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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. 2)
Filed By the registrant [v]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[v] Preliminary proxy statement [ ] Confidential, for use of the
[ ] Definitive proxy statement Commission only(as permitted by
[ ] Definitive other materials Rule 14a-6(e)(2))
[ ] Soliciting material under Rule 14a-12
CEM CORPORATION
(Name of Registrant as Specified In Its Charter)
-----------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than Registrant)
Payment of filing fee (check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction
applies:
Common Stock, $.05 par value
2) Aggregate number of securities to which transaction
applies: 2,580,285
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
is determined):
$11.15 per share cash merger consideration
4) Proposed maximum aggregate value of transaction:
$29,158,024, based on 3,062,427 shares outstanding
as of April 17, 2000 and 482,142 shares beneficially
owned by an affiliate that will not be converted into
cash in the proposed merger and payment of $387,846
for in-the-money unexercised options to purchase
common stock of CEM Corporation.
5) Total fee paid:
$5,832
[ ] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing:
1) Amount Previously Paid:
$5,824
2) Form, Schedule or Registration Statement No.:
Schedule 14A
3) Filing Party:
CEM Corporation
4) Date Filed:
February 24, 2000
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[CEM Corporation Logo]
_________ ___, 2000
To Our Shareholders:
I am writing to you in my capacity as both a private investor in CEM
Corporation (referred to as "CEM") and the chief executive officer of CEM. In my
capacity as CEO, I am cordially inviting you to attend a special meeting of
shareholders (referred to as the "special meeting") of CEM to be held on
__________ __, 2000 at 10:00 a.m., local time, at 3100 Smith Farm Road,
Matthews, North Carolina. The purpose of the Meeting is to consider and vote
upon a merger (referred to as the "merger") that, if approved and subsequently
completed, will result in our public shareholders receiving $11.15 in cash per
share for their stock and CEM becoming a privately-owned company. If approved by
the shareholders, the merger would be accomplished under an Agreement and Plan
of Merger (referred to as the "merger agreement") that provides for MJC
Acquisition Corporation, a newly formed North Carolina corporation (referred to
as "MJC Acquisition"), to merge with and into CEM. CEM would be the surviving
corporation in the merger. If the merger is completed, each outstanding share of
CEM common stock, $.05 par value, other than shares held by MJC Acquisition,
will be canceled and converted automatically into the right to receive $11.15 in
cash, without interest.
In my capacity as a private investor, I organized and own all of the
equity interests in MJC Acquisition. Immediately prior to the completion of the
merger, I will contribute cash and 482,142 outstanding shares of CEM common
stock (representing approximately 15.7 percent of the outstanding shares) that I
and my family currently own to MJC Acquisition. If the merger is completed, I
will own all of the outstanding equity of CEM. Immediately following the
closing, I plan to have CEM establish an employee stock ownership plan to permit
our employees to own up to five percent of CEM's common stock. Since I am not
obligated to establish an employee stock ownership plan, employees who own
shares should base their decision to approve the merger agreement on any
expectation that the plan will be established or that they will participate in
the plan.
A special committee of CEM's board of directors (referred to as the
"special committee"), consisting of Ronald A. Norelli and John L. Chanon, was
organized to investigate, consider and evaluate my proposal, in addition to
other acquisition proposals and alternative transactions available to CEM. The
special committee unanimously recommended to our board of directors that the
merger be approved. In connection with its evaluation of the fairness to our
public shareholders of the merger and other available transactions, the special
committee engaged Brookwood Associates, Inc. to act as its financial advisor.
Brookwood has rendered its written opinion that, as of December 29, 1999, based
upon and subject to the assumptions, limitations and qualifications included in
its opinion, the cash merger consideration of $11.15 per
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share to be received in the merger is fair from a financial point of view to our
public shareholders.
Brookwood's written opinion, dated December 29, 1999, is attached as
Appendix B to the accompanying proxy statement and you should read it carefully.
The special committee and the other members of CEM's board of directors
believe that the terms of the merger are fair to, and in the best interests of,
the public shareholders and unanimously recommend that the shareholders approve
the merger. Since I have a personal conflict of interest in recommending this
merger to you, I abstained from voting at the board meeting at which this
recommendation was made.
The affirmative vote of holders of at least 66 2/3 percent of the
outstanding shares entitled to vote at the meeting is required to approve the
merger. I and my family hold 482,142 shares which represents approximately 15.7
percent of the outstanding shares. We intend to vote these shares in favor of
the merger. Accordingly, if holders of 1,559,476 shares, which represents
approximately 51 percent of the outstanding shares, also vote in favor of the
merger, the merger will be approved.
The accompanying proxy statement provides you with a summary of the
proposed merger and additional information about the parties involved and their
interests. Please give all this information your careful attention. Whether or
not you plan to attend, it is important that your shares are represented at the
special meeting. A FAILURE TO VOTE WILL EFFECTIVELY COUNT AS A VOTE AGAINST THE
MERGER. Accordingly, please promptly complete, sign and date the enclosed proxy
and return it in the envelope provided.
By: /s/ Michael J. Collins
-----------------------------------------
Michael J. Collins
President and Chief Executive Officer
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[CEM Corporation Logo]
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held __________, 2000
To Our Shareholders:
Notice is hereby given that a special meeting of shareholders of CEM
Corporation will be held on __________________, 2000 at 10:00 a.m., local time,
at 3100 Smith Farm Road, Matthews, North Carolina, for the following purposes:
- To consider and vote on a proposal to adopt and approve the
plan of merger included in an Agreement and Plan of Merger,
dated as of December 29, 1999, under which MJC Acquisition
Corporation, a newly formed company indirectly owned by
Michael J. Collins, CEM's President and Chief Executive
Officer, will merge with and into CEM and under which each CEM
shareholder (other than MJC Acquisition) will become entitled
to receive $11.15 in cash for each outstanding share of CEM
common stock. A copy of this merger agreement is attached to
the accompanying proxy statement as Appendix A and is
described in the proxy statement.
- To consider and act upon such other matters as may properly
come before the special meeting or any adjournment or
adjournments thereof.
The board of directors has determined that only holders of CEM common
stock of record at the close of business on ___________, 2000 will be entitled
to notice of, and to vote at, the special meeting, including any adjournment.
By Order of the Board of Directors,
By: /s/ Richard N. Decker
---------------------------------------------
Vice President - Finance, Chief Financial
Officer, Secretary and Treasurer
YOUR VOTE IS IMPORTANT
Whether or not you are able to attend the meeting, please date, sign
and return the accompanying proxy card promptly in the enclosed envelope, which
requires no postage if mailed in the United States. Please do not send in any
certificates for your shares of common stock at this time. If the merger is
approved, instructions regarding the exchange of your shares for the cash merger
consideration will follow.
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[CEM Corporation Logo]
3100 Smith Farm Road
Matthews, North Carolina 28106
PRELIMINARY PROXY STATEMENT
We are providing this proxy statement and accompanying proxy card to
our shareholders, in connection with the solicitation by our board of directors
of proxies to be used at the special meeting of shareholders to be held on
_______ ___, 2000 at 10:00 a.m., local time, at 3100 Smith Farm Road, Matthews,
North Carolina, including at any adjournment of the special meeting. We began
mailing these materials and the accompanying letter to shareholders and the
notice of the meeting to our shareholders on or about ____________ ___, 2000.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION (REFERRED TO AS THE
"COMMISSION") NOR ANY STATE SECURITIES AGENCY HAS APPROVED OR DISAPPROVED THE
MERGER OR PASSED UPON THE FAIRNESS OR MERITS OF THE MERGER or THE ACCURACY OR
ADEQUACY OF THE INFORMATION CONTAINED IN THESE DOCUMENTS. ANY REPRESENTATION TO
THE CONTRARY IS UNLAWFUL.
SUMMARY TERM SHEET
The following question-and-answer summary contains the most material
terms of our proposed merger with MJC Acquisition Corporation. This summary may
not contain all the information that you should consider before voting on the
proposed merger. You should read the entire proxy statement and all of its
appendices before voting on the proposed merger.
- WHAT WILL HAPPEN IN THE MERGER?
If it is completed, the merger will result in our public shareholders
receiving $11.15 in cash per share for their stock and ceasing to hold any
equity interest in CEM and ceasing to participate in any future earnings or
growth of CEM. The merger will also result in CEM becoming a privately held
company owned by our current chief executive officer, Michael J. Collins.
