" has the meaning set forth in Section
3.8(c).
"EMS/Rosa Interim Balance Sheet" has the meaning set forth in Section
3.8(c).
"EMS/Rosa Interim Balance Sheet Date" has the meaning set forth in
Section 3.8(c).
"EMS/Rosa Interim Financial Statements" has the meaning set forth in
Section 3.8(c).
"EMS/Rosa Year-End Financial Statements" has the meaning set forth in
Section 3.8(c).
"Employees" has the meaning set forth in Section 3.21.
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"Encumbrance" means any claim, lien, pledge, option, charge, easement,
security interest, deed of trust, mortgage, right-of-way, encroachment, building
or use restriction, conditional sales agreement, encumbrance or other right of
third parties, whether voluntarily incurred or arising by operation of law, and
includes, without limitation, any agreement to give any of the foregoing in the
future, and any contingent sale or other title retention agreement or lease in
the nature thereof.
"Environmental Conditions" has the meaning set forth in Section
3.17(k).
"Environmental Laws" has the meaning set forth in Section 3.17(b).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Agreement" has the meaning set forth in Section 1.6.
"ESI" has the meaning set forth in the preamble hereto.
"ESI Balance Sheet" has the meaning set forth in Section 3.8(b).
"ESI Balance Sheet Date" has the meaning set forth in Section 3.8(b).
"ESI Financial Statements" has the meaning set forth in Section 3.8(b).
"ESI Interim Balance Sheet" has the meaning set forth in Section
3.8(b).
"ESI Interim Balance Sheet Date" has the meaning set forth in Section
3.8(b).
"ESI Interim Financial Statements" has the meaning set forth in Section
3.8(b).
"ESI Year-End Financial Statements" has the meaning set forth in
Section 3.8(b).
"Excluded Assets" means, notwithstanding anything contained herein to
the contrary, the following assets which are not to be acquired by Buyer
hereunder and which shall be retained by Seller:
(b) stock in Electromotive System GmbH, a wholly-owned
subsidiary of ESI;
(b) the real property located at N50 W13605 Overview Drive and
at N49 W13650 Campbell Drive, in Menomonee Falls, Wisconsin;
(c) deferred financing costs included in Sellers' balance
sheets;
(d) Notes Receivable from Fulghum Industries and from Safety
Hoist & Crane Inc. to ESI for an aggregate of $99,732.32;
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(e) Sellers' Insurance Policies; and
(f) all claims, causes of action, rights of recovery and
rights of set-off of any kind against any person or entity arising out of or
relating to the Assets or the Business to the extent related to the Excluded
Liabilities.
"Excluded Liabilities" means, except for Assumed Liabilities, any and
all liabilities or obligations of Sellers, whether actual or contingent, matured
or unmatured, liquidated or unliquidated, or known or unknown, whether arising
out of occurrences prior to, at or after the date hereof, which Excluded
Liabilities include, without limitation:
(b) Any liability or obligation to or in respect of any
current or former employees, directors or independent contractors (or any
beneficiaries thereof) of Sellers including, without limitation, (i) any
employment agreement, whether or not written, between any Seller and any person,
(ii) except as provided in Section 6.4, any liability under any Benefit Plan at
any time maintained, contributed to or required to be contributed to by or with
respect to any Seller or under which any Seller has incurred or may incur
liability, or any contributions, benefits or liabilities therefor, or any
liability with respect to any Seller's withdrawal or partial withdrawal from or
termination of any Benefit Plan, and (iii) any claim of an unfair labor
practice, or any claim under any state unemployment compensation or worker's
compensation law or regulation or under any federal or state employment
discrimination law or regulation;
(c) Any liability or obligation of any Seller in respect of
any Tax;
(d) Any liability arising from any injury to or death of any
person or damage to or destruction of any property, whether based on negligence,
breach of warranty, strict liability, enterprise liability or any other legal or
equitable theory arising from defects in products manufactured or from services
performed by or on behalf of either Seller or any other person or entity on or
prior to the Closing Date;
(e) Any liability or obligation of any Seller arising out of
or related to any Action against such Seller or any Action which adversely
affects the Assets and which shall have been asserted on or prior to the Closing
Date or to the extent the basis of which shall have arisen on or prior to the
Closing Date;
(f) Any liability or obligation of any Seller resulting from
entering into, performing its obligations pursuant to or consummating the
transactions contemplated by, this Agreement;
(g) Any liability or obligation related to any Former
Facility; and
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(h) Any liability or obligation arising out of CERCLA, any
equivalent state statute or any other Environmental Law.
"Facilities" means the Owned Property and the Leased Property.
"Final Adjusted Purchase Price" has the meaning set forth in Section
1.5(f).
"Final Adjustments" has the meaning set forth in Section 1.5(d).
"Final Closing Balance Sheet" has the meaning set forth in Section
1.5(e).
"Financial Statements" has the meaning set forth in Section 3.8.
"Fixtures and Equipment" means all of the furniture, fixtures,
furnishings, machinery, cranes, automobiles, trucks, spare parts, supplies,
equipment and other tangible personal property owned by Sellers and used in
connection with, and located at any office or other facility of, the Business.
"Former Facility" means each plant, office, manufacturing facility,
store, warehouse, improvement, administrative building and all real property and
related facilities which was owned, leased or operated by Sellers at any time
prior to the date hereof, but excluding any Facilities.
"Funded Debt" means the sum of (a) the principal amount of all Debt for
borrowed money, plus (b) Debt under acceptance facilities or facilities for the
discount or sale of accounts receivable.
"GAAP" means generally accepted accounting principles.
"General Claim" means any claim based on, arising out of or otherwise
in respect of (i) any inaccuracy in or any breach of any representation,
warranty, covenant or agreement of any Seller on the one hand or Buyer on the
other hand, contained in this Agreement, or (ii) any misrepresentation in or
omission from any certificate or other instrument furnished hereunder.
"Governmental Authority" means any foreign, domestic, federal,
territorial, state or local governmental authority, quasi-governmental
authority, instrumentality, court, government organization, commission, or
tribunal, or any regulatory, administrative or other agency of governmental
authority, or any political or other subdivision, department or branch of any of
the foregoing.
"Hazardous Substance" shall mean any quantity of asbestos in any form,
urea formaldehyde, PCBs, radon gas, crude oil or any fraction thereof, all forms
of natural gas, petroleum products or by-products, any radioactive substance,
any toxic, infectious, reactive, corrosive, ignitable or flammable chemical or
chemical compound and any other hazardous
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substance, material or waste (as defined in or for purposes of any
Environmental Law), whether solid, liquid or gas.
"Income Tax" means any federal, state, local or foreign Tax imposed on
or measured by gross or net income or a taxable base in the nature of gross or
net income (including franchise, alternative, minimum, alternative minimum,
add-on, and surcharge and other similar Taxes), any Tax imposed in whole or in
part in lieu of any of the foregoing, and in each instance any interest
(including interest on deferred tax liability under Section 453A(c) of the IRC
and "look-back" interest under Section 460 of the IRC and similar amounts of
interest imposed by the IRC), penalties, additions to tax or similar charges
attributable to such Tax.
"Indemnitee" has the meaning set forth in Section 8.2.
"Indemnitor" has the meaning set forth in Section 8.2.
"Independent Auditors" has the meaning set forth in Section 1.5(d).
"Insurance Policies" means the insurance policies listed in the
Disclosure Letter.
"Intangible Assets" has the meaning set forth in Section 3.18.
"Intellectual Property Rights" has the meaning set forth in Section
3.18.
"Interim Balance Sheet" has the meaning set forth in Section 3.8.
"Interim Balance Sheet Date" has the meaning set forth in Section 3.8.
"Interim Financial Statements" has the meaning set forth in Section
3.8.
"Inventory" shall mean all of Sellers' inventory of goods, including
all merchandise, raw materials, work in progress and finished products,
wrapping, supply and packaging items and similar items, held for resale or used
in connection with the Business, in each case wherever the same may be located.
"IRC" means the Internal Revenue Code of 1986, as amended.
"IRS" has the meaning set forth in Section 3.14(b).
"Leased Property" has the meaning set forth in Section 3.12(a)(ii).
"Leasehold Improvements" means all leasehold improvements situated in
or on the Leased Property and owned by any of Sellers.
"Leases" has the meaning set forth in Section 3.12(a)(ii).
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"Liability" or "Liabilities" means, with respect to any Person, any
liability or obligation of such Person of any kind, character or description,
whether known or unknown, absolute or contingent, unsecured, joint or several,
due or to become due, vested or unvested, executory, determined, determinable or
otherwise and whether or not the same is required to be accrued on the financial
statements of such Person.
"Losses" means all losses, costs, claims, liabilities, damages,
lawsuits, deficiencies, demands and expenses (whether or not arising out of
third-party claims), including without limitation interest, penalties, costs of
litigation, losses in connection with any Environmental Law (including without
limitation any clean-up, remedial, corrective or responsive action), losses,
excluding lost profits, resulting from any shut down or curtailment of
operations, damages to the environment, attorneys' fees, and all amounts paid in
the investigation, defense or settlement of any of the foregoing.
"Material Adverse Effect" or "Material Adverse Change" means any
significant and substantial adverse effect or change in the condition (financial
or other), business, results of operations, public image, prospects, assets,
liabilities or operations of Sellers, taken as a whole or on the ability of any
Seller to consummate the transactions contemplated hereby, or any event or
condition which would, with the passage of time, constitute a "material adverse
effect" or "material adverse change," excluding, however, any such effect or
change caused by or resulting from (i) the announcement or pendency of the
transactions contemplated by this Agreement, and (ii) changes in economic
conditions generally.
"Multiemployer Plan" has the meaning set forth in Section 3.22(a).
"Order Backlog" means any unfilled purchase order or commitment of any
Seller for the Business.
"OSHA" has the meaning set forth in Section 3.15.
"Owned Property" has the meaning set forth in Section 3.12(a)(i).
"PBGC" has the meaning set forth in Section 3.22(g).
"Pension Plan" has the meaning set forth in Section 3.22(a).
"Permits" means all licenses, permits, franchises, approvals,
authorizations, consents or orders of, or filings with, any Governmental
Authority, whether foreign, federal, state or local, or any other person,
necessary for the operation of the Business.
"Person" means an individual, corporation, partnership, association,
trust, estate or other entity or organization, including a Governmental
Authority.
"Personal Goodwill" means all customer lists and information, customer
contacts and relationships, supplier lists, contacts and relationships, rights
and power to cause the continuation
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of such customer and supplier relationships, representation and standing within
the AC/DC drive and related industries and other personal assets associated with
a specified individual's performance of his duties as an employee of a Seller
that are generally understood to be within the definition of "goodwill."
"Plan Affiliate" means, with respect to any Person, any employee
benefit plan or arrangement sponsored by, maintained by or contributed to by
such Person, and with respect to any employee benefit plan or arrangement, any
Person sponsoring, maintaining or contributing to such plan or arrangement.
"Proposition 65" has the meaning set forth in Section 3.17(o).
"Purchase Price" has the meaning set forth in Section 1.4.
"RCRA" has the meaning set forth in Section 3.17(b).
"Recalls" has the meaning set forth in Section 3.33(b).
"Release" shall mean and include all unlawful spilling, leaking,
pumping, pouring, emitting, emptying, discharging, injecting, escaping,
leaching, dumping, migrating within the environment or disposing into the
environment or the workplace of any Hazardous Substance, and otherwise as
defined in any Environmental Law.
"Representative" means any officer, director, principal, attorney,
agent, employee or representative.