If approved by the shareholders, the merger would be accomplished under
a merger agreement that provides for MJC Acquisition Corporation, a newly formed
North Carolina corporation, to merge with and into CEM. CEM would be the
surviving corporation in the merger. If the merger is completed, each
outstanding share of CEM common stock, other than shares held by MJC
Acquisition, will be canceled and converted automatically into the right to
receive $11.15 in cash, without interest. Shares of MJC Acquisition will be
automatically converted into shares of common stock of CEM, as the surviving
corporation. At the time of the
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merger, MJC Acquisition will be owned by Mr. Collins. Accordingly, immediately
following the merger, Mr. Collins will own all of the outstanding equity
interests in CEM.
For more information concerning the terms and provisions of the merger
and the merger agreement, see "Description of the Merger Agreement."
- WHAT AM I BEING ASKED TO VOTE UPON?
You are being asked to approve the merger and the merger agreement,
which provides for the acquisition of CEM by Mr. Collins as indicated above.
CEM's board of directors has approved the merger and merger agreement and the
other transactions contemplated thereby and recommends that you vote "FOR"
approval of the merger and the merger agreement as well.
- WHY IS MR. COLLINS ACQUIRING CEM?
Mr. Collins believes that due to CEM's small size and the lack of
equity research coverage for both CEM stock and the analytical instruments
industry in general (factors he believes are in large measure beyond CEM's
control), it is and will continue to be difficult for CEM to attract new
investor interest and for CEM shareholders to get a fair price when selling
their shares in the market. In addition, trading volume in CEM stock has
historically been low--at the time Mr. Collins made his first proposal to
acquire CEM the trading volume over the prior 12 months averaged approximately
4,200 shares a day. While he believes these factors do and would continue to
limit the ability of CEM shareholders, including him, to receive a fair price in
selling their shares in the market, Mr. Collins also believes that CEM is a
valuable company with the opportunity to increase its revenues and net income in
the future. Mr. Collins also believes that the expenses and pressures of being a
public company are significant for a company the size of CEM and that
eliminating those pressures and expenses would enhance CEM's long-term success.
He believes that the merger offers our shareholders the opportunity to obtain a
fair value for their shares, with his final offer of $11.15 per share
representing a 94 percent premium to the closing price of CEM common stock on
the date he made his first offer to buy the company. The $11.15 per share merger
price also represents a nine percent premium to the $10.25 closing price per
share of CEM common stock on April 18, 2000.
- HAS THE BOARD OF DIRECTORS RECOMMENDED THE MERGER?
Yes. The board of directors and the special committee formed by the
board of directors have unanimously approved the merger and merger agreement,
with Mr. Collins abstaining. The board voted unanimously to recommend that you
vote "FOR" approval of the merger and the merger agreement, again with Mr.
Collins abstaining. See "Special Factors - Recommendation of the Special
Committee and the Board of Directors."
- WHY IS THE BOARD OF DIRECTORS RECOMMENDING THAT I VOTE TO
APPROVE THE MERGER?
CEM's board of directors and a special committee formed by the board to
consider CEM's available options are recommending the merger because we believe
that the merger is a more desirable alternative for you than CEM's continuing to
operate as a public company. In reaching this conclusion, CEM's board of
directors and the special committee considered, among other factors:
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- the current illiquidity of your investment in CEM and
the likelihood of that illiquidity continuing in the
future, which the board and the special committee
believe limits the ability of our shareholders to
sell their shares at the times and in the amounts
they desire and may also have the effect of
depressing the price of CEM common stock if
shareholders attempt to sell a large volume of shares
at the same time, and
- the opportunity, through the merger, for you to
achieve immediate liquidity with respect to your
investment at a price that the board of directors and
the special committee believe is fair to you.
To review the background and reasons for the merger and the factors
considered by the special committee and the board of directors in approving and
recommending the merger in greater detail, see "Special Factors--Recommendation
of the Special Committee and the Board of Directors."
- WHY WAS THE SPECIAL COMMITTEE FORMED AND WHO MAKES UP THAT
COMMITTEE?
We established the special committee, consisting of Messrs. Ronald A.
Norelli and John L. Chanon, two of our independent directors, to consider Mr.
Collins's acquisition proposal as well as other available options, including
offers from other potential acquirors, and to review, evaluate and negotiate the
terms of the merger agreement. We formed the special committee primarily because
we recognized that a merger transaction would present a conflict of interest for
Mr. Collins as a member of CEM's senior management since the board of directors,
through the special committee, would be negotiating against Mr. Collins with the
view toward increasing the price he would pay to acquire CEM. In addition,
unlike CEM's shareholders generally, he would have a continuing interest in CEM
following the proposed acquisition. The special committee independently selected
and retained legal and financial advisors who had no prior relationship with CEM
or Mr. Collins to assist it in its deliberations generally and in the
negotiation of the merger agreement, in particular. It received an opinion from
its financial advisor, Brookwood Associates, Inc., on which the special
committee and the board of directors relied, that as of the date of the merger
agreement, the $11.15 per share you will receive in the merger is fair to you
from a financial point of view. For more information concerning the special
committee, its activities and Brookwood's opinion see "Special Factors -
Background of the Merger" and " - Opinion of CEM's Financial Advisor."
- HOW WAS THE AMOUNT OF THE MERGER CONSIDERATION DETERMINED?
The $11.15 per share merger consideration was determined as a result of
negotiations between the special committee and Mr. Collins. These negotiations
resulted in Mr. Collins's acquisition price being increased by more than 32
percent from the $8.40 per share first offered by him. For further information
concerning the negotiation of the merger consideration, see "Special Factors -
Background of the Merger."
- DID THE SPECIAL COMMITTEE RECEIVE ANY FIRM OFFERS TO ACQUIRE
CEM AT PRICES HIGHER THAN $11.15 PER SHARE?
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Yes. During the course of its negotiations with Mr. Collins, the
special committee solicited proposals from other potential buyers of CEM. As a
result of this solicitation process, the special committee received firm
proposals from three other potential buyers. Two of these proposals were at
prices greater than $11.15 per share--one at $11.33 per share and the other at
$11.50 per share. For further information concerning the solicitation process,
see "Special Factors - Background of the Merger."
- WHY DIDN'T THE SPECIAL COMMITTEE ACCEPT THE HIGHER PROPOSALS?
The special committee did not accept the two higher proposals because
they were subject to conditions that the special committee believed created a
substantial risk that the proposed transaction would not be completed. These
conditions included, among others, the requirement that Mr. Collins enter into a
non-competition agreement in favor of the acquiror. Mr. Collins, however, had
advised the special committee and the board that he would not sign a
non-competition agreement. For more information concerning these conditions and
the special committee's conclusion, see "Special Factors - Background of the
Merger" and " Recommendation of the Special Committee and the Board of
Directors."
- WHAT WILL I RECEIVE IN THE MERGER?
As indicated above, you will be entitled to receive $11.15 in cash,
without interest, for each share of CEM's common stock that you own. For
example, if you own 100 shares of CEM common stock, upon completion of the
merger, and subject to you properly submitting your stock certificates for
cancellation, you will be entitled to receive $1,115 in cash.
- IF THE MERGER IS COMPLETED, WHEN CAN I EXPECT TO RECEIVE THE
MERGER CONSIDERATION FOR MY SHARES?
Promptly after the merger is completed, we will send you detailed
instructions regarding the surrender of your stock certificates. You should not
send your stock certificates to CEM or anyone else until you receive these
instructions. We will send payment of the merger consideration to you as
promptly as practicable following our receipt of your stock certificates and
other required documents. For further information concerning procedures for
delivery of your shares and receipt of the merger consideration, see "The
Special Meeting - Payment of Merger Consideration and Surrender of Stock
Certificates" and "The Merger Conversion of Securities."
- WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
If the merger is approved by the shareholders we expect to complete the
merger immediately following the special meeting.
- WHAT VOTE IS REQUIRED TO APPROVE THE MERGER?
Under CEM's articles of incorporation, the affirmative vote of holders
of two-thirds of the outstanding shares of CEM's common stock is required to
approve the merger and the merger agreement. Mr. Collins and his family
currently own approximately 15.7 percent of CEM's outstanding shares, which they
will vote in favor of the merger agreement. In addition, our other directors and
executive officers who together own 17,634 shares, or 0.6 percent of the
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outstanding shares, plan to vote their shares in favor of the merger.
Accordingly, if holders of 1,541,849 shares, or 50.3 percent of the outstanding
shares, also vote in favor of the merger, the merger will be approved. See "The
Special Meeting" and "Information Regarding CEM - Stock Ownership."
- WHO CAN VOTE ON THE MERGER?
All shareholders of record as of the close of business on ________ __,
2000, including Mr. Collins and CEM's other officer and directors, will be
entitled to notice of, and to cast their votes at, the special meeting to
approve or disapprove the merger and the merger agreements, as well as the other
matters to be presented for a vote of the shareholders at the meeting.
- WHAT RIGHTS DO I HAVE IF I OPPOSE THE MERGER?