"Returns" has the meaning set forth in Section 3.14.
"Seller" and "Sellers" have the meaning set forth in the preamble
hereto.
"Sellers' Micro-Technology" has the meaning set forth in Section 3.35.
"Settlement Date" has the meaning set forth in Section 1.5(e).
"Subsidiary" means (a) any corporation in an unbroken chain of
corporations beginning with any Seller if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing 50% or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain, (b) any partnership in which the Company is a
general partner, or (c) any partnership in which the Company possesses a 50% or
greater interest in the total capital or total income of such partnership.
"Tax" or "Taxes" has the meaning set forth in Section 3.14.
"Treasury Regulation" means any final, proposed or temporary
regulations promulgated under the IRC.
48
<PAGE> 53
"Welfare Plan" has the meaning set forth in Section 3.22(a).
"Working Capital" means the difference between the current assets and
current liabilities of the Company, as determined in accordance with GAAP
consistently applied.
"Year 2000 Compliant and Ready" has the meaning set forth in Section
3.35.
"Year-End Financial Statements" has the meaning set forth in Section
3.8.
49
<PAGE> 54
IN WITNESS WHEREOF, Buyer and Sellers have duly executed and delivered
this Agreement as of the date first above written.
"SELLERS"
ELECTRIC MOTOR SYSTEMS, INC.,
an Ohio corporation
By:
-------------------------------------
Title:
----------------------------------
ELECTROMOTIVE SYSTEMS, INC.,
a Wisconsin corporation
By:
-------------------------------------
Title:
----------------------------------
and
EMS/ROSA AUTOMATION
ENGINEERING, INC.,
an Ohio corporation
By:
-------------------------------------
Title:
----------------------------------
"BUYER"
MAGNETEK, INC.,
a Delaware corporation
By:
-------------------------------------
Title:
----------------------------------
50
<PAGE> 55
"INDIVIDUAL SELLERS"
-----------------------------------------
ROBERT FRIEDRICH
-----------------------------------------
STEVEN J. BADINGHAUS
51
<PAGE> 1
1999 MAGNETEK ANNUAL REPORT
DEAR FELLOW STOCKHOLDER:
This annual report represents the new philosophy of MagneTek. We are
spending our money where it counts most, on initiatives for satisfying present
customers and attracting new ones.
We ended fiscal 1998 with revenues still over $1 billion but falling sales
and profits. After our recent dispositions of Generators and Motors, we will
enter the new millennium with annualized revenues of over $700 million, a much
stronger balance sheet and excellent prospects for reversing MagneTek's negative
sales and profit trends.
FOCUSING ON ELECTRONIC PRODUCTS
Though revenues and profits declined sharply in fiscal 1999, the catalyst
for strategic change was the sale of our generator business. For three decades,
MagneTek (and its predecessor, Century Electric) built generators for
Caterpillar Inc., consistently receiving praise for outstanding quality. The
generators were custom built for CAT diesel gensets, which accounted for almost
all of our $100-million generator sales volume. In recent years, Caterpillar
entered into global agreements with Emerson Electric Company and purchased a
manufacturer of large generators, which suggested that MagneTek's participation
with it's largest customer would diminish over time. We therefore sold the
generator business to Emerson in April of 1999 for $115 million.
Recognizing that we would emerge from the sale of generators as a different
company, we retained outside consultants (Goldman Sachs) to help us determine
what alternatives were available that we should pursue which would give us the
best chance of enhancing shareholder value. These ranged from recapitalization
to selling the entire company to examining the value of each entity on a
break-up basis. As we went through the process, it became clear that although
the motor business was a big part of MagneTek, it's profitability would be
affected by the generator sale, and we were a niche player in an industry that
was consolidating. Though lacking the financial resources to be a consolidator,
we had a business of significant value to others. Selling that business would
result in our becoming, predominantly, an electronic products company
participating in a "growth industry." Moreover, proceeds from the divestiture of
motors, along with those realized from the generator sale, would enable us to
eliminate our debt. Shortly after fiscal year-end, we sold the motor business to
A. O. Smith Corporation for $253 million, repaid all borrowings under our
domestic bank lines and had significant cash balances on hand.
As part of the strategy we had developed, we are using the surplus cash from
the divestitures to buy back MagneTek shares as we think our stock is
undervalued given the strength of our balance sheet and the multiples afforded
electronics companies in general. To date, we have purchased almost three
million shares of a Board authorization to buy back up to 10 million shares
(one-third) of MagneTek's outstanding stock.
In summary, our strategy review has been completed and our new strategy
should be clear: focus on leadership in electronic products for profitability
and future growth, both internally and from appropriate acquisitions, and
concentrate on cash flow from operations. That said, let me address MagneTek's
1999 results and the revenue and profit issues that we faced during the year.
FISCAL 1999 RESULTS
Motors and generators together comprised 41% of total revenue in fiscal
1998. They have been reported as discontinued operations in fiscal 1999 and
prior years. Compliance with accounting rules requires that all $25 million of
corporate overhead incurred during the 1999 fiscal year be included in the
results of continuing operations. (We have already cut corporate overhead by 40%
to a new annual run rate of approximately $14 million.) Also, the 1999 operating
results include charges of $34.4 million taken in the fourth quarter for
downsizing, inventory adjustments, severance costs and other asset write-downs.
2
<PAGE> 2
1999 MAGNETEK ANNUAL REPORT
Revenue from continuing operations in fiscal 1999 was $662.5 million, down
from $709.4 million in 1998. Including the fourth quarter charges referenced
above, we had an operating loss of $22.9 million in fiscal 1999, equal to $0.74
per basic and diluted share. Adding back profits from discontinued operations --
primarily a $51.0 million gain on the sale of generators in April -- we had
positive net income of $38.5 million, equal to $1.25 per basic and $1.24 per
diluted share. This compares with $37.9 million in fiscal 1998, equal to $1.25
per basic and $1.20 per diluted share.
Before fourth quarter charges and one-time gains, income from continuing
operations was $0.5 million, or $.02 per common share, in fiscal 1999. The fact
that we have cut overhead almost in half will, of course, benefit the bottom
line in the future; and no one who knows MagneTek thinks that the last fiscal
years' results are truly indicative of its potential.
LIGHTING POWER PRODUCTS
Revenues of our Lighting Power Group went from $478.0 million in fiscal 1997
to $445.9 million in fiscal 1998 to $409.9 million in fiscal 1999. This occurred
during a period in which lighting products markets were flat to up 2 to 3%.
We, however, suffered from problems related to:
(a) moving almost all North American manufacturing facilities from the U.S.
to Mexico;
(b) moving R&D facilities from Indiana to Alabama;
(c) entering a new marketing alliance which, during initial execution, cost
us more business than it produced;
(d) implementing a new Enterprise Resource Planning system that initially
disrupted customer service.
All of these problems are now behind us, and we have achieved our aims:
(a) we believe we are the industry's low cost producer, and have cut our
demand-based cycle time from 13 days to 8.5 days on the way to our goal
of 7 days;
(b) we have, in Huntsville, Alabama access to a wealth of electronics
talent, which is now delivering a stream of higher margin new products;
(c) the marketing alliance with GE is starting to pay off as we had hoped;
(d) customer service is now our "disruption-free zone."
We have also developed a solid operating team under group president Brian
Dundon, a 14-year MagneTek veteran who previously ran the profitable Motors and
Generators Group.
POWER ELECTRONIC PRODUCTS
Revenues of $164.6 million in fiscal 1997, $165.9 million in fiscal 1998 and
$168.2 million in fiscal 1999 have been essentially flat. We, during this
period, shifted our market strategy away from the low margin personal computer
market to higher margin data and telecom markets, temporarily sacrificing sales
volume in the transition.
Additionally, due to the domino effect of financial troubles in the Far
East, the Information Technology industry (data processing, data-com and
telecom) experienced a slowdown that closely paralleled our 1999 fiscal year.
Our Power Electronics Group began getting delivery deferrals from customers in
July of 1998. We recorded only a small revenue increase in fiscal 1999, despite
a full year's contribution from Omega Power Systems, Chatsworth, California, an
$18-million power supplies manufacturer that we acquired in June of 1998. In the
Spring of 1999, we consolidated our Huntsville, Alabama power supplies
operations into Chatsworth, which resulted in some manufacturing inefficiencies
and missed sales opportunities.
Bookings began to improve in both Europe and the U.S. in the fourth quarter
of fiscal 1999, with telecom accounting for 40% of the new orders, up from 25% a
year ago. We believe that our Power Electronics Group has exciting potential,
not only because of long-term trends in the Information Technology industry, but
also because we believe we are gaining a foothold in the U.S. power supplies
market. Under group president Antonio Canova, the architect of our electronic
power supplies business, MagneTek is a market leader in Europe, and our
objective is to capture a growing share of the even larger domestic market. We
will also actively seek product-line acquisitions in this segment to accelerate
our rate of market penetration.
3
<PAGE> 3
1999 MAGNETEK ANNUAL REPORT
DRIVES AND SYSTEMS
Revenues were $94.5 million in fiscal 1997, $97.6 million in fiscal 1998 and
$84.4 million in fiscal 1999.
We feel that FY `99 was an aberration as problems emerged in several
important markets. Construction slowdowns in Asia and elsewhere cooled demand
for elevators, while depressed metals prices all but froze orders for new mining
equipment -- two key markets for MagneTek drives. Further, delayed introduction
of a new product line needed for building air conditioning, our largest drives
market, put us at a temporary competitive disadvantage.
We are optimistic about the new year as demand for elevator and mining
drives is slowly recovering and we introduced a new drive line for air
conditioning in June. Shortly after fiscal year end, we acquired EMS/ESI. It
will contribute to earnings immediately and add more than $40 million to our top
line, making MagneTek the number two supplier of A/C (alternating current)
drives in the U.S., as well as the nation's leading provider of motion controls
for cranes and hoists. Further, exiting the motor business frees us to form
technical and marketing alliances with motor builders who do not have their own
drive lines, and we are doing so.
In June, Dean Hoffmann joined MagneTek as president of the Drives and
Systems Group. He has 17 years of experience in the drives business, most
recently as Vice President, Global Operations for Asea Brown Bovari. Under Dean
we will focus more on A/C drives, which are displacing D/C (direct current)
drives and fluid power controls in factory automation, elevators and even
certain multi-axis positioning applications.
POSITIVE SIGNS
There is no question that our mid-1999 strategy review created uncertainty
among MagneTek's customers and employees, and that contributed to the reduction
in our overall sales volume and productivity. While the negative impact of the
strategy review process is incalculable, some positive effects of its outcome
have already begun to show. In spite of operating losses, we reversed a trend
and generated $15 million in free cash from operations in the final quarter of
fiscal 1999. Today, we are practically debt-free, and stockholders' equity is
approximately $235 million, up from $188 million a little over a year ago. And,
our continuing operations appear to be on track to return to pre-1999 sales
levels on reduced SG&A.
MagneTek is a very personal as well as professional matter for me. I took
the Company private as an LBO in 1984 and public as an IPO in 1989. As we enter
the new century, I am committed to taking MagneTek to the next level as a
leading electronic products company. We have an organization of committed
associates who believe in that vision, and we are counting on your support to
help us achieve it. Watch us perform.