If you oppose the merger you may vote against it at the special
meeting. You do not have any statutory appraisal rights for a court-ordered
valuation of your shares. Accordingly, if the merger is approved by the
shareholders and is completed you will be forced to accept the $11.15 per share
merger payment for your shares even if you believe the amount is insufficient.
See "The Special Meeting - Rights of Objecting Shareholders."
- WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO ME?
The receipt of the merger consideration by you will be a taxable
transaction for federal income tax purposes. To review the tax consequences to
you in greater detail, see "Federal Income Tax Consequences." Your tax
consequences will depend on your personal situation. You should consult your tax
advisors for a full understanding of the tax consequences of the merger to you.
- WHAT DO I NEED TO DO NOW?
This proxy statement contains important information regarding the
merger as well as information about CEM, Mr. Collins and the company he
organized to complete the merger. It also contains important information about
what the board of directors and the special committee considered in evaluating
the merger. We urge you to read this proxy statement carefully, including its
annexes. You may also want to review the documents referenced under the heading
"Where You Can Find More Information."
- HOW DO I CAST MY VOTE?
Just indicate on your proxy card how you want to vote, and sign and
mail it in the enclosed envelope as soon as possible. This is important so that
your shares will be counted at the special meeting. As indicated above, approval
of the merger and the merger agreement requires the affirmative vote of holders
of two-thirds of the outstanding shares of CEM's common stock. Accordingly, a
failure to vote or a vote to "ABSTAIN," as permitted on the proxy card, will
have the same effect as a vote "AGAINST" the merger. A proxy marked to vote
"AGAINST" the merger will be voted "AGAINST" any proposal to adjourn the meeting
to permit CEM more time to solicit proxies. The special meeting will take place
on _______, 2000 at _____ a.m., local time, at 3100 Smith Farm Road, Matthews,
North Carolina. You may also attend the special meeting and vote your shares in
person, rather than voting by proxy.
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- IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY
BROKER VOTE MY SHARES FOR ME?
Your broker will vote your shares, with regard to the merger proposal,
only if you provide instructions on how to vote. You should instruct your broker
how to vote your shares, following the directions your broker provides to you
for doing so. If you do not provide instructions to your broker, your shares
will not be voted and they will have the effect of votes cast "AGAINST" the
merger and the merger agreement. We expect that your broker will generally vote
your shares "FOR" any other matters to be presented for shareholder approval at
the special meeting, unless you provide instructions to your broker to the
contrary. See "- What other matters will be voted on at the special meeting?"
For further information concerning procedures for dealing with your broker if
your shares are held in "street name," see "The Special Meeting - Required Vote;
Voting Procedures."
- MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
Yes. A shareholder giving a proxy has the power to revoke it at any
time before the vote is taken at the special meeting by:
- submitting to the Secretary of CEM a written instrument
revoking the proxy;
- submitting a duly executed proxy bearing a later date; or
- voting in person at the special meeting.
Either of these actions will have the automatic effect of revoking any
prior proxy card that you have sent in. See "The Special Meeting - Voting and
Revocation of Proxies."
- WHAT OTHER MATTERS WILL BE VOTED ON AT THE SPECIAL MEETING?
Under North Carolina law, only the specific matters included in a
notice of the meeting and procedural motions regarding the conduct of the
meeting may be presented for shareholder approval at a special meeting. We do
not expect to ask you to vote on any other matters at the special meeting.
However, if a motion is made to take some other action, including a procedural
action such as to adjourn the meeting, you may also be asked to vote on such
action at the special meeting. If you send your proxy card to us for use at the
special meeting and do not revoke that proxy by means indicated above, we will
have authority to vote your shares in our discretion with regard to any such
other motion or action that may arise, except that if you mark your proxy card
to vote "AGAINST" approval of the merger and the merger agreement your shares
will be voted "AGAINST" any proposal to adjourn the meeting to permit CEM more
time to solicit proxies. See "The Special Meeting - Other Matters to be
Considered at the Special Meeting."
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"). As a result, we file reports, proxy
statements and other information with the Commission. You can review and copy
these reports, proxy statements and other information at the public reference
facilities maintained by the Commission at 450 Fifth Street,
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N.W., Judiciary Plaza, Washington D.C. 20549 and at the following Regional
Offices of the Commission: 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
You can also obtain copies of these material at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W. Judiciary Plaza,
Washington, D.C. 20549. You can call the Commission's Public Reference Section
at (800) SEC-0330 to obtain information. You can also access copies of these
materials at the Commission's web site on the internet at http://www.sec.gov. We
will also send you copies of these documents on request and without charge.
CEM, Mr. Collins and MJC Acquisition have jointly filed a Schedule
13E-3 with the Commission with respect to the merger. This proxy statement does
not contain all of the information contained in the Schedule 13E-3, some of
which is omitted as permitted by the Commission's rules. Statements made in this
proxy statement, while complete in all material respects, are qualified by
reference to documents filed as exhibits to the Schedule 13E-3. The Schedule
13E-3, including exhibits, is available for inspection and copying at the
Commission as described above.
FORWARD-LOOKING INFORMATION
The following cautionary statement identifies important factors that
could cause CEM's actual results to differ materially from those projected in
forward-looking statements included in this proxy statement, including
statements incorporated by reference into this proxy statement. Except for the
historical information, the matters discussed in this proxy statement may be
deemed forward-looking statements. Forward-looking statements are statements
that include projections, predictions, expectations or beliefs about future
events or results or otherwise are not statements of historical fact. Such
statements are often characterized by the use of qualifying words (and their
derivatives) such as "expect," "believe," "plan," "project," or other statements
concerning our opinions or judgment about future events. The industry in which
we compete, as well as the markets that it serves, are characterized by cyclical
market patterns as a consequence of, among other things, business cycles,
foreign exchange fluctuations, regulatory changes, government spending levels
and general economic conditions. These factors affect the timing of orders from
our customers and cause substantial variations in sales and profitability from
quarter to quarter. Likewise, supplier-related delays and the timing of the
release of our customer orders may affect quarter-to-quarter sales and
profitability. Our sales may also be adversely affected by direct and indirect
competition from third parties including, but not limited to, legal challenges
to existing patents or pending patent applications. Demand for our
instrumentation is substantially affected by the enactment, timing, extent and
severity of state, federal and foreign laws governing environmental testing
standards as well as product labeling requirements including foods and
pharmaceuticals. We have experienced and may continue to experience fluctuations
in sales of such products as well as in demand for particular product
enhancements as a result of actual or perceived changes in regulatory
requirements. Legislation or regulations resulting in the development or
expansion of acceptance standards for specific testing methods has and may
result in periodic delays in sales, especially in the United States. Conversely,
increases in international sales have resulted, and may result in the future,
from less stringent or nonexistent acceptance standards in a given country.
Moreover, our success is dependent on our ability to continue to develop and
engineer high-quality, high-performance products that are commercially
acceptable. Risks associated with new product development include market
acceptance,
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competition from other products and our ability to manufacture and market
products on an efficient and timely basis at a reasonable cost and in sufficient
volume.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you would like additional copies of this document, or if you would
like to ask any additional questions about the merger, you should contact:
Mr. Richard N. Decker
CEM Corporation
3100 Smith Farm Road
Matthews, North Carolina 28106
Telephone: (704) 821-7015
Email: [email protected]
THE SPECIAL MEETING
TIME, PLACE AND DATE; PROXY SOLICITATION
The special meeting will be held on _______ __, 2000 at 10:00 a.m.,
local time, at CEM's principal offices, which are located at 3100 Smith Farm
Road, Matthews, North Carolina. We will pay all expenses incurred in connection
with solicitation of the enclosed proxy. Our officers, directors and regular
employees may solicit proxies by telephone or personal call, but they will
receive no additional compensation for doing so. We have requested brokers and
nominees who hold stock in their names to furnish this proxy material to their
customers and to request authority for the execution of the proxy. We will
reimburse these brokers and nominees for their related reasonable out-of-pocket
expenses. In addition, we have engaged Corporate Communications, Inc. to solicit
proxies from these institutions. We have agreed to pay Corporate Communications,
Inc. a fee of approximately $3,500, plus expenses, for its services.
RECORD DATE AND QUORUM REQUIREMENT
Our common stock, $.05 par value, is the only outstanding voting
security of CEM. The board of directors has fixed the close of business on
___________ ____, 2000 as the record date for the determination of shareholders
entitled to notice of, and to vote at, the special meeting, including at any
adjournment. Each holder of record of common stock at the close of business on
the record date is entitled to one vote for each share then held on each matter
submitted to a vote of shareholders. At the close of business on the record
date, we had 3,062,427 shares of common stock issued and outstanding held by
[314] holders of record.
To conduct any business at the special meeting, holders of a majority
of the outstanding shares must be present in person or represented by proxy at
the beginning of the meeting. Proxies marked as abstentions are counted as
shareholders represented by proxy at the special meeting for purposes of this
quorum requirement.
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REQUIRED VOTE; VOTING PROCEDURES
Approval of the merger agreement, which is attached as Appendix A
hereto, will require the affirmative vote of the holders of two-thirds of the
outstanding shares of common stock entitled to vote at the special meeting. A
FAILURE TO VOTE OR A VOTE TO ABSTAIN WILL HAVE THE SAME LEGAL EFFECT AS A VOTE
CAST AGAINST APPROVAL.
If you hold your shares through a broker, your broker will vote your
shares, with regard to the merger proposal, only if you provide instructions on
how to vote. You should instruct your broker how to vote your shares, following
the directions your broker provides to you for doing so. If you do not provide
instructions to your broker, your shares will not be voted and they will have
the effect of votes "AGAINST" the merger and the merger agreement. We expect
that your broker will generally vote your shares "FOR" any other matters to be
presented for shareholder approval at the special meeting, unless you provide
instructions to your broker to the contrary.
VOTING AND REVOCATION OF PROXIES
A shareholder giving a proxy has the power to revoke it at any time
before the vote is taken at the special meeting by:
- submitting to the Secretary of CEM a written instrument
revoking the proxy;
- submitting a duly executed proxy bearing a later date; or
- voting in person at the special meeting.
Subject to revocation, all shares represented by each properly executed proxy
received by the Secretary of CEM will be voted in accordance with the
instructions indicated on the proxy, and if no instructions are indicated, will
be voted to approve the merger and the merger agreement and on any other matter
considered at the meeting as the persons named on the enclosed proxy card in
their discretion decide.
The shares represented by the accompanying proxy card and entitled to
vote will be voted if the proxy card is properly signed and received by the
Secretary of the Company prior to the special meeting.
EFFECTIVE TIME
The merger will be effective following shareholder approval of the
merger agreement when articles of merger are filed with the Secretary of State
of the State of North Carolina. The time the merger becomes effective is
referred to as the "Effective Time." If the merger is approved by the
shareholders at the special meeting, we currently expect to complete the merger
and file articles of merger as soon as practicable after the special meeting,
subject to the satisfaction or waiver of the terms and conditions included in
the merger agreement. See "The Merger -- Conditions."
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PAYMENT OF MERGER CONSIDERATION AND SURRENDER OF STOCK CERTIFICATES
If the merger is completed, we will send you detailed instructions
regarding the surrender of your stock certificates. You should not send your
stock certificates to CEM or anyone else until you receive these instructions.
We will send payment of the merger consideration to you as promptly as
practicable following our receipt of your stock certificates and other required
documents. For further information concerning procedures for delivery of your
shares and receipt of the merger consideration, see "The Merger - Conversion of
Securities."
RIGHTS OF OBJECTING SHAREHOLDERS
If you oppose the merger you may vote against it at the special
meeting. Even if you vote against the merger, if holders of two-thirds of the
outstanding shares of CEM's common stock vote to approve the merger and merger
agreement, the merger will be completed and your shares will be converted into
the right to receive the $11.15 per share cash merger consideration.
Because CEM is incorporated in North Carolina, North Carolina law
governs its internal affairs, as well as any rights you may have if you object
to the merger. North Carolina, like many states, generally provides a statutory
remedy to shareholders who object to a merger. This remedy, commonly called
"appraisal rights," entitles shareholders who object to a merger and who follow
required procedures to ask a court to determine the fair value of their shares
and requires payment of that amount instead of the merger consideration.
However, North Carolina law specifically denies appraisal rights if the
shareholders hold stock listed on the Nasdaq National Market or a national stock
exchange and receive cash payments in the merger--a provision commonly referred
to as a "market-out" exception. Because CEM's common stock is listed on the
Nasdaq National Market and cash will be paid to the public shareholders in the
merger, you do not have any statutory appraisal rights with respect to the
merger.
The North Carolina statute establishing appraisal rights provides that
appraisal rights are the exclusive remedy available to shareholders that have
those rights, except that those shareholders may challenge a merger if the
merger is unlawful or fraudulent. The North Carolina statute does not expressly
address, and no court has addressed, whether a shareholder who does not have
appraisal rights by virtue of the "market out" exception also may not challenge
a merger unless it is unlawful or fraudulent.
If you object to the merger and wish to examine your rights further,
you should consult your legal counsel at your expense. Neither CEM, MJC
Acquisition, MJC Holdings nor Mr. Collins has made any provision to reimburse
you for any of your legal expenses or for any expenses for any appraisal
services you may obtain in separately evaluating the merger. Your right to
examine CEM's corporate records is described in "Information Regarding CEM -
Incorporation of Documents by Reference."
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OTHER MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
Under North Carolina law, only the specific matters included in a
notice of the meeting and procedural motions regarding the conduct of the
meeting may be presented for shareholder approval at a special meeting. We do
not expect to ask you to vote on any other matters at the special meeting.
However, if a motion is made to take some other action, including a procedural
action such as to adjourn the meeting, you may also be asked to vote on such
action at the special meeting. If you send your proxy card to us for use at the
special meeting and do not revoke that proxy by the means indicated above, we
will have authority to vote your shares in our discretion with regard to any
such other motion or action that may arise, although a proxy marked to vote
"AGAINST" the merger will be voted "AGAINST" any proposal to adjourn the meeting
to permit CEM more time to solicit proxies.
SPECIAL FACTORS
BACKGROUND OF THE MERGER
For several years, as part of its regular meetings, the board of
directors has discussed CEM's long-term strategy. In a number of these
discussions, non-employee directors from time to time noted that CEM at its
current size was not benefiting from being an independent publicly traded
company and that limited trading volume and public float may impair the ability
of CEM's shareholders to obtain a fair price in selling their shares in the
market. Because CEM was the predominant supplier of microwave testing equipment,
directors also noted that opportunities for growth were limited. In response to
those comments generally, but not in response to any specific discussion by the
board, during the last calendar quarter of 1998, Ronald A. Norelli, CEM's
Chairman of the Board, had one or more conversations with Michael J. Collins,
CEM's President and Chief Executive Officer, regarding whether CEM should remain
a public company, due to its small size, lack of growth, and the illiquidity of
its shares. At a dinner meeting of the board of directors on January 27, 1999,
Mr. Norelli informed the other directors of his conversations with Mr. Collins.
Mr. Norelli also indicated to the other directors that the end of CEM's then
current fiscal year would be an appropriate time to review CEM's performance,
including its performance against management's plan. If by that time, CEM's
financial results, operating prospects and share price had not improved, the
board would need to explore more vigorously possible alternatives to enhance
shareholder value. Mr. Norelli suggested the end of the then current fiscal year
(June 30, 1999) as opposed to the end of other fiscal periods solely to
establish some deadline for the board to focus on this strategic issue that had
been discussed at board meetings for some time. At this dinner meeting Mr.
Collins indicated to the directors that if the board were to consider
alternatives to CEM remaining a public company he would like to explore the
feasibility of taking CEM private.
On June 23, 1999, Mr. Collins, at the request of representatives of
Wachovia Bank, N.A. (referred to as "Wachovia Bank") met with representatives of
Wachovia Bank and its affiliate, Wachovia Securities, Inc. (referred to as
"Wachovia Securities"). Since 1988, Wachovia Bank has served as CEM's primary
commercial bank, and has a $3.6 million line of credit outstanding to the
company. Neither CEM nor Mr. Collins had previously engaged Wachovia Bank or
Wachovia Securities to examine any transaction to enhance shareholder value.
Wachovia Securities, through Wachovia Bank, initiated the meeting with Mr.
Collins as part of Wachovia
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Securities' ordinary investment banking business of developing and presenting
transaction ideas to potential customers.
At the meeting, representatives of Wachovia Securities presented to Mr.
Collins their ideas for possible transactions to enhance shareholder value,
including the possible acquisition by Mr. Collins of CEM. Wachovia Securities
also presented a preliminary assessment of the availability of financing to fund
an acquisition by Mr. Collins. Prior to the meeting on June 23, 1999, Mr.
Collins had not discussed with representatives of Wachovia Bank or Wachovia
Securities the possibility of, or any interest he may have in, an acquisition of
CEM by him.