/s/ Andrew G. Galef
--------------------------------------
Andrew G. Galef
Chairman of the Board,
President and Chief Executive Officer
4
<PAGE> 4
1999 MAGNETEK ANNUAL REPORT
SELECTED FINANCIAL DATA
STATEMENT OF INCOME DATA
<TABLE>
<CAPTION>
For the years ended June 30,
(Amounts in thousands,
except per share data) 1999(*) 1998 1997 1996(**) 1995(**)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $662,486 $709,374 $737,038 $ 718,588 $768,208
Income (loss):
Continuing operations (22,877) 16,239 14,562 (104,870) 10,262
Discontinued operations 61,350 21,637 14,189 10,706 (3,166)
Extraordinary item -- -- (4,676) -- (4,820)
Net income (loss) 38,473 37,876 24,075 (94,164) 2,276
Per common share--basic:
Income (loss) from continuing
operations before extraordinary
item $ (0.74) $ 0.54 $ 0.57 $ (4.25) $ 0.42
Net income (loss) $ 1.25 $ 1.25 $ 0.94 $ (3.81) $ 0.09
Per common share--diluted:
Income (loss) from continuing
operations before extraordinary
item $ (0.74) $ 0.52 $ 0.57 $ (4.25) $ 0.42
Net income (loss) $ 1.24 $ 1.20 $ 0.89 $ (3.81) $ 0.09
========================================================================================================================
</TABLE>
(*) Net income for the year ended June 30, 1999 includes a $50,988 after-tax
gain on the sale of the Company's Generator business included in
discontinued operations. Continuing operations results in fiscal 1999
include charges aggregating $34,400 relating to downsizing, inventory
adjustments, severance costs and other asset-writedowns.
(**) Losses from continuing operations for the years ended June 30, 1996
include pretax charges aggregating $79,717. Charges in fiscal 1996
reflect costs associated with repositioning operations primarily for
severance, termination benefits, warranty and asset write-downs related
to facility closures and consolidations. Also, in review of the
Company's deferred tax asset in accordance with FASB No.109, a $14,700
charge was incurred in fiscal year 1996. Loss from discontinued
operations includes after tax charges of $14,400 for the year ended June
30, 1995 reflecting estimated losses on disposition.
BALANCE SHEET DATA
<TABLE>
<CAPTION>
As of June 30,
(Amounts in thousands) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $645,574 $667,922 $599,892 $627,306 $801,027
Long-term debt,
including current portion 183,234 244,904 243,908 322,023 448,467
Common stockholders' equity 203,931 188,392 101,495 41,289 116,888
======================================================================================================
</TABLE>
5
<PAGE> 5
1999 MAGNETEK ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
During fiscal 1999, after a period of declining revenues and pressure on
operating profits, we undertook a review of strategic alternatives for improving
MagneTek's value. Based on this review, which was conducted by both internal and
outside analysts, we concluded that the Company's electronic product lines offer
the best opportunity for growth, profitability and value enhancement. Moreover,
our Motor and Generator businesses were being impacted by industry
consolidation, exposing the Company to unknown costs to remain competitive.
Therefore, we elected to divest these businesses and use the proceeds to reduce
debt, repurchase Company stock and strengthen our electronic product lines.
The Generator business was sold to Emerson Electric Co. in April 1999 for $115
million. In August, just after fiscal year end, the Motor business was sold to
A. O. Smith Corporation for $253 million. These businesses are reported as
discontinued operations in the accompanying Consolidated Financial Statements.
We have used proceeds from the divestitures to repay all borrowings under the
Company's domestic bank lines of credit, to continue the stock repurchase
program previously authorized by our Board, and to acquire substantially all of
the assets of EMS group (see Note 2 of Notes to Consolidated Financial
Statements). This acquisition significantly increases MagneTek's share of the
North American A/C (alternating current) electronic drives market.
MagneTek now operates in three business segments: LIGHTING POWER PRODUCTS(LP),
POWER ELECTRONIC PRODUCTS(PE), and DRIVES & SYSTEMS (DS). LP makes power devices
called "ballasts" that energize and operate fluorescent and other types of
lamps, as well as certain ballast components. PE produces electronic converters,
rectifiers and battery chargers, generally known as "power supplies," primarily
for data processing and communications equipment, as well as component
transformers. Previously part of the Motors & Controls segment, DS supplies
electronic "drives" for regulating motor speed, as well as related hardware and
software.
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company's computer
programs or any hardware that has date-sensitive software or imbedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. Such an
occurrence could result in operating systems that either fail or miscalculate
information. Should such failures occur, normal business processes could be
disrupted.
The Company's plan to resolve the Year 2000 Issue includes specific phases of
software/hardware review, testing and final implementation. In fiscal 1997, the
Company initiated a comprehensive systems review that resulted in the purchase
of an Oracle "Enterprise Resource Planning" software package. While the primary
purpose of the software is to improve business processes, it also enabled the
Company to address Year 2000 issues. In addition to the implementation of
Oracle, some of the Company's software and hardware is being modified or
replaced so that its computer systems will function properly with respect to the
dates in the year 2000 and thereafter. To date, the Company has completed all
review and testing phases and has completed 95% of the final implementation
phase. Management believes this process will substantially address its Year 2000
issues and anticipates a completion date no later than the end of October 1999.
Local area networks, voice and data lines and computer hardware have had final
reviews. Certain administrative software (e.g. accounts receivable) at specific
locations still remains to be fully implemented but these locations are not felt
to pose a material risk of not having implementation completed in the requisite
time frames.
6
<PAGE> 6
1999 MAGNETEK ANNUAL REPORT
We have also enlisted a third party review of systems to evaluate our degree of
preparation and readiness in this area. We have also contacted and will continue
to contact critical suppliers to determine that their products and services are
Year 2000 compliant. The Company has contacted its significant suppliers, none
of which share information systems with the Company. The Company will continue
to solicit Year 2000 compliance responses from suppliers in an effort to reduce
risk. To date, the Company is not aware of any third party with a Year 2000
issue that would materially impact the Company's results of operations,
liquidity or capital resources. However, the Company cannot ensure that all
external agents will be Year 2000 ready. The inability of third parties to
complete their Year 2000 resolution process in a timely fashion could materially
impact the Company. The effect of non-compliance by external agents is not
determinable. Management estimates that the total cost of the project
attributable to continuing operations at $8.5 million with funding occurring
from the operating cash flows of the Company. Approximately $7 million has been
spent through fiscal 1999.
Management of the Company believes it has a program in place to resolve the Year
2000 Issue in a timely manner. While the Company has not completed all phases of
its Year 2000 program, the remaining elements for completion are primarily
restricted to the stages of implementation as opposed to review and testing of
software and hardware. In the event schedules for final implementation would
appear at risk with the current resources, the Company has reviewed contingency
plans which include incremental support from third party agents. The Company
believes that while not without risk, these actions would support completion of
the program in the required time frames. Based upon work completed to date,
management believes that the likelihood of a material adverse impact due to
problems with systems is remote. Notwithstanding its efforts, the Company feels
that disruptions in the general economy or from third parties upon which it
relies for means of production or administrative services, resulting from Year
2000 issues, could adversely affect the Company in a material manner.
The Company is exposed to various types of market risks. These risks include raw
material price changes most notably in copper and aluminum. Additional risks
exist with interest rate movements and foreign currency fluctuations in relation
to the U.S. dollar. Management attempts to lower these risks by hedging
exposures within established guidelines. Futures contracts for copper and
aluminum are purchased over time periods and at volume levels, which approximate
expected usage. Interest rate swaps limit the Company's exposure to upward
movements in interest rates that would increase the cost of variable rate debt.
Foreign currency contracts mitigate exposure from our foreign operations and
changes in exchange rates of foreign currencies. We do not speculate on futures
prices and have established limitations on the dollar magnitude and time frames
for these transactions.
RESULTS OF OPERATIONS
NET SALES AND GROSS PROFIT
Net sales for the Company declined to $662.5 million in fiscal 1999 from $709.4
million in fiscal 1998 and $737.0 million in fiscal 1997. Net sales of Lighting
Power Products decreased 8% in fiscal 1999 compared to fiscal 1998. The majority
of the reduction occurred in domestic markets and was a function of lower unit
volumes and competitive pricing for electronic and magnetic lighting ballasts.
LP's sales declined 7% in fiscal 1998 versus fiscal 1997 with the reductions
concentrated in magnetic and electronic ballasts and reduced foreign demand.
7
<PAGE> 7
1999 MAGNETEK ANNUAL REPORT
Net sales of Power Electronic Products increased 1% in fiscal 1999 from fiscal
1998 and was equal to the 1% increase in fiscal 1998 versus fiscal 1997. Revenue
increases in fiscal 1999 of Power Electronic Products were augmented by the
contribution of Omega Power Products, which was acquired in June of 1998 but
offset by the transition to higher margin telecommunication markets and exiting
of less profitable high volume niches. PE's revenue in fiscal 1998 improved from
fiscal 1997 due to stronger sales of custom power supplies offset by weaker
transformer product sales. Foreign currencies eroded PE revenues by $20 million
when comparing fiscal 1998 to 1997.
Drives and Systems revenue declined 13% in fiscal 1999 compared to 1998.
Standard drives accounted for the majority of the decrease, with lesser declines
occurring in custom drives and systems products. Elevator and mining markets
slowed in fiscal 1999 from the previous year. DS's revenue increased 3% in
fiscal 1998 versus fiscal 1997 due to improved systems and standard drives sales
versus the year earlier period.
The Company's gross profit fell to $108.8 million in fiscal 1999 from $144.4
million in fiscal 1998. Gross profit levels fell due primarily to the lower
sales volumes in Lighting Power Products and Drives and Systems. Power
Electronic Products were negatively impacted by transition costs associated with
domestic manufacturing consolidations into a single site in Chatsworth,
California. The first six months of fiscal 1999 also included manufacturing
transition expenses in Lighting Power Products. The move to lower cost ballast
facilities in Mexico and closure of domestic plants is now complete. In the
fourth quarter of fiscal 1999, the Company recorded charges of approximately $15
million, primarily for surplus inventory. Increased reserves resulted from lower
sales volumes in Lighting Power Products, and shorter product life cycles, most
notably in Power Electronic Products. Gross profit levels fell to $144.4 million
in fiscal 1998 from $154.6 million in fiscal 1997. This decline was caused by
LP's revenue shortfall from the previous year.
OPERATING EXPENSES
Selling, general and administrative expense (including research and development
expenditures) was $136.0 million (20.5% of net sales) in fiscal 1999 compared to
$114.7 million (16.2% of net sales) in fiscal 1998. Fiscal 1999 results included
approximately $17 million of fourth quarter charges related primarily to
severance expense, costs associated with vacating facilities, provisions for
accounts receivable and write-offs associated with software assets. The balance
of the increase was attributable to the full year inclusion of the Omega Power
Products acquisition and higher expenses associated with selling and marketing
costs. Fiscal 1998 costs of $114.7 million declined from fiscal 1997 levels of
$123.2 million (16.7% of net sales), due primarily to lower employee related
costs.
INTEREST AND OTHER EXPENSES
Interest expense was $1.9 million in fiscal 1999 compared to $2.2 million in
fiscal 1998 and $3.5 million in fiscal 1997. Interest expense for the Company is
recorded in conformance with accounting principles which require the allocation
of interest expense between continuing and discontinued operations based upon
the amount of debt that can be attributed to discontinued operations. Other
expense was $4.6 million in fiscal 1999 compared to $2.2 million in fiscal 1998
and $3.6 million in fiscal 1997. The increase in other expense in fiscal 1999
from fiscal 1998 reflects the write-off of goodwill related to the Company's
magnetic ballast operation in Italy. Other expense in fiscal 1998 declined from
fiscal 1997 due to reduction of debt and resulting lower amortization of
deferred financing costs.