On July 1, 1999, Mr. Collins met with John L. Chanon, a member of the
board of directors at their regularly scheduled monthly meeting. At the meeting,
Mr. Collins mentioned to Mr. Chanon that he had met with Wachovia Securities and
indicated that he may pursue an acquisition of CEM. The next day, Mr. Collins
met with representatives of Wachovia Securities to further discuss the
feasibility of a potential acquisition by Mr. Collins, including refining its
preliminary assessment of the availability of adequate financing to fund an
acquisition. At that meeting, Wachovia Securities provided Mr. Collins with its
preliminary assessment of the availability of financing to support an
acquisition of CEM, describing possible financing structures that could involve
both debt and equity financing. Wachovia Securities advised Mr. Collins that, as
a preliminary assessment, based on its experience in arranging financing for
other customers, financing would be available to support an acquisition of CEM
by Mr. Collins at $9.50 per share or more.
On July 19, Mr. Collins met with Mr. Norelli for their regularly
scheduled monthly meeting. At that meeting, Mr. Collins indicated that he had
discussed a possible acquisition of CEM with Wachovia Securities, that he may
have an interest in pursuing such a transaction if it were feasible, and that he
had asked Wachovia Securities to examine whether such a transaction could be
financed at a price that would be fair to CEM's shareholders. At this meeting,
Mr. Collins indicated that Wachovia Securities' preliminary assessment of
available financing would support an acquisition of CEM by him at a price to the
public shareholders of $9.50 per share or more, and accordingly since financing
would be available to support a premium price to the public shareholders Mr.
Collins would continue to explore the possibility of acquiring CEM. By
mentioning a specific price per share, Mr. Collins did not intend to make, and
Mr. Norelli did not interpret him as making, an offer to acquire CEM at that or
any other price.
On August 4, at a dinner meeting preceding the scheduled board meeting
to occur on August 5, Mr. Collins again mentioned to Messrs. Norelli and Chanon
and to George F. Krall, the remaining director of CEM, his possible interest in
acquiring the company and his conversations with Wachovia Securities. He also
indicated that he would like to request that the board permit him to engage
CEM's corporate counsel as his personal counsel to pursue a possible
acquisition. Immediately following the adjournment of the board meeting held on
August 5, Mr. Collins initiated continued discussion with the other board
members of his possible interest in acquiring CEM. During these discussions, the
other members of the board indicated that before Mr. Collins further pursued
either engaging CEM's corporate counsel as his personal counsel or exploring
further a transaction, the board would need to discuss the matter with
independent legal counsel. On August 6, Messrs. Norelli and Chanon met with
independent legal counsel and discussed the board's responsibilities with
respect to Mr. Collins's proposed plans.
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On August 13, at a special meeting of the board of directors called by
Mr. Norelli, Mr. Collins again informed the board of his desire to continue to
examine a possible acquisition of CEM and his request that the board permit him
to retain CEM's corporate counsel to serve as his personal legal counsel and to
permit him to provide possible financing sources with non-public information,
including projections. The board of directors consented to CEM's corporate
counsel serving as Mr. Collins's personal counsel in a possible transaction. The
board of directors believed this action was in the best interests of the
shareholders because it anticipated that if Mr. Collins would make an offer to
acquire CEM, the offer would be at a premium to current trading price (which
could be to the benefit of the shareholders) and if he used counsel familiar
with CEM he could prepare that offer while simultaneously continuing to fulfill
his duties in managing CEM with minimum distraction. The board of directors also
believed that granting such permission would not prejudice CEM, since, based
upon Messrs. Norelli and Chanon August 6 conversation with independent legal
counsel, the board anticipated that the special committee would retain
independent legal counsel to advise the special committee and the board.
At the August 13 special meeting, the board voted to permit Mr. Collins
to provide non-public information regarding CEM to potential financing partners,
subject to obtaining adequate assurances that the information would be kept
confidential. The board also required Mr. Collins to provide all non-public
information, including projections, to CEM and the board to the same extent that
information was provided to his potential financing partners, except that Mr.
Collins was not required to provide information with respect to how much he
would be willing, or could afford, to pay to acquire CEM. The board did not
require Mr. Collins to provide it with information with respect to how much he
would be willing, or could afford, to pay to acquire CEM in response to a
request from Mr. Collins that he not be required to do so. The board believed
that information with respect to how much Mr. Collins would be willing, or could
afford, to pay to acquire CEM was not information properly belonging to the
company but was instead personal information developed by him outside his
responsibilities as a director, officer and employee of CEM.
The board also voted at the August 13 special meeting to suspend CEM's
stock repurchase program which had commenced in 1991. See "Information Regarding
CEM - Recent Stock Purchases."
In addition, the board unanimously voted to appoint Messrs. Chanon and
Norelli to serve on a special committee of the board. The board of directors
delegated to the special committee broad authority to consider any proposal made
by Mr. Collins or any other person with respect to acquiring CEM, to retain
independent legal counsel and financial advisors, and to explore other available
strategic alternatives to maximize shareholder value. The board formed the
special committee primarily because it believed that the exploration by Mr.
Collins of a possible acquisition of CEM would present conflicts of interest for
him as an officer and director of CEM since, unlike the other CEM shareholders,
he would have a continuing interest in CEM following the completion of such a
transaction. The board selected Messrs. Norelli and Chanon as members of the
special committee because they were not employed by CEM and would neither be
employed nor own an equity interest in CEM following the completion of any
transaction with Mr. Collins or any other likely acquiror. Immediately following
the board meeting, the special committee convened its first meeting, at which it
ratified the engagement of independent
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legal counsel and discussed a process for selecting an independent financial
advisor to assist the special committee in its work.
Following the August 13 special meeting of the board of directors, Mr.
Collins engaged Wachovia Securities as his financial advisor, and he promptly
notified the special committee. Wachovia Securities met with Mr. Collins during
the next month to develop materials needed to provide to potential financing
sources. This information included projections developed by Mr. Collins with
respect to CEM's financial performance (referred to as the "Collins
Projections"). The Collins Projections are presented and discussed in " -
Projections." Also, during this period Mr. Collins met with representatives of
potential financing sources. On September 30, Wachovia Securities presented to
Mr. Collins the proposals of four bank financing sources to fund an acquisition
of CEM. Wachovia Securities summarized the proposals made by each of the banks,
comparing the applicable repayment schedules, interest rates and other terms.
Based on the proposals received by Wachovia Securities, Mr. Collins asked
Wachovia Securities to develop more definitive financing terms with Banc of
America Commercial Finance Corporation ("Banc of America"). In addition, at that
meeting, Wachovia Securities presented its report to Mr. Collins regarding the
value of CEM. Wachovia Securities' report, which is discussed in more detail in
" - Valuation Analysis of Mr. Collins's Financial Advisor," indicated that based
on its analysis of comparable public companies, companies in the same industry,
recent comparable merger transactions and discounted cash flow based on the
Collins Projections the value of CEM was in the range of $7.68 per share to
$10.18 per share. On September 30, the closing sales price of CEM common stock
on the Nasdaq Stock Market was $6.125. Wachovia Securities also provided a
report to Mr. Collins summarizing and comparing the financing proposals made by
the potential financing sources contacted by Wachovia Securities.
During the month following the August 13 special meeting, the special
committee identified and interviewed several potential financial advisors and on
September 14, engaged Brookwood Associates, Inc. ("Brookwood") as its financial
advisor. The special committee instructed Brookwood to develop a financial
analysis of CEM and the strategic alternatives available to enhance shareholder
value and liquidity. From early September through October 25, representatives of
Brookwood gathered from various sources extensive information regarding CEM, its
products, operations, prospects, customers, competitors and other relevant
information. As part of this process Brookwood representatives met several times
with Mr. Collins and other CEM employees. Mr. Collins provided to Brookwood a
copy of the Collins Projections, redacted to remove information regarding the
cost of acquiring CEM that had been assumed in the projections. This information
was deleted consistent with the board's position that Mr. Collins was not
required to provide it with information with respect to how much he would be
willing, or could afford, to pay to acquire CEM. He also provided to Brookwood
copies of what he stated were all of the other materials he had provided to
Wachovia Securities.
During this period, members of the special committee contacted Richard
Decker, CEM's Vice President - Finance and Chief Financial Officer, and Ken
Corliss, CEM's Director of Sales and Marketing, separately to advise them of the
formation and role of the special committee and to seek their cooperation during
the process. During the course of these contacts, Messrs. Decker and Corliss
each indicated that he would be supportive of any effort by Mr. Collins to
acquire CEM but that he would not be inclined to remain with CEM if it were
acquired by another company. Each of them indicated that he had worked for
large, institutional companies in the past and preferred the environment of a
smaller, more entrepreneurial company. Also during this
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period, the special committee considered the advisability of negotiating
retention incentive arrangements with certain key members of CEM's management
(other than Mr. Collins), in order to induce them to remain with CEM through a
change of control process. On September 24, Mr. Chanon met with Mr. Decker, and
proposed that CEM enter into such an arrangement with him. The terms of the
proposed arrangement included a payment to Mr. Decker upon the occurrence of a
change of control of CEM, and an additional payment if within six months
following such a change of control Mr. Decker's employment was terminated or his
responsibilities, position or salary was reduced. The proposed terms also
included a one-year non-competition agreement. Mr. Decker agreed to take the
proposal under advisement.
On October 18, Mr. Collins, his legal counsel and representatives of
Wachovia Securities met at his request with the special committee, its legal
counsel and representatives of Brookwood. At the meeting, Mr. Collins offered to
acquire all shares of CEM's common stock that he did not already own at a price
of $8.40 per share. The closing price for CEM's common stock on the Nasdaq Stock
Market on October 18 was $5.75. At the meeting, Mr. Collins delivered a letter
to the special committee setting forth his proposal and attaching a term sheet
from Banc of America to provide up to $18.0 million in debt financing to fund
the acquisition of CEM by Mr. Collins and provide working capital to CEM after
the acquisition. Mr. Collins stated that he would promptly deliver to the
special committee a draft merger agreement that would include all details of his
proposal. Mr. Collins also specifically advised the special committee that,
because of his familiarity with CEM as its chief executive officer, he would not
require any due diligence as a condition to entering into a merger agreement or
completing the merger.
On October 18, CEM issued a press release announcing its receipt of Mr.
Collins's acquisition proposal and indicating that the special committee had
been formed to consider Mr. Collins's proposal as well as other strategic
alternatives to maximize shareholder value. The press release also noted that
the special committee had retained Brookwood as its financial adviser. On
October 19, the board of directors of CEM convened a special meeting and voted
to postpone indefinitely the annual meeting of shareholders scheduled for
November 4.
On October 19, the special committee met with its advisors to receive a
status report from Brookwood regarding the strategic alternatives that might be
available to CEM to enhance shareholder value and provide shareholders with
greater liquidity, and to consider Mr. Collins's offer. The alternatives
discussed included, among other things, continuing as a public company, seeking
to grow the company through an aggressive acquisition program and selling CEM.
Brookwood noted that the first two alternatives were not likely to be effective
in enhancing shareholder value or providing liquidity to CEM's shareholders. In
particular, Brookwood noted that neither the shareholders nor CEM were currently
benefiting from CEM's stock being publicly traded, that CEM's small size (1999
fiscal year net sales of $32 million) and limited trading volume (12-month
average daily trading volume of approximately 4,200 shares), institutional
sponsorship (based on publicly available reports, no institutional purchases
were made in over six months) and public float (approximately $14.6 million on
the date Mr. Collins made his offer) impaired the ability of its shareholders to
obtain a fair price in selling their shares in the market and that CEM's future
growth prospects were not sufficient to remedy those problems. Regarding an
acquisition program, Brookwood explained that, based on its discussions with
CEM's management, there appeared to be few attractive acquisition candidates
that would strengthen CEM's core business. Furthermore, to achieve the size
necessary to obtain
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and sustain market focus, Brookwood believed that CEM would need to pursue a
very aggressive program involving significant diversifying acquisitions, which
would expose CEM to substantial financial and operating risks.
Regarding a sale of CEM, Brookwood noted that there had been
significant consolidation in the markets in which CEM operates and that there
were several public companies in businesses related to CEM's business with the
financial ability to acquire CEM at a substantial premium. Brookwood believed
that these strategic buyers were likely to be willing to pay a higher price for
CEM than would buyers (such as Mr. Collins) who were pursuing an investment
opportunity, primarily because of the ability of strategic buyers to leverage
their market position and reduce costs by acquiring CEM. Brookwood noted,
however, that a lack of commitment to selling the business on the part of CEM's
management could have an adverse effect on the perceived value of CEM to any
outside buyer.
Based in part on Brookwood's evaluation of these alternatives, the
special committee concluded that a sale of CEM represented the best available
alternative to enhance shareholder value and liquidity.
Regarding Mr. Collins's offer, Brookwood reported that it had not
completed its financial analysis but that Mr. Collins's offer of $8.40 per share
was below the range of equity values indicated by its preliminary analysis. The
special committee decided to defer any final decision regarding Mr. Collins's
offer until Brookwood had further refined its analysis. Based upon the
information presented, however, the special committee instructed Brookwood to
develop a marketing plan that it would recommend in the event the special
committee decided to authorize the solicitation of other offers for CEM.
In the days following the announcement of Mr. Collins's offer,
Brookwood and members of the special committee received calls from CEM
shareholders or their advisors expressing concern that the price offered by Mr.
Collins did not reflect the fair value of CEM's shares. Also during this time,
Brookwood and members of the special committee received unsolicited preliminary
expressions of interest from three potential strategic buyers, one of which
indicated that its interest was not conditioned on Mr.
Collins remaining with CEM following a transaction.
On October 29, the special committee met again with its advisors, at
which meeting Brookwood presented its preliminary financial analysis of CEM.
Brookwood reviewed in detail with the special committee the analysis, including
the methodologies and assumptions it used. These methodologies and assumptions
were substantially the same as those which formed the basis of Brookwood's
opinion that was given orally to the Board on December 29, 1999 and subsequently
confirmed in writing. See " - Opinion of CEM's Financial Advisor." Brookwood
advised the special committee that its analysis indicated an equity value range
the low end of which was higher than Mr. Collins's offer of $8.40 per share.
Brookwood also indicated that, on the basis of the unsolicited expressions of
interest it had received and its analysis of other potential buyers, it believed
that there were several potential strategic buyers who would have the interest
and ability to acquire CEM at a price that was likely to be substantially higher
than $8.40 per share. Of these unsolicited proposals, one was received in
writing and two were received by telephone calls placed to Brookwood. These
proposals reflected only expressions of interest, and, in telephone
conversations with the three parties, each potential bidder advised
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Brookwood of the reason for its interest in CEM and requested information
regarding the process for pursuing a transaction with CEM. No definitive terms
were received from any of these potential bidders.
Also at the October 29 meeting, Brookwood reviewed the three
unsolicited preliminary expressions of interest it had received. None of them
included any specific indication as to the value of the potential bid, and
accordingly, in Brookwood's judgment none of them was sufficiently compelling to
be pursued on an exclusive basis. Instead, Brookwood recommended that the
special committee implement a multi-step process in order to solicit potential
additional bids. As the first step, Brookwood would contact a number of
companies it had identified as likely to have an interest and the financial
ability to acquire CEM. Those companies that expressed an interest would be
required to execute a confidentiality agreement, and if they did so they would
receive the confidential solicitation materials and be asked to submit a
preliminary indication of interest, including an indicated value for CEM's
shares. In the third step, a small group of potential acquirors whose
indications of interest were most attractive to the special committee would be
invited to meet with CEM's management and then be asked to submit competing
proposals to acquire CEM. As a final step, CEM would enter into exclusive
negotiations with respect to a definitive agreement with the bidder whose offer
appeared to be the best available alternative for the public shareholders,
taking into account such factors as price and certainty of completion of the
transaction at the bid price. Following Brookwood's presentation, the special
committee concluded that Mr. Collins's offer was inadequate, and instructed
Brookwood to commence the recommended marketing effort in order to identify and
solicit proposals from other qualified potential buyers.
On October 31, the special committee met with Mr. Collins and legal
counsel. At that meeting, the special committee advised Mr. Collins that his
proposal was below the range of values the special committee considered to be
fair. In addition, the special committee told Mr. Collins that it had authorized
Brookwood to solicit proposals from other potential acquirors. The special
committee requested Mr. Collins's cooperation in this process, since his
assistance would be required in preparing materials to be sent to potential
acquirors, and he would be required to attend due diligence meetings with
potential acquirors. Mr. Collins assured the special committee that he would
cooperate, and requested that the special committee move quickly with this
process since an extended period of uncertainty could adversely affect employee
morale and customer relationships. The special committee outlined its proposed
schedule to complete this process within six to eight weeks.
From November 1 through November 9, Brookwood met several times with
Mr. Collins and other CEM personnel to prepare materials to be sent to potential
acquirors. The solicitation materials prepared by Brookwood included operating
projections for the business. These projections were identical to the Collins
Projections, with two exceptions. After discussions with Mr. Decker, who had not
earlier reviewed the Collins Projections, Brookwood included depreciation
charges based on existing scheduled depreciation. The Collins Projections
included equal annual depreciation charges for existing assets, without
consideration of reduction in annual charges as assets became fully depreciated.
Brookwood adjusted downward the depreciation charges for existing assets to
match the depreciation schedule used by CEM in preparing its historical
financial statements. Accordingly, the projections included in the materials
provided to potential bidders
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included a line item showing projected depreciation of $1,136,000 for the 2000
fiscal year, $1,019,000 for the 2001 fiscal year, $969,000 for the 2002 fiscal
year and $931,000 for the 2003 fiscal year. In addition, Brookwood did not
include the line item for "other income" included in the Collins Projections
because the projected other income was primarily comprised of interest and
investment income, which was not consistent with Brookwood's assumption that
essentially all cash would be used to fund the acquisition of CEM. After
discussing these items with Brookwood, Mr. Decker agreed that these adjustments
were appropriate.