8
<PAGE> 8
1999 MAGNETEK ANNUAL REPORT
NET INCOME (LOSS)
In fiscal 1999, the Company recorded net income of $38.5 million or $1.25 per
share (basic) and $1.24 on a diluted basis, reflecting a loss from continuing
operations of $22.9 million and income from discontinued operations of $10.4
million, as well as a gain of $51 million (net of taxes) from the sale of the
Generator business in April of 1999. Comparable net income for fiscal 1998 was
$37.9 million, of which $16.2 million was from continuing operations and $21.6
million from discontinued operations. Earnings per share in fiscal 1998 were
$1.25 per share (basic) and $1.20 on a diluted basis. Fiscal 1997 net income of
$24.1 million included net income from continuing operations of $14.6 million,
discontinued operations of $14.2 million and an extraordinary charge of $4.7
million associated with the early retirement of the Company's Senior
Subordinated Debentures. Earnings per share in fiscal 1997 were $.94 basic and
$.89 diluted, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, long-term borrowings (including the current portion) were
$183 million, compared to $245 million as of June 30, 1998 and $244 million as
of June 30, 1997. The decrease in long-term borrowings in fiscal 1999 resulted
primarily from proceeds received from the sale of the Generator business, which
totaled $115 million. Primary uses of cash during fiscal 1999 included
investments in net working capital, capital equipment and open market purchases
of approximately 1.6 million shares of the Company's common stock for $17
million. The Company's Board of Directors has authorized the purchase of up to
10 million shares of the Company's stock.
At June 30, 1999, the Company had an agreement with a group of banks to lend up
to $350 million under a revolving loan facility through June, 2002. As of June
30, 1999, the Company had approximately $170 million in available capacity under
this agreement. Effective July 30, 1999, the Company amended its Bank Loan
Agreement, reducing the lending commitment from $350 million to $200 million.
This reflected lower expected borrowing requirements as a result of the $253
million sale of the Company's Motor business in August, 1999. Concurrent with
the sale of the business, the Company repaid all outstanding borrowings under
its Bank Loan Agreement.
We believe that internally generated cash flows, along with the Company's Bank
Loan Agreement and access to external capital resources, will be sufficient to
fund our near-term commitments and plans.
Cash outflow in connection with repositioning reserves established in fiscal
1996 approximated $4 million in fiscal 1999 and is not expected to exceed $10
million in fiscal 2000. In addition, however, the Company may be subject to
certain potential environmental and legal liabilities (see Note 11).
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risks in the areas of commodity prices, foreign
exchange and interest rates. To mitigate the effect of such risks, the Company
selectively utilizes specific financial instruments. Hedging transactions are
entered into under Company policies and procedures and monitored monthly.
Company policy clearly prohibits the use of such financial instruments for
trading or speculative purposes. A discussion of the Company's accounting
policies for derivative financial instruments is included in the Summary of
Significant Accounting Policies in the Notes to the Consolidated Financial
Statements.
9
<PAGE> 9
1999 MAGNETEK ANNUAL REPORT
COMMODITY PRICES
The Company uses a significant amount of copper wire in the production of its
products. The price of copper is subject to fluctuations based upon general
economic conditions, labor issues at the producing mines, the capacity of
smelting operations and the availability of scrap copper. Due to the relatively
large content of copper cost in the Company's product, the Company enters into
forward copper futures positions to act as a hedge against its material
purchases. The fair value of the Company's position in copper is calculated by
valuing its net futures position at quoted market prices. Market risk is
estimated as the potential loss in fair value resulting from a hypothetical 10%
adverse change in such prices. The potential loss in fair value of the Company's
copper futures position from a hypothetical 10% decrease in copper prices was
$1.6 million at June 30, 1999 and $3.0 million at June 30, 1998.
INTEREST RATES
The fair value of the Company's debt was $179 million and $240 million at June
30, 1999 and June 30, 1998, respectively. The fair value of the Company's debt
is equal to borrowings outstanding from domestic and foreign banks and small
amounts owed under capital lease arrangements. Effective in August of 1999, the
Company repaid all domestic revolving debt on outstanding borrowings with
proceeds received from the sale of its Motor business. Prospectively, the
Company does not consider there to be a material risk due to changes in the
interest rate structure of borrowing rates applicable to such debt. For the
variable rate debt outstanding at June 30, 1999 and 1998, a hypothetical 10%
adverse change in interest rates would have had an unfavorable impact of $1.0
million and $1.5 million, respectively, on the Company's pre-tax earnings and
cash flows.
FOREIGN CURRENCY EXCHANGE RATES
The Company enters into foreign exchange forward contracts to hedge certain
balance sheet exposures in Europe and operating cost exposures related to
manufacturing facilities in Mexico. The Company had foreign currency contracts
outstanding of approximately $39 million at June 30, 1999 and $59 million at
June 30, 1998. Assuming a hypothetical 10% adverse change in foreign exchange
rates, the potential loss in value of the Company's forward contracts would have
been $3.9 million at June 30, 1999 and $5.9 million at June 30, 1998.
FORWARD-LOOKING INFORMATION
The foregoing risk management discussion and amounts projected, generated from
adverse changes that could occur are forward-looking statements of market risks
assuming that certain adverse market conditions do occur. Actual results in the
future are beyond the control of the Company and may differ materially from
those estimated. The analytical methods used to assess and mitigate risks in
areas discussed should not be considered projections of future events or losses.
10
<PAGE> 10
1999 MAGNETEK ANNUAL REPORT
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the years ended June 30,
(Amounts in thousands, except per share data) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 662,486 $709,374 $ 737,038
Cost of sales 553,687 564,982 582,455
- -----------------------------------------------------------------------------------------------------------------
Gross profit 108,799 144,392 154,583
Research, sales, general and administrative 135,982 114,664 123,166
- -----------------------------------------------------------------------------------------------------------------
Income (loss) from operations (27,183) 29,728 31,417
Interest expense 1,853 2,208 3,451
Other expense, net 4,641 2,181 3,604
- -----------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
provision (benefit) for income taxes and extraordinary item (33,677) 25,339 24,362
Provision (benefit) for income taxes (10,800) 9,100 9,800
- -----------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before extraordinary item (22,877) 16,239 14,562
Discontinued operations -
Income from operations (net of taxes) 10,362 21,637 14,189
Gain on disposal (net of taxes) 50,988 -- --
Extraordinary item--loss on early extinguishment of debt
(net of taxes) -- -- (4,676)
- -----------------------------------------------------------------------------------------------------------------
Net income $ 38,473 $ 37,876 $ 24,075
=================================================================================================================
Per common share basic:
Income (loss) from continuing operations before extraordinary item $ (0.74) $ 0.54 $ 0.57
Income from discontinued operations 1.99 0.71 0.55
Extraordinary item -- -- (0.18)
- -----------------------------------------------------------------------------------------------------------------
Net income $ 1.25 $ 1.25 $ 0.94
=================================================================================================================
Per common share diluted:
Income (loss) from continuing operations before extraordinary item $ (0.74) $ 0.52 $ 0.57
Income from discontinued operations 1.98 0.68 0.47
Extraordinary item -- -- (0.15)
- -----------------------------------------------------------------------------------------------------------------
Net income $ 1.24 $ 1.20 $ 0.89
=================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
11
<PAGE> 11
1999 MAGNETEK ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of June 30,
(Amounts in thousands, except share and per share data) 1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
- --------------------------------------------------------------------------------------------------------
Current assets:
Cash $ 6,880 $ 5,976
Accounts receivable, less allowance for doubtful accounts of $4,306 in 1999
and $2,427 in 1998 111,105 126,988
Inventories 116,316 132,058
Deferred income taxes 30,401 6,791
Prepaids and other assets 5,003 4,248
- --------------------------------------------------------------------------------------------------------
Total current assets 269,705 276,061
- --------------------------------------------------------------------------------------------------------
Property, plant and equipment:
Land 2,021 2,087
Buildings and improvements 30,932 29,350
Machinery and equipment 205,601 191,173
- --------------------------------------------------------------------------------------------------------
238,554 222,610
Less accumulated depreciation and amortization 133,489 119,970
- --------------------------------------------------------------------------------------------------------
Net property, plant and equipment 105,065 102,640
- --------------------------------------------------------------------------------------------------------
Net assets of discontinued operations 173,779 185,054
Goodwill, less accumulated amortization of $7,967 in 1999 and $4,895 in 1998 37,548 39,754
Deferred financing costs, intangible and other assets
less accumulated amortization of $23,844 in 1999 and $23,136 in 1998 59,477 64,413
- --------------------------------------------------------------------------------------------------------
$645,574 $667,922
=========================================================================================================
</TABLE>
12
<PAGE> 12
1999 MAGNETEK ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of June 30,
(Amounts in thousands, except share and per share data) 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
- ---------------------------------------------------------------------------------------------------------
Accounts payable $ 73,266 $ 74,646
Accrued liabilities 87,742 90,168
Current portion of long-term debt 4,141 5,327
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 165,149 170,141
- ---------------------------------------------------------------------------------------------------------
Long-term debt, net of current portion 179,093 239,577
Other long-term obligations 54,262 58,028
Deferred income taxes 43,139 11,784
Commitments and contingencies
Stockholders' Equity:
Common stock, $0.01 par value, 100,000,000 shares authorized
29,986,000 and 31,484,000 shares issued and outstanding in 1999 and 1998 300 315
Additional paid-in capital 160,574 176,462
Retained earnings 66,210 27,737
Accumulated other comprehensive loss (23,153) (16,122)
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 203,931 188,392
- ---------------------------------------------------------------------------------------------------------
$645,574 $667,922
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
13
<PAGE> 13
1999 MAGNETEK ANNUAL REPORT
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL RETAINED OTHER
-------------------- PAID-IN EARNINGS COMPREHENSIVE
SHARES AMOUNT CAPITAL (DEFICIT) INCOME TOTAL
---------- ------ ---------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996 25,462,000 $ 255 $ 89,609 $(34,214) $ (14,361) $ 41,289
- --------------------------------------------------------------------------------- -------------------------
Exercise of stock options 332,000 3 3,434 -- -- 3,437
Restricted stock grants 252,000 2 634 -- -- 636
Debt conversion 2,213,000 22 35,474 -- -- 35,496
Net income -- -- -- 24,075 -- 24,075
Translation adjustments -- -- -- -- (3,438) (3,438)
Comprehensive income - 1997 -- -- -- -- -- 20,637
- -----------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1997 28,259,000 $ 282 $ 129,151 $(10,139) $ (17,799) $ 101,495
- -----------------------------------------------------------------------------------------------------------
Exercise of stock options 513,000 5 7,057 -- -- 7,062
Restricted stock grants 40,000 1 1,215 -- -- 1,216
Debt conversion 2,472,000 25 38,944 -- -- 38,969
Share value trust 200,000 2 3,055 -- -- 3,057
Unearned employee compensation -- -- (2,960) -- -- (2,960)
Net income -- -- -- 37,876 -- 37,876
Translation adjustments -- -- -- -- 1,677 1,677
Comprehensive income - 1998 -- -- -- -- -- 39,553
- -----------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1998 31,484,000 $ 315 $ 176,462 $ 27,737 $ (16,122) $ 188,392
- -----------------------------------------------------------------------------------------------------------
Exercise of stock options 108,000 1 1,137 -- -- 1,138
Share value trust -- -- (1,006) -- -- (1,006)
Unearned employee compensation -- -- 911 -- -- 911
Share repurchase/retirement (1,606,000) (16) (16,930) -- -- (16,946)
Net income -- -- -- 38,473 -- 38,473
Translation adjustment -- -- -- -- (7,031) (7,031)
Comprehensive income - 1999 -- -- -- -- -- 31,442
- -----------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1999 29,986,000 $ 300 $ 160,574 $ 66,210 $ (23,153) $ 203,931
===========================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE> 14
1999 MAGNETEK ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended June 30,
(Amounts in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations before extraordinary item $ (22,877) $ 16,239 $ 14,562
Adjustments to reconcile income (loss) from continuing operations
before extraordinary items to net cash provided by operating activities:
Depreciation and amortization 26,000 22,987 24,119
Changes in operating assets and liabilities of continuing operations 4,347 (33,130) 19,907
- ---------------------------------------------------------------------------------------------------------------------------
Total adjustments 30,347 (10,143) 44,026
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 7,470 6,096 58,588
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase and investment in companies, net of cash acquired -- (31,001) --
Proceeds from sale of Generator business and other assets 115,571 1,336 --
Capital expenditures (24,418) (30,652) (19,317)
Other investments 23 3,792 (5,377)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 91,176 (56,525) (24,694)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings under bank and other long-term obligations -- 40,586 80,594
Proceeds from issuance of common stock 1,137 7,057 3,413
Repurchase of common stock (16,930) -- --
Repayment of bank and other long-term obligations (63,574) -- (130,022)
Increase in deferred financing costs -- (102) (1,323)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (79,367) 47,541 (47,338)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) continuing operations 19,279 (2,888) (13,444)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from discontinued operations:
Income from discontinued operations 10,362 21,637 14,189
Adjustments to reconcile income to net cash provided by
discontinued operations:
Depreciation and amortization 13,465 15,418 14,312
Changes in operating assets and liabilities of discontinued operations (25,788) (14,015) 4,138
Capital expenditures (16,414) (20,314) (13,928)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) discontinued operations $ (18,375) $ 2,726 $ 18,711
===========================================================================================================================
Net increase (decrease) in cash 904 (162) 5,267
Cash at the beginning of the year 5,976 6,138 871
- ---------------------------------------------------------------------------------------------------------------------------
Cash at the end of the year $ 6,880 $ 5,976 $ 6,138
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE> 15
1999 MAGNETEK ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in the notes to consolidated financial statements are expressed in
thousands, except share and per share data.)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of MagneTek, Inc. and
its subsidiaries (the Company). All significant intercompany accounts and
transactions have been eliminated. Certain reclassifications have been made to
the fiscal 1998 and fiscal 1997 financial statements to conform to the current
year presentation.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company's policy is to record and recognize sales only upon shipment.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY, PLANT AND EQUIPMENT
Additions and improvements are capitalized at cost, whereas expenditures for
maintenance and repairs are charged to expense as incurred. Depreciation is
provided over the estimated useful lives of the respective assets principally on
the straight-line method (equipment normally five to ten years, buildings
normally ten to forty years).