At the special committee's request, Mr. Collins reviewed
drafts of the solicitation materials prepared by Brookwood, including these
projections. Mr. Collins suggested several modifications to the text of the
solicitation materials, most of which were accepted by the special committee.
These modifications included revisions to Brookwood's characterization of the
markets in which CEM competes and its competitors (Mr. Collins suggested the
inclusion of information regarding the recent introduction of a competitive
product in a market in which CEM previously had no competitors) and its
potential synergies with industry buyers (Mr. Collins believed that the initial
draft overstated potential synergies). In addition, at Mr. Collins's request a
reference to a pending acquisition was deleted because CEM was subject to
nondisclosure obligations with respect to that transaction. (This acquisition,
CEM's purchase of the assets of Societe Prolabo for $250,000, closed on January
1, 2000.) The special committee elected not to adopt Mr. Collins's suggestion
that the solicitation materials include a statement that he would likely not be
willing to remain an employee of CEM if the company was sold to another buyer.
During this period, Brookwood generated an extensive list of
prospective acquirors based on SIC codes, known participants in CEM's markets,
research reports and conversations with management. In consultation with the
Special Committee, Brookwood then narrowed the list to 26 operating companies
and 10 private equity firms that were deemed most likely to have the interest
and financial ability to acquire CEM. During this process, on November 4, Mr.
Collins called Mr. Chanon to express his concern that sensitive competitive
information not be disclosed to certain identified competitors of CEM who might
be solicited as potential acquirors. Subsequently, counsel to the special
committee advised Mr. Collins's counsel that all potential acquirors would be
required to execute confidentiality agreements prior to receiving the
solicitation materials, that one of the competitors identified by Mr. Collins
had been told that it would not receive non-public information until it had
submitted a written indication of interest to acquire CEM, specifying a
preliminary price or price range acceptable to the special committee, and that
the other competitors identified by Mr. Collins were not being solicited because
they were not considered by the special committee to be qualified acquirors for
other reasons.
On November 9, Mr. Collins delivered to the special committee a letter
increasing his proposed acquisition price to $9.25 per share and enclosed a
revised term sheet from Banc of America to provide up to $20.0 million in debt
financing to fund the acquisition and subsequent working capital requirements.
The closing price of CEM common stock on the Nasdaq Stock Market on November 9
was $7.563 per share.
On November 10, the special committee met with its advisors to receive
a status report on the marketing process and to consider Mr. Collins's revised
offer. Brookwood reported that it had contacted more than thirty potential
acquirors and estimated that at least ten were sufficiently interested in CEM to
warrant sending them confidential solicitation materials. After an extensive
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discussion, the special committee concluded that Mr. Collins's revised offer was
inadequate, being below the minimum value the special committee considered to be
fair and substantially below the value it believed other potential acquirors
were reasonably likely to offer.
On November 11, Mr. Collins's counsel met with the special committee's
counsel at the request of the special committee's counsel. Counsel for the
special committee advised Mr. Collins's counsel of the special committee's
conclusions regarding Mr. Collins's revised offer. In addition, the special
committee's counsel reported that the special committee intended to continue the
process it had described to Mr. Collins at their October 31 meeting and had
directed Brookwood to send solicitation materials to qualified potential
acquirors. The special committee's counsel also reported that as part of its
solicitation effort Brookwood was orally informing interested potential
acquirors that Mr. Collins had advised the special committee that he was not
likely to remain as an employee of CEM if it was acquired by another bidder.
By November 29, Brookwood had contacted thirty-six potential acquirors,
of which twelve had received solicitation materials and six had submitted
written indications of interest, at values ranging from $10.00 to $11.76 per
share. On November 30, the special committee met with its advisors to review
these proposals. With Brookwood's assistance, the special committee identified
four of the proposals (indicating values between $11.00 and $11.76 per share)
that it wished to pursue further. Each of these four indications of interest was
from an operating company which had expressed a strong strategic interest in
CEM, and which had financial resources the special committee deemed sufficient
to fund the transaction without a financing contingency. Each of the four
potential acquirors indicated a strong interest in meeting with Mr. Collins to
discuss his future plans. One of these four proposals stated that the offer was
not contingent on Mr. Collins remaining as an employee of CEM. The two proposals
the special committee decided not to pursue had indicated values below $11.00
and were deemed not otherwise sufficiently attractive to warrant further
attention.
On December 1, at its request the special committee and its advisors
met with Mr. Collins and his advisors. At that meeting, the special committee
advised Mr. Collins that it had received six written indications of interest to
acquire CEM, and that four of the potential acquirors were proposing a price of
$11.00 per share or more. The special committee indicated that it planned to
continue its process with these four bidders and provided Mr. Collins with
publicly available information with respect to each of them. It also reported
that each of the four bidders had been advised of Mr. Collins's stated
unwillingness to remain as an employee of CEM following its sale to another
party. It further indicated that each of the bidders had requested to meet
directly with Mr. Collins to discuss his future plans, and that some but not all
of them had conditioned their proposal on him remaining with CEM following an
acquisition. The special committee then proposed a schedule for each bidder's
facility visit and a management presentation involving Mr. Collins and other
members of senior management, as well as direct meetings between the four
potential bidders and Mr. Collins.
On December 6, Messrs. Chanon and Norelli met separately with Mr.
Collins at his request. At each of these meetings Mr. Collins asked whether, as
the special committee, they would stop the scheduled meetings with the four
other bidders if Mr. Collins offered to increase the acquisition price to $11.00
per share. Later that day, Messrs. Chanon and Norelli telephoned Mr. Collins and
told him that the special committee did not consider an $11.00 per share offer
to be preemptive under the current circumstances and that the process with the
four bidders would
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proceed as planned even if Mr. Collins increased his bid to $11.00 per share.
They again requested and received assurances from Mr. Collins that he would
cooperate fully with the special committee's efforts to market CEM to the four
bidders through the due diligence process.
On December 7, Messrs. Chanon and Norelli telephoned Messrs. Decker and
Corliss. They informed Messrs. Decker and Corliss of the pending visits by the
four bidders, and requested and received assurances from each of them that they
would cooperate fully in the special committee's efforts to market CEM to the
four bidders through the due diligence process.
From December 8 through December 15, separate due diligence meetings,
including management presentations, were held with representatives of three of
the four identified bidders. The fourth bidder (which had indicated an interest
at "approximately $10.75 to $11.00 per share") withdrew from the process, citing
a lack of assurance that senior management could be convinced to remain with
CEM. A member of the special committee and representatives of Brookwood attended
each management presentation made by CEM to the remaining bidders. Messrs.
Collins, Decker and Corliss participated in each management presentation. In
addition, Mr. Collins met directly with representatives of each of the three
remaining bidders and provided each with a tour of CEM's North Carolina
facility. During these due diligence meetings, in response to questions from two
of the bidders regarding their future plans, each of Messrs. Collins, Decker and
Corliss indicated his unwillingness to sign a non-competition agreement or to
remain an employee of CEM if the company was sold to any party other than Mr.
Collins.
On December 16, Mr. Decker advised counsel to the special committee
that he was not willing to enter into the retention incentive arrangement
proposed by the special committee, because he considered it unlikely that he
would remain an employee of CEM if it were sold to any of the three identified
bidders.
On December 17, the special committee met with its advisers to discuss
the status of the marketing process. Following the meeting, Brookwood sent a
letter to each of the three bidders requesting that each of them submit a final
proposal by December 21, and that such proposal include any and all conditions
to the offer, including specifically conditions pertaining to the retention of
management. At the request of the special committee, Brookwood also contacted
Wachovia Securities and requested information confirming Mr. Collins's ability
to finance an offer at or above $11.00 per share.
Also on December 17, at the request of the special committee, counsel
to the special committee delivered a letter to Mr. Collins's counsel asking that
Mr. Collins advise the special committee of his plans if one of the three
bidders acquired CEM. The letter also asked Mr. Collins to confirm his
understanding of the intentions of identified senior management employees,
including Messrs. Decker and Corliss. Following receipt of this letter, Mr.