ACCOUNTING FOR STOCK OPTIONS
As permitted under Statement of Financial Accounting Standards No. 123 (SFAS
123), "Accounting for Stock-Based Compensation," the Company has elected to
follow Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued
to Employees" (APB 25), and related interpretations, in accounting for stock
based awards to employees. Under APB 25, the Company recognizes no compensation
expense with respect to such awards. The Company has adopted the disclosure-only
option under SFAS No.123.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No.130,"Reporting Comprehensive Income," and SFAS No.
131,"Disclosures about Segments of an Enterprise and Related Information," in
fiscal 1999. Each required additional disclosure but does not have a material
effect on the Company's financial position or results of operations.
16
<PAGE> 16
1999 MAGNETEK ANNUAL REPORT
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued, and as amended, is required to be adopted in years
beginning after June 15, 2000. This Statement requires all derivatives to be
recorded on the balance sheet at fair value. This results in the offsetting
changes in fair values or cash flows of both the hedge and the hedged item being
recognized in earnings in the same period. Changes in fair value of derivatives
not meeting the Statement's hedge criteria are included in income. The Company
does not expect the adoption of this Statement to have a significant effect on
its results of operations or financial position.
RESEARCH AND DEVELOPMENT
Expenditures for research and development are charged to expense as incurred and
aggregated $16,392, $16,371 and $14,839 for the years ended June 30, 1999, 1998,
and 1997, respectively. Research and development costs are classified in the
accompanying Consolidated Statements of Income as operating expenses (after
Gross profit) for all periods presented. Historically the Company included such
costs in Cost of sales. This reclassification more closely reflects industry
practice and improves comparability with similar companies.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments to reduce commodity and
financial market risks. These instruments are used to hedge copper material
purchases, foreign currency and interest rate market exposures. The Company does
not use derivative financial instruments for speculative or trading purposes.
The accounting policies for these instruments are based on the Company's
designation of such instruments as hedging transactions. The criteria the
Company uses for designating an instrument as a hedge include the instrument's
effectiveness in risk reduction and the matching of the derivative to the
underlying transaction. The resulting gains or losses are accounted for as part
of the transactions being hedged, except that losses not expected to be
recovered upon the completion of the hedge transaction are expensed.
DEFERRED FINANCING COSTS, INTANGIBLE AND OTHER ASSETS
Costs incurred to obtain financing are deferred and amortized principally on a
straight line method over the term of the financing. Amortization expense
relating to deferred financing costs was $708, $741 and $2,874 for the years
ended June 30, 1999, 1998 and 1997, respectively. Goodwill is being amortized
using the straight-line method over a forty-year period. The Company assesses
the recoverability of goodwill based upon several factors, including
management's intention with respect to the operations to which the goodwill
relates and those operations' projected future income and undiscounted cash
flows. Write-downs of goodwill are recognized when it is determined that the
value of such asset has been impaired. Amortization expense relating to goodwill
(including a write-down of $2,224 in fiscal 1999) was $3,072, $978, and $967 for
the years ended June 30, 1999, 1998, and 1997, respectively.
INCOME TAXES
Income taxes are provided based upon the results of operations for financial
reporting purposes and include deferred income taxes applicable to timing
differences between financial and taxable income.
Federal income taxes are not provided currently on undistributed earnings of
foreign subsidiaries since the Company presently intends to reinvest any
earnings overseas indefinitely.
17
<PAGE> 17
1999 MAGNETEK ANNUAL REPORT
EARNINGS PER SHARE
The consolidated financial statements are presented in accordance with SFAS No.
128, "Earnings Per Share." Basic earnings per share are computed using the
weighted average number of common shares outstanding during the period. Diluted
earnings per common share incorporate the incremental shares issuable upon the
assumed exercise of stock options and common equivalent shares outstanding
including the effect of additional shares related to the Company's Convertible
Notes as if conversion to common shares had occurred at the beginning of the
fiscal year. Earnings have also been adjusted for interest expense on the
Convertible Notes.
FISCAL YEAR
The Company uses a fifty-two, fifty-three week fiscal year which ends on Sunday
nearest June 30. For clarity of presentation, all periods are presented as if
the year ended on June 30. Fiscal years 1999, 1998 and 1997 all contained 52
weeks.
2. ACQUISITIONS
Subsequent to fiscal year-end, on July 23, 1999, the Company purchased the
assets of Electric Motor Systems, Inc., Electromotive Systems, Inc., and
EMS/Rosa Automation Engineering, Inc., (The EMS Group) for cash of approximately
$38 million. The EMS Group manufactures and purchases for resale, adjustable
speed drives. The acquisition will be accounted for under the purchase method of
accounting and, accordingly, the purchase price will be allocated to the net
assets acquired based on their estimated fair market values. Operating results
of the EMS Group will be included in the Company's consolidated results
effective as of the acquisition date.
3. DISCONTINUED OPERATIONS
In April, 1999, the Company sold its Generator business to Emerson Electric.
Subsequent to fiscal year-end in August, 1999, the Company sold its Motor
business to A. O. Smith. The results of those businesses have been reflected as
Discontinued Operations in the accompanying consolidated financial statements.
The operating results of discontinued operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $460,194 $487,815 $453,502
Income before provision for income taxes 15,162 33,837 23,589
Provision for income taxes 4,800 12,200 9,400
- ----------------------------------------------------------------------------------------------------
Income from discontinued operations $ 10,362 $ 21,637 $ 14,189
====================================================================================================
</TABLE>
A portion of the Company's interest expense has been allocated to discontinued
operations based upon the debt balance attributable to those operations
(interest expense allocated to discontinued operations was $17.0 million in
fiscal 1999, $14.4 million in fiscal 1998 and $24.4 million in fiscal 1997).
Taxes have been allocated using the same overall rate incurred by the Company in
each of the fiscal years presented.
18
<PAGE> 18
1999 MAGNETEK ANNUAL REPORT
The accompanying financial statements have been re-stated to conform to
discontinued operations treatment for all historical periods presented. During
the year ended June 30, 1999, the Company completed the sale of the Generator
business for $115 million of pre-tax proceeds. The Motor business was sold on
August 2, 1999 for $253 million of pre-tax proceeds. Both transactions are
subject to post closing adjustments. Proceeds from the sales were used to repay
borrowings outstanding under the Bank Loan Agreement.
Net income for the year ended June 30, 1999 includes a $50,988 (net of taxes of
$24,000) after-tax gain on the sale of the Company's Generator business included
in discontinued operations. Subsequent to fiscal year end, the Company sold the
Motor business and will recognize a gain on sale in the first quarter of fiscal
year 2000. Continuing operations in fiscal 1999 include charges aggregating
$34,400 relating to downsizing, inventory adjustments, severance costs and other
asset write-downs.
4. REPOSITIONING COSTS
During the year ended June 30, 1996, the Company established certain reserves
associated with a variety of repositioning actions and included severance,
termination benefits and asset write-downs related to facility closures
aggregating $79,717, including $28,700 for estimated future warranty claims for
electronic ballasts. Net cash outlays associated with these reserves in fiscal
1999 were $3,754 and included $2,800 of recoveries from a structured settlement
for defective capacitors and certain facility sales. In fiscal 1999, the Company
completed all charges related to these reserves with the exception of warranty
related liabilities. Due to the continued low warranty claims experienced, the
Company reduced its reserve for remaining claims in the second quarter of fiscal
1999 by $5,100 and in the fourth quarter by an additional $5,500. Expiration of
warranty for these products is between January, 1999 and December of 2001. The
Company believes that the remaining warranty reserves are adequate to cover the
outstanding liabilities. Remaining reserves are included in warranty reserves
(see Note 15).
5. INVENTORIES
Inventories at June 30, consist of the following:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Raw materials and stock parts $ 51,489 $ 50,540
Work-in-process 19,244 21,224
Finished goods 45,583 60,294
- ------------------------------------------------------------------------------
$116,316 $132,058
==============================================================================
</TABLE>
6. LONG-TERM DEBT AND BANK BORROWING ARRANGEMENTS
Long-term debt at June 30, consists of the following:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revolving bank loans $175,780 $231,690
10.75 percent Senior Subordinated Debentures, interest payable
semi-annually, due November 15, 1998 -- 3,035
Miscellaneous installment notes, capital leases and other obligations at rates
ranging from 4.55 percent to 8.00 percent, due through 2004 7,454 10,179
- --------------------------------------------------------------------------------------------------------------
$183,234 $244,904
Less current portion 4,141 5,327
- --------------------------------------------------------------------------------------------------------------
$179,093 $239,577
==============================================================================================================
</TABLE>
19
<PAGE> 19
1999 MAGNETEK ANNUAL REPORT
BANK BORROWING ARRANGEMENTS
At June 30, 1999, the Company had an agreement with a group of banks to lend up
to $350,000 under a revolving loan facility through June, 2002. Borrowings under
the agreement (the "Bank Loan Agreement") bear interest at the bank's prime
lending rate or, at the Company's option, the London Interbank Offered Rate plus
one percent. These rates may be reduced or increased based on the level of
certain debt-to-cash flow ratios. At June 30, 1999, borrowings under the Bank
Loan Agreement bore interest at a weighted average of approximately 6.05%. The
Company is required to pay a commitment fee of .25 percent on unused
commitments.
Effective July 30, 1999, the Company amended its Bank Loan Agreement to reduce
the lending commitment from $350,000 to $200,000 to reflect lower borrowing
requirements as a result of proceeds received from the sale of the motor and
generator operations. The Company is in the process of further amending its Bank
Loan Agreement to adjust covenants to reflect the reclassification of the motor
and generator businesses as discontinued operations and the impact of charges
associated with the Company's downsizing program. All other terms and conditions
remain substantially the same. Borrowings under the Bank Loan Agreement are
secured by domestic accounts receivable and inventories and by stock of certain
of the Company's subsidiaries. The Bank Loan Agreement contains certain
provisions and covenants which, among other things, restrict the payment of cash
dividends on common stock, limit the amount of future indebtedness and require
the Company to maintain specified levels of net worth and cash flow.
The Company's European subsidiaries have certain limited local borrowing
arrangements to finance working capital needs. The borrowings under these
arrangements are secured by accounts receivable and inventories of the
respective subsidiaries. The Company has provided parent guarantees to the local
banks which provide the related financing.
Senior Subordinated Debentures
On June 27, 1997 the Company completed a tender for its 10 3/4 percent Senior
Subordinated Debentures ("Debentures") leaving $3,035 of the Debentures
outstanding. The debentures were fully redeemed on November 15, 1998.
Aggregate principal maturities on long-term debt outstanding at June 30, 1999
are as follows:
<TABLE>
<CAPTION>
Year ended June 30
----------------------------------------------------------
<S> <C>
2000 $ 4,141
2001 10,467
2002 166,723
2003 438
2004 342
Thereafter 1,123
----------------------------------------------------------
</TABLE>
Effective in August of 1999, the Company repaid all domestic outstanding
borrowings with proceeds received from the sale of its Motor business.
20
<PAGE> 20
1999 MAGNETEK ANNUAL REPORT
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share.
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share:
Income (loss) from continuing operations before extraordinary item $(22,877) $16,239 $ 14,562
Income from discontinued operations 10,362 21,637 14,189
Gain on sale of Generator business (net of taxes) 50,988 -- --
Extraordinary item -- -- (4,676)
- ---------------------------------------------------------------------------------------------------------
Net income $ 38,473 $37,876 $ 24,075
Weighted average shares for basic earnings per share 30,774 30,417 25,692
Basic earnings per share:
Income (loss) from continuing operations before extraordinary item $ (0.74) $ 0.54 $ 0.57
Income from discontinued operations 0.34 0.71 0.55
Gain on sale of Generator business (net of taxes) 1.65 -- --
Extraordinary item -- -- (0.18)
- ---------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.25 $ 1.25 $ 0.94
Diluted earnings per share:
Income (loss) from continuing operations before extraordinary item $(22,877) $16,239 $ 14,562
Income from discontinued operations 10,362 21,637 14,189
Gain on sale of Generator business (net of taxes) 50,988 -- --
Extraordinary item -- -- (4,676)
Interest savings on convertible debt to equity -- 466 3,452
- ---------------------------------------------------------------------------------------------------------
Net income $ 38,473 $38,342 $ 27,527
Weighted average shares for basic earnings per share 30,774 30,417 25,692
Effect of dilutive stock options 179 1,017 740
Effect of convertible debt to equity -- 571 4,651
- ---------------------------------------------------------------------------------------------------------
Weighted average shares for diluted earnings per share 30,953 32,005 31,083
Diluted earnings per share:
Income (loss) from continuing operations before extraordinary item $ (0.74) $ 0.52 $ 0.57
Income from discontinued operations 0.33 0.68 0.47
Gain on sale of Generator business (net of taxes) 1.65 -- --
Extraordinary item -- -- (0.15)
- ---------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.24 $ 1.20 $ 0.89
</TABLE>
8. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of certain financial instruments such as cash, annuity
contracts and borrowings under revolving credit agreements approximate their
fair values. At June 30, 1999, the Company had certain interest rate swaps (see
Note 9) which, if unwound, would result in a loss of $1,482. In addition, the
Company had foreign exchange forward contracts, which if liquidated would result
in an approximate gain of $2,248.
21
<PAGE> 21
1999 MAGNETEK ANNUAL REPORT
9. DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into futures contracts to provide an economic hedge against
fluctuations in copper prices. Gains and losses are recorded in cost of sales as
the related materials are purchased. The Company also uses certain foreign
exchange contracts to minimize its risk of loss from fluctuations in exchange
rates. These contracts relate to hedging peso fluctuations as the Company has
significant Mexican manufacturing operations and lira contracts to hedge against
positions of significant foreign currency receivables. Gains and losses from
these transactions are recorded in cost of sales as the contracts are
liquidated. In combination with the amended Bank Loan Agreement (see Note 6),
the Company has entered into certain interest rate swaps in connection with the
management of its exposure to fluctuation in interest rates. Gains or losses
from the interest rate swaps are amortized over the period of the original
contract. The Company does not use derivative financial instruments for
speculative or trading purposes.
Outstanding notional amounts for derivative financial instruments at fiscal
year-ends were as follows:
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------
<S> <C> <C>
Interest rate swaps $100,000 $100,000
Currency forward contracts 38,508 59,257
Copper forward contracts 15,988 29,674
Aluminum forward contracts -- 5,469
- ---------------------------------------------------------------------------
</TABLE>
Weighted average pay and receive rates, average maturities and range of
maturities on swaps as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
Weighted
Weighted Weighted average Range of
average average maturity maturity
pay rate receive rate (in years) (in years)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Swaps hedging debt 6.4% 5.3% 4.9 3.0 - 8.5
</TABLE>
As of June 30, 1999 the Company had approximately 23 million pounds of copper
under futures contracts with an average cost per pound of $0.70. Copper under
contract represents 77% of the Company's fiscal 2000 estimated requirements and
no contract extends beyond the end of fiscal year 2000. The Company has
purchased forward contracts equal to 51% of its peso requirements for fiscal
2000 at an average rate of 11.3 pesos to the dollar. No contracts extend beyond
the end of fiscal 2000. Unrealized gains as of June 30, 1999 on copper, pesos,
and lira were not material to the Company.
10. INCOME TAXES
Income tax expense (benefit) is allocated in the financial statements as
follows:
<TABLE>
<CAPTION>
Year ended June 30 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing operations before extraordinary item $(10,800) $ 9,100 $ 9,800
Extraordinary item -- -- (3,250)
- ---------------------------------------------------------------------------------------------------------------
Income tax expense attributable to continuing operations $(10,800) $ 9,100 $ 6,550
Discontinued operations 28,800 12,200 9,400
- ---------------------------------------------------------------------------------------------------------------
Total $ 18,000 $ 21,300 $ 15,950
===============================================================================================================
</TABLE>
22
<PAGE> 22
1999 MAGNETEK ANNUAL REPORT
The expense for income taxes applicable to continuing operations is as follows:
<TABLE>
<CAPTION>
Year ended June 30 1999 1998 1997
- ------------------------------------------------------------------------------------
Current:
<S> <C> <C> <C>
Federal $(17,472) $ 3,867 $ 525
State 932 860 486
Foreign (706) 5,405 2,499
Deferred:
Federal 3,881 (1,257) 1,965
State and Foreign 2,565 225 1,075
- ------------------------------------------------------------------------------------
$(10,800) $ 9,100 $6,550
====================================================================================
</TABLE>
A reconciliation of the Company's effective tax rate to the statutory Federal
tax rate for income from continuing operations before extraordinary items is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------------------
Year ended June 30 Amount % Amount % Amount %
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Provision (benefit) computed at the statutory rate $(11,787) 35.0 $ 8,871 35.0 $ 8,527 35.0
State income taxes, net of federal benefit (15) (0.1) 961 3.8 680 2.8
Foreign tax rates in excess of federal statutory rate 2,986 (8.9) 2,848 11.2 2,253 9.2
Decrease in valuation allowance for
deferred tax assets (16,974) 50.5 (4,295) (16.8) (6,048) (25.0)
Provision for additional taxes 14,677 (43.6) 324 1.3 4,030 16.5
Other--net 313 (0.9) 391 1.5 358 1.5
- ---------------------------------------------------------------------------------------------------------------------
$(10,800) 32.0 $ 9,100 36.0 $ 9,800 40.0
=====================================================================================================================
</TABLE>
Income before provision for income taxes of the Company's foreign subsidiaries
was approximately $(1,239), $6,847 and $5,929 for the years ended June 30, 1999,
1998 and 1997.
23
<PAGE> 23
1999 MAGNETEK ANNUAL REPORT
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets for continuing operations as
of June 30, 1999 and 1998 follows:
<TABLE>
<CAPTION>
Year ended June 30 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization (including differences in the basis of acquired assets) $46,524 $ 24,064
Prepaid pension asset 12,644 9,586
- -------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 59,168 33,650
- -------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Postretirement medical benefit obligation 17,329 20,006
Warranty reserves 12,598 13,302
Inventory and other reserves (including restructuring) 16,503 12,323
- -------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 46,430 45,631
- -------------------------------------------------------------------------------------------------------------------
Less valuation allowance -- (16,974)
- -------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $12,738 $ 4,993
===================================================================================================================
</TABLE>
The Company has determined that as of June 30, 1999 it is more likely than not,
that the deferred tax asset will be realized. Therefore, the valuation allowance
that existed in prior years is no longer necessary.
11. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain facilities and machinery and equipment primarily
under operating lease arrangements. Future minimum rental payments under
noncancelable operating leases as of June 30, 1999 total $56,477 and are payable
in future fiscal years as follows: $9,260 in 2000; $7,343 in 2001; $6,206 in
2002; $5,159 in 2003; $4,732 in 2004 and $23,747 thereafter.
Rent expense for the years ended June 30, 1999, 1998 and 1997, was $12,023,
$10,046 and $9,259, respectively.
LITIGATION--PRODUCT LIABILITY
The Company is a party to a number of product liability lawsuits, many of which
involve fires allegedly caused by defective ballasts. All of these cases are
being defended by the Company, and management believes that its insurers will
bear all liability, except for applicable deductibles, and that none of these
proceedings individually or in the aggregate will have a material effect on the
Company.
24
<PAGE> 24
1999 MAGNETEK ANNUAL REPORT
LITIGATION--PATENT
In April 1998, Ole K. Nilssen filed a lawsuit in the U.S. District Court for the
Northern District of Illinois alleging the Company is infringing seven of his
patents pertaining to electronic ballast technology. The plaintiff seeks an
unspecified amount of damages and an injunction to preclude the Company from
making, using or selling those products allegedly infringing his patents. The
Company denies that it has infringed, or is infringing, any of the plaintiff's
patents, and has asserted several affirmative defenses. The Company also filed a
counterclaim seeking judicial declaration that it is not infringing (and has not
infringed) the patents asserted by the plaintiff, and that such asserted patents
are invalid. The Company intends to defend this matter vigorously. Due to the
preliminary state of the litigation, it is difficult to predict the outcome of
the foregoing legal proceeding. However, management of the Company does not
believe that the financial impact of such litigation will be material.
ENVIRONMENTAL MATTERS--GENERAL
The Company has from time to time discovered contamination by hazardous
substances at certain of its facilities. In response to such a discovery, the
Company conducts remediation activities to bring the facility into compliance
with applicable laws and regulations. The Company's remediation activities for
fiscal 1999 did not entail material expenditures, and its remediation activities
for fiscal 2000 are not expected to entail material expenditures. Future
discoveries of contaminated areas could entail material expenditures, depending
upon the extent and nature of the contamination.
ENVIRONMENTAL MATTERS--MCMINNVILLE, TENNESSEE
Prior to its purchase by the Company in 1986, Century Electric, Inc. ("Century
Electric") acquired a business from Gould Inc. ("Gould") in May 1983 which
included a leasehold interest in a fractional horsepower electric motor
manufacturing facility located in McMinnville, Tennessee. In connection with
this acquisition, Gould agreed to indemnify Century Electric from and against
liabilities and expenses arising out of the handling and cleanup of certain
waste materials, including but not limited to cleaning up any PCBs at the
McMinnville facility (the "1983 Indemnity"). Investigation has revealed the
presence of PCBs and other substances, including solvents, in portions of the
soil and in the groundwater underlying the facility and in certain offsite soil,
sediment and biota samples. Century Electric has kept the Tennessee Department
of Environment and Conservation, Division of Superfund, apprised of test results
from the investigation. The McMinnville plant has been listed as a Tennessee
Inactive Hazardous Substance Site, a report on that site has been presented to
the Tennessee legislature, and community officials and plant employees have been
notified of the presence of contaminants as above described. In 1995, Gould
completed an interim remedial measure of excavating and disposing onsite soil
containing PCBs. Gould also conducted preliminary investigation and cleanup of
certain onsite and offsite contamination. The cost of any further investigation
and cleanup of onsite and offsite contamination cannot presently be determined.
The Company recently sold its leasehold interest in the McMinnville plant and
believes that the costs for further onsite and offsite cleanup (including
ancillary costs) are covered by the 1983 Indemnity. While the Company believes
that Gould will continue to perform substantially under its indemnity
obligations, Gould's substantial failure to perform such obligations could have
a material adverse effect on the Company.
ENVIRONMENTAL MATTERS--OFFSITE LOCATIONS
The Company has been identified by the United States Environmental Protection
Agency and certain state agencies as a potentially responsible party for cleanup
costs associated with alleged past waste disposal practices at several offsite
locations. Due, in part, to the existence of indemnification from the former
owners of certain acquired businesses for cleanup costs at certain of these
sites, the Company's estimated share in liability (if any) at the offsite
facilities is not expected to be material. It is possible that the Company will
be named as a potentially responsible party in the future with respect to other
sites.
25
<PAGE> 25
1999 MAGNETEK ANNUAL REPORT
ENVIRONMENTAL MATTERS--INDEMNIFICATION OBLIGATIONS FROM RESTRUCTURING
In selling certain business operations, the Company from time to time has
agreed, subject to various conditions and limitations, to indemnify buyers with
respect to environmental liabilities associated with the acquired operations.
The Company's indemnification obligations pursuant to such agreements did not
entail material expenditures for fiscal 1999, and its indemnification
obligations for fiscal 2000 are not expected to entail material expenditures.
Future expenditures pursuant to such agreements could be material, depending
upon the nature of any future asserted claims subject to indemnification.
LETTERS OF CREDIT
The Company had approximately $14,257 of outstanding letters of credit as of
June 30, 1999. The Company may issue up to $40,000 of letters of credit under
the Bank Loan Agreement.
12. STOCK OPTION AGREEMENTS
The Company has three stock option plans (the "Plans"), two of which provide for
the issuance of both incentive stock options (under Section 422A of the Internal
Revenue Code of 1986) and non-qualified stock options at exercise prices not
less than the fair market value at the date of grant, and one of which only
provides for the issuance of non-qualified stock options at exercise prices not
less than the fair market value at the date of grant. One of the Plans also
provides for the issuance of stock appreciation rights, restricted stock,
unrestricted stock, restricted stock rights and performance units. The total
number of shares of the Company's common stock authorized to be issued upon
exercise of the stock options and other stock rights under the Plans is
7,235,413. Options granted under two of the Plans vest in three or four equal
annual installments, and options under the third Plan vest in two equal annual
installments.
A summary of certain information with respect to options under the Plans
follows:
<TABLE>
<CAPTION>
Year ended June 30 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding, beginning of year 4,346,621 3,650,485 3,155,820
Options granted 1,065,773 1,605,424 1,045,810
Options exercised (108,129) (512,534) (334,770)
Weighted average exercise price $ 9.06 $ 9.95 $ 10.85
- --------------------------------------------------------------------------------------------------------------
Options cancelled (574,940) (396,754) (216,375)
- --------------------------------------------------------------------------------------------------------------
Options outstanding, end of year 4,729,325 4,346,621 3,650,485
Weighted average price $ 14.19 $ 14.08 $ 11.78
- --------------------------------------------------------------------------------------------------------------
Exercisable options 3,037,261 1,964,593 1,541,135
==============================================================================================================
</TABLE>
26
<PAGE> 26
1999 MAGNETEK ANNUAL REPORT
The following table provides information regarding exercisable and outstanding
options as of June 30, 1999.
<TABLE>
<CAPTION>
Exercisable Outstanding
---------------------------------------------------------------
Weighted Weighted Weighted
average average average
exercise exercise remaining
Options price Options price contractual
Range of exercise price per share exercisable per share outstanding per share life (years)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Under $10.00 586,240 $ 8.88 799,116 $ 8.83 5.91
$10.00-$12.50 326,408 10.84 332,317 10.85 3.49
$12.51-$15.00 804,748 13.64 1,517,198 13.44 6.73
Over $15.00 1,319,865 17.56 2,080,694 17.33 7.11
- ------------------------------------------------------------------------------------------------------------
Total 3,037,261 $14.13 4,729,325 $14.19 6.53
============================================================================================================
</TABLE>
As permitted under Statement of Financial Accounting Standards No. 123 (SFAS
123), "Accounting for Stock-Based Compensation," the Company has elected to
follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" (APB 25) in accounting for stock-based awards to employees. Under
APB 25, the Company generally recognizes no compensation expense with respect to
such awards.
Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS 123 for awards granted in fiscal years after December
31, 1994 as if the Company had accounted for its stock-based awards to employees
under the fair value method of SFAS 123. The fair value of the Company's
stock-based awards to employees was estimated using a Black-Scholes option
pricing model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, the Black-Scholes model requires the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock-based awards to employees have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
stock-based awards to employees. The fair value of the Company's stock-based
awards to employees was estimated assuming no expected dividends and the
following assumptions:
<TABLE>
<CAPTION>
Options
-----------------
1999 1998
- ----------------------------------------------------------------------
<S> <C> <C>
Expected life (years) 5.3 5.1
Expected stock price volatility 38% 37%
Risk-free interest rate 5.4% 6.0%
======================================================================
</TABLE>
27
<PAGE> 27
1999 MAGNETEK ANNUAL REPORT
For pro forma purposes, the estimated fair value of the Company's stock-based
awards to employees is amortized over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
(Thousands except per share amounts) 1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
Net income--as reported $ 38,473 $37,876
Net income--pro forma $ 34,644 $34,597
Basic net income per share--as reported $ 1.25 $ 1.25
Basic net income per share--pro forma $ 1.18 $ 1.17
Diluted net income per share--as reported $ 1.24 $ 1.20
Diluted net income per share--pro forma $ 1.15 $ 1.12
===================================================================================
</TABLE>
Because SFAS 123 is applicable only to awards granted subsequent to fiscal years
beginning after December 31, 1994, its pro forma effect has not been fully
reflected until approximately 1999. A total of 1,045,810 options were granted
during fiscal year 1997 with exercise prices equal to the market price of the
stock on the grant date. The weighted average exercise price and weighted
average fair value of these options were $9.75 and $4.29, respectively. In
fiscal year 1998 a total of 1,605,424 options were granted with exercise prices
equal to the market price of the stock on the grant date. The weighted average
exercise price and weighted average fair value of these options were $17.56 and
$7.49, respectively. In fiscal year 1999 a total of 1,605,773 options were
granted with exercise prices equal to the market price of the stock on the grant
date. The weighted average exercise price was $14.07 and the average fair value
of these options were $6.06.
The Company has granted stock appreciation rights (SARs) to certain of its
directors under director incentive compensation plans. As of June 30, 1999 SARs
with respect to 54,000 shares, with a weighted average exercise price of $14.92
were outstanding under these plans. In July of 1995, the Board of Directors
approved the conversion of SARs with respect to 265,000 shares of common stock
into stock options with comparable vesting, share amounts and exercise prices.
In April of 1997, the Board of Directors approved the conversion of SARs with
respect to an additional 491,500 shares of common stock into stock options with
comparable vesting, share amounts and exercise prices.
28
<PAGE> 28
1999 MAGNETEK ANNUAL REPORT
13. EMPLOYEE BENEFIT PLANS
Benefit obligations, at year-end, fair value of plan assets and prepaid
(accrued) benefit costs for the years ended June 30, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
- ------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 175,776 $ 140,065 $ 23,748 $ 22,606
Service cost 5,125 4,542 98 143
Interest cost 11,873 11,179 1,769 1,682
Plan participants' contributions 107 114 896 489
Amendments -- 386 -- --
Actuarial (gain)/loss (15,563) 27,757 2,447 1,230
Curtailment (gain)/loss -- (552) (1,105) 69
Benefits paid (8,075) (7,715) (3,706) (2,471)
- ------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 169,243 $ 175,776 $ 24,147 $ 23,748
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 189,604 $ 160,329 N/A N/A
Actual return on plan assets 1,374 21,876 N/A N/A
Employer contributions 6,000 15,000 N/A N/A
Plan participants' contributions 107 114 N/A N/A
Benefits paid (8,075) (7,715) N/A N/A
- ------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 189,010 $ 189,604 N/A N/A
Funded status $ 19,767 $ 13,828 $(24,147) (23,748)
Unrecognized transition amount (968) (1,290) -- --
Unrecognized net actuarial (gain)/loss 13,628 12,383 (15,797) (20,071)
Unrecognized prior service cost 78 (277) (4,604) (7,611)
- ------------------------------------------------------------------------------------------------------
Prepaid/(accrued) benefit cost $ 32,505 $ 24,644 $(44,548) $(51,430)
WEIGHTED-AVERAGE ASSUMPTIONS AS OF JUNE 30
Discount rate 7.50% 7.00% 7.50% 7.00%
Expected return on plan assets 9.50% 9.50% N/A N/A
Rate of compensation increase 5.50% 6.00% N/A N/A
</TABLE>
For measurement purposes, an 8.00% (7.00% for HMO Plans) annual rate of increase
in the per capita cost of covered health benefits was assumed for fiscal 1999 to
fiscal year 2000. The rate was assumed to decrease to 6.75% for fiscal year
2000, to 5.75% by fiscal year 2010 and remain at 5.75% per year thereafter.
Pension plan assets include $7,922 in company stock.
29
<PAGE> 29
1999 MAGNETEK ANNUAL REPORT
Net periodic postretirement benefit costs (income) for pension and other
benefits for the years ended June 30, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
- --------------------------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET
PERIODIC BENEFIT COST (INCOME)
Service cost $ 5,125 $ 4,542 $ 4,500 $ 98 $ 143 $ 162
Interest cost 11,873 11,179 9,920 1,769 1,682 1,806
Expected return on plan assets (18,182) (15,927) (11,007) -- -- --
Amortization of transition amount (322) (322) (322) -- -- --
Amortization of prior service cost (315) (335) (332) (917) (1,024) (1,129)
Recognized net actuarial (gain)/loss -- -- 5 (1,140) (1,719) (1,705)
- --------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ (1,821) $ (863) $ 2,764 $ (190) $ (918) $ (866)
Curtailment/settlement (gain)/loss (40) (24) 106 (3,882) (1,337) --
- --------------------------------------------------------------------------------------------------------------
Net benefit cost $ (1,861) $ (887) $ 2,870 $(4,072) $(2,255) $ (866)
</TABLE>
MagneTek recognized a curtailment/settlement gain or loss in each of the fiscal
years resulting from the following:
1999 Fiscal Year: The sale of the Generator business.
1998 Fiscal Year: The closing of the Mendenhall and Huntington facilities.
1997 Fiscal Year: The sale of Jefferson Electric and the closing of the
Blytheville facility.
The health care plans are contributory, with participants' contributions
adjusted annually. The life insurance plans are noncontributory. The accounting
for the health care plans anticipates future cost-sharing changes.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects for Fiscal Year
1999:
<TABLE>
<CAPTION>
1-Percentage Point 1-Percentage Point
Increase Decrease
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Effect of total service and interest cost components
-based on 7.0% discount rate $ 120 $ (105)
Effect on postretirement benefit obligation
-based on 7.5% discount rate $1,736 $(1,459)
</TABLE>
In addition to the defined benefit retirement plans and health care plans, the
Company contributes to a defined contribution savings plan. Company
contributions were $992, $1,083 and $1,184 during the plan years ending March
1999, 1998 and 1997, respectively.
30
<PAGE> 30
1999 MAGNETEK ANNUAL REPORT
14. RELATED PARTY TRANSACTIONS
The Company has an agreement with the Spectrum Group, Inc. whereby Spectrum will
provide management services to the company through fiscal 2000 at an annual fee
plus certain allocated and out of pocket expenses. The Company's chairman is
also the chairman of Spectrum. The services provided include consultation and
direct management assistance with respect to operations, strategic planning and
other aspects of the business of the Company. Fees and expenses paid to Spectrum
for these services under the agreement amounted to $805, $772 and $907 for the
years ended June 30, 1999, 1998 and 1997, respectively.
During the years ended June 30, 1999, 1998 and 1997, the Company paid
approximately $120, $270 and $399, respectively in fees to charter an aircraft
owned by a company in which the chairman is the principal shareholder.
15. ACCRUED LIABILITIES
Accrued liabilities consist of the following at June 30:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Salaries, wages and related items $21,733 $23,249
Warranty 23,865 29,462
Interest 1,320 1,850
Income taxes 14,330 9,819
Other 26,494 25,788
- ------------------------------------------------------------------------------------
$87,742 $90,168
====================================================================================
</TABLE>
16. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in operating assets and liabilities of continuing operations follows:
<TABLE>
<CAPTION>
Year ended June 30, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Increase) decrease in accounts receivable $ 13,616 $ 4,530 $10,163
(Increase) decrease in inventories 12,943 (4,063) 27,962
(Increase) decrease in prepaids and other current assets (586) (823) 2,645
(Increase) decrease in other operating assets 3,006 (19,763) (11,796)
Increase (decrease) in accounts payable (1,547) 3,689 (6,688)
Increase (decrease) in accrued liabilities (3,064) (9,292) (5,182)
Increase (decrease) in deferred income taxes (16,255) (2,411) 7,404
Increase (decrease) in other operating liabilities (3,766) (4,997) (4,601)
- -----------------------------------------------------------------------------------------------------------------
$ 4,347 $(33,130) $19,907
=================================================================================================================
CASH PAID FOR INTEREST AND INCOME TAXES FOLLOWS:
Interest $ 18,241 $ 15,938 $28,255
Income taxes $ 5,931 $ 8,134 $ 3,463
=================================================================================================================
</TABLE>
1997 amounts have been restated to conform to 1998 presentation for prepaid
pension values and net deferred tax liabilities.
During the year ending June 30, 1997, 2,213,067 shares of common stock were
issued upon the conversion of $35,410 of Convertible Notes. On September 22,
1997, the Company redeemed the remaining $39,590 of Convertible Notes with
holders converting their Notes into 2,471,898 shares of common stock.
31
<PAGE> 31
1999 MAGNETEK ANNUAL REPORT
17. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company currently operates in three business segments: Lighting Power
Products; Power Electronic Products; and Drives and Systems.
The Lighting Power Products segment produces magnetic and electronic ballasts
for various lighting applications.
The Power Electronic Products segment produces electronic power supplies
primarily for computer and telecommunications applications, as well as
industrial equipment; component transformers for a wide range of electronic
equipment; and power converters for recreational vehicles.
The Drives and Systems segment designs, manufactures and markets a broad range
of high quality electronic adjustable speed drives and systems.
The Company sells its products primarily to large original equipment
manufacturers and distributors. The Company performs ongoing credit evaluations
of its customers' financial conditions and generally requires no collateral. The
Company has no significant concentration of credit risk.
Financial information by business segment for continuing operations follow:
<TABLE>
<CAPTION>
LIGHTING POWER DRIVES ASSETS
POWER ELECTRONIC AND HELD FOR
For the year ended June 30, 1999 PRODUCTS PRODUCTS SYSTEMS SALE TOTAL
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 409,861 $ 168,201 $ 84,424 -- $ 662,486
Operating income (11,748) (10,227) (5,208) -- (27,183)
Identifiable assets 257,006 173,146 41,643 173,779 645,574
Capital expenditures 10,443 12,307 1,668 -- 24,418
Depreciation and amortization 10,025 14,654 1,321 -- 26,000
===============================================================================================================
<CAPTION>
LIGHTING POWER DRIVES ASSETS
POWER ELECTRONIC AND HELD FOR
For the year ended June 30, 1998 PRODUCTS PRODUCTS SYSTEMS SALE TOTAL
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 445,930 $ 165,860 $ 97,584 -- $ 709,374
Operating income 13,472 9,761 6,495 -- 29,728
Identifiable assets 262,493 177,966 42,409 185,054 667,922
Capital expenditures 12,858 16,400 1,394 -- 30,652
Depreciation and amortization 12,170 9,486 1,331 -- 22,987
===============================================================================================================
<CAPTION>
LIGHTING POWER DRIVES ASSETS
POWER ELECTRONIC AND HELD FOR
For the year ended June 30, 1997 PRODUCTS PRODUCTS SYSTEMS SALE TOTAL
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 477,958 $ 164,574 $ 94,506 -- $ 737,038
Operating income 18,198 8,751 4,468 -- 31,417
Identifiable assets 241,757 152,875 39,117 166,143 599,892
Capital expenditures 7,361 11,111 845 -- 19,317
Depreciation and amortization 13,392 9,278 1,449 -- 24,119
===============================================================================================================
</TABLE>
In fiscal 1999, results for continuing operations include charges aggregating
$34,400 relating to downsizing, inventory adjustments, severance costs and other
asset write-downs.
32
<PAGE> 32
1999 MAGNETEK ANNUAL REPORT
Geographic information with respect to the Company's foreign subsidiaries
follows:
<TABLE>
<CAPTION>
For the year ended June 30 1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $176,534 $194,054 $186,090
Operating income 3,960 12,957 13,132
Identifiable assets 142,208 142,970 129,748
Capital expenditures 10,811 15,468 10,385
Depreciation and amortization 8,496 7,665 7,117
==============================================================================================
</TABLE>
The Company's foreign operations outside of Europe are not material. Export
sales were $27,507, $31,515 and $24,385 in 1999, 1998 and 1997, respectively.
18. QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
1999 quarter ended Sept. 30 Dec. 31 Mar. 31 June 30
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $165,683 $174,105 $168,334 $ 154,364
Gross profit 33,171 34,808 33,664 7,156
Provision (benefit) for income taxes 1,548 1,378 1,545 (15,271)
Income (loss) from continuing operations
before extraordinary item $ 3,291 $ 2,931 $ 3,284 $ (32,383)
Net income $ 9,017 $ 2,418 $ 4,538 $ 22,500
Per common share:
Basic:
Income from continuing operations $ 0.11 $ 0.10 $ 0.11 $ (1.06)
Net income $ 0.29 $ 0.08 $ 0.15 $ 0.74
Diluted:
Income from continuing operations $ 0.11 $ 0.09 $ 0.11 $ (1.06)
Net income $ 0.29 $ 0.08 $ 0.15 $ 0.74
=========================================================================================
<CAPTION>
1998 quarter ended Sept. 30 Dec. 31 Mar. 31 June 30
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $166,560 $184,038 $180,752 $ 178,024
Gross profit 34,865 37,437 37,712 34,378
Provision (benefit) for income taxes 1,017 2,566 3,371 2,146
Income (loss) from continuing operations $ 1,807 $ 4,561 $ 5,992 $ 3,879
Net income $ 7,479 $ 8,985 $ 10,141 $ 11,271
Per common share:
Basic:
Income from continuing operations $ 0.06 $ 0.15 $ 0.19 $ 0.12
Net income $ 0.26 $ 0.29 $ 0.33 $ 0.36
Diluted:
Income from continuing operations $ 0.06 $ 0.14 $ 0.19 $ 0.12
Net income $ 0.25 $ 0.28 $ 0.32 $ 0.35
========================================================================================
</TABLE>
33
<PAGE> 33
1999 MAGNETEK ANNUAL REPORT
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
MagneTek, Inc.
We have audited the accompanying consolidated balance sheets of MagneTek, Inc.
as of June 30, 1999 and 1998, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended June 30, 1999. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MagneTek, Inc. at
June 30, 1999 and 1998 and the consolidated results of its operations and its
cash flows for each of the three years in the period ended June 30, 1999, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Nashville, Tennessee
August 20, 1999
34
<PAGE> 1
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 Nos. 33-31932, 33-40222, 333-15933, 333-24187, and 333-28415) and in
the related Prospectuses, and in the Registration Statements (Form S-8 Nos.
33-31439, 33-33887, 33-34112, 33-34834, 33-44519, 33-58929, 333-04021,
333-17889, 333-45935, and 333-45939) pertaining to the 1987 Stock Option Plan of
MagneTek, Inc., the MagneTek, Inc. FlexCare Plus Retirement Savings Plan, the
1989 Incentive Stock Compensation Plan of MagneTek, Inc., the MagneTek Unionized
Employee Savings Plan, the Amended and Restated 1989 Incentive Stock
Compensation Plan of MagneTek, Inc., the Second Amended and Restated 1989
Incentive Stock Compensation Plan of MagneTek, Inc., the MagneTek, Inc.
Non-Employee Director Stock Option Plan, the MagneTek, Inc. Deferral Investment
Plan, the MagneTek, Inc. 1997 Non-Employee Director Stock Option Plan, and the
MagneTek, Inc. Director Compensation and Deferral Investment Plan, of our
reports dated August 20, 1999, with respect to the consolidated financial
statements and schedule of MagneTek, Inc. included or incorporated by reference
in the Annual Report (Form 10-K) for the year ended June 30, 1999.
ERNST & YOUNG LLP
Nashville, Tennessee
September 22, 1999
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