Collins's counsel contacted the special committee's counsel. In that
conversation, and in several follow-up telephone conferences, Mr. Collins's
counsel advised the special committee's counsel that Mr. Collins considered it
unlikely that he would continue as an employee of CEM if it became a division or
subsidiary of another company and that since he was not subject to any
non-competition agreement and had no legal obligation to sign one, he considered
it highly unlikely that he would execute such an agreement for the benefit of an
acquiror of CEM. Mr. Collins's counsel further advised that although Mr. Collins
had not made any plans as to what he would do if he left CEM following an
acquisition by another bidder, he considered it likely that he would
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continue in the microwave field, since that was the industry in which he had
worked for over 20 years. Mr. Collins's counsel also advised the special
committee's counsel that Mr. Collins had confirmed that he had not spoken with
other members of CEM's management about leaving CEM and that he was not aware of
their plans except for statements made by them in his presence to bidders during
the management presentations. Following these conversations between counsel, Mr.
Collins called Messrs. Norelli and Chanon to discuss his intentions and to
confirm the statements made by his counsel, including that he did not plan to
sign a non-competition agreement.
On December 21, Brookwood received updated bids from each of the three
remaining bidders. The offers, all of which were non-binding, indicated values
of $11.00, $11.33 and $11.50 per share. All of the offers were made subject to
several express conditions, including further due diligence. The $11.50 offer
was conditioned on, among other things, obtaining employment and non-competition
agreements with identified members of senior management, including Messrs.
Collins, Decker and Corliss. The $11.33 offer required, among other things,
non-competition agreements with Messrs. Collins, Decker and Corliss. The $11.00
offer was subject to, among other things, obtaining satisfactory retention
agreements with identified members of management other than Mr. Collins,
including Messrs. Decker and Corliss.
On December 22, the special committee met with its advisers to review
the three final bids. Brookwood confirmed to the special committee that the
indicated value of each of the three bids was within the range of equity values
developed by Brookwood. The special committee believed, however, that based on
the information at hand it was unlikely that any of the management-related
conditions to which the bids were subject could be satisfied. Based on
Brookwood's report of its discussions with the three bidders regarding their
proposals, the special committee did not believe that any of the bidders would
agree to waive or substantially modify the management-related conditions. The
special committee was also concerned that the additional due diligence to which
the bids were subject could significantly delay the execution of a definitive
agreement, and that the due diligence process could disrupt CEM's operations and
cause or accelerate the loss of employees, all of which might affect a bidder's
willingness to consummate the transaction. After extensive discussion, the
special committee concluded that the contingencies to which the bids were
subject created a substantial risk that the proposed transactions would not be
consummated. The special committee believed that Mr. Collins was the only
identified potential acquiror whose offer would not be subject to similar
contingencies. Accordingly, the special committee decided to seek from Mr.
Collins his final offer. The special committee believed that there was more
certainty that a transaction with Mr. Collins would be consummated, if his final
price was competitive with the three other bids, and if his financing for the
offer was firm. The special committee did not go back to the other bidders
because it believed it would serve no purpose, based on Brookwood's report that
at the time their bids were submitted the other bidders were fully aware of Mr.
Collins's continued interest in acquiring CEM and the likelihood that the
management-related conditions could not be satisfied.
On December 23, at its request the special committee met with Mr.
Collins and their respective advisors. At the meeting, the special committee
first requested that Mr. Collins confirm in writing his previous oral
statements, if it continued to be his intention, that he would not sign a
non-competition agreement even if he was offered a substantial amount to do so
by an acquiror. Mr. Collins agreed that he was willing to provide this written
confirmation. The special committee then advised Mr. Collins that each of the
three potential acquirors had
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submitted definitive bids to acquire CEM at prices of $11.00 or more, with two
bids being significantly more than $11.00. The special committee also advised
Mr. Collins that not all of the bids contained an express condition requiring
that Mr. Collins continue with CEM or sign a non-competition agreement
preventing him from working for a competitor if he left CEM. The special
committee asked Mr. Collins to give it his final proposal. After a recess, Mr.
Collins offered to increase his acquisition price from $9.25 to $11.10 per share
and again confirmed to the special committee that, because of his familiarity
with CEM as its chief executive officer, he would not require any due diligence
as a condition to entering into a merger agreement or completing the merger.
After another recess, the special committee told Mr. Collins that it would
recommend his proposal to the board if he increased his price to $11.15 per
share, subject to the board receiving written commitments of sufficient
financing to support an acquisition at that price. Mr. Collins agreed to
increase his offer to $11.15 per share. Following the meeting, the special
committee requested that Brookwood render to the special committee and the board
an opinion as to the fairness of Mr. Collins's offer.
From December 23 through December 29, Mr. Collins and the special
committee, primarily through their counsel, negotiated the terms of the merger
agreement. Also during this period, the special committee, primarily through
Brookwood, investigated the terms and conditions of Mr. Collins's financing
arrangements with Banc of America. Also during this period, Brookwood executed a
supplemental engagement letter with the special committee relating to the
fairness opinion, and made additional investigations and calculations as it
deemed necessary to update its earlier financial analysis for purposes of
rendering its fairness opinion. These investigations and calculations included a
review of current stock prices for comparable companies and current prevailing
interest rates, as well as confirming with Mr. Collins the continued validity of
the Collins Projections. The details and conclusions of Brookwood's analysis of
the fairness of the transaction from a financial point of view are set forth
below under " - Opinion of CEM's Financial Advisor." Also during this period, at
the request of the special committee, Brookwood and the special committee's
legal counsel provided materials to, and had separate conversations with, CEM's
remaining director, Mr. Krall, in order to familiarize him with the financial
analyses of CEM prepared by Brookwood for the special committee and with the
proposed terms of the merger agreement.
On December 28, Brookwood reviewed Mr. Collins's financing with the
special committee, and advised the special committee that it was prepared to
render to the special committee and the Board its opinion that the price
proposed by Mr. Collins was fair, from a financial point of view, to the
shareholders of CEM. Thereafter, following a report from legal counsel regarding
the negotiated terms of the merger agreement, the special committee determined
that the terms of the merger were fair and in the best interests of CEM's
shareholders, and agreed to recommend to the board of directors that it approve
the merger and the merger agreement and recommend the merger to CEM's
shareholders.
On December 29, at a special meeting of the board, Mr. Collins
delivered a letter to the board confirming that he did not intend to enter into
a non-competition agreement if another acquiror purchased CEM, even if he was
offered a substantial amount to do so. In addition, he provided an executed
commitment letter of Banc of America to provide financing to fund Mr. Collins's
proposed acquisition and CEM's anticipated working capital needs following the
acquisition. Also, at the board meeting, Brookwood provided its oral opinion to
the effect that, as of the date thereof, and based on the assumptions and
subject to the limitations and qualifications
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set forth therein, the $11.15 per share merger consideration was fair to the
shareholders of CEM from a financial point of view. Brookwood confirmed to the
board that the methodologies and assumptions used in the financial analysis on
which its opinion was based were generally consistent with those presented to
the special committee at its October 29 meeting and subsequently reviewed with
Mr. Krall. Brookwood also confirmed that in rendering its opinion it had taken
into account relevant changes since its October 29 presentation, including,
among other things, changes in interest rates and share prices for comparable
companies, and CEM's anticipated results of operations. Brookwood further
reported that it had recently confirmed that the Collins Projections continued
to represent Mr. Collins's best estimate as to the likely future performance of
CEM. Brookwood's oral opinion was subsequently confirmed in a letter dated as of
December 29, 1999. See " - Opinion of CEM's Financial Advisor." Following a
discussion by the board, the merger proposed by Mr. Collins and recommended by
the special committee was approved by unanimous vote of the directors, other
than Mr. Collins who recused himself from a portion of the discussion and
abstained from the vote. The merger agreement was signed immediately following
the board meeting, and CEM promptly issued a press release announcing the
execution of the merger agreement.
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS
As discussed above under " - Background of the Merger," the special
committee and the board of directors (other than Mr. Collins) unanimously
determined that the merger agreement and the merger are fair to and in the best
interests of the public shareholders. The special committee and the board
recommend that you vote "FOR" the approval of the merger agreement and the
merger.
In reaching the determination that the merger agreement and the merger
are fair to and in the best interests of the public shareholders, the special
committee and the board of directors consulted with their financial and legal
advisors, drew on their knowledge of our business, operations, properties,
assets, financial condition, operating results, historical public share trading
prices and prospects and considered the following factors, each of which, in the
opinion of the special committee and the board, supported the determination:
- the belief of the special committee and the board that the
merger was a better alternative for the public shareholders
than continuing to operate CEM as a public company. The
special committee concluded that, based on CEM's limited
trading volume, institutional sponsorship and public float,
its small market capitalization, and the diminishing research
attention that it received from market analysts, CEM's
continuing status as a public company would limit the ability
of CEM's shareholders to obtain a fair price in selling their
shares in the market. See "- Background of the Merger" and
" - Projections."
- the fact that the $11.15 per share merger consideration
represented a significant premium to recent historical trading
prices of the CEM common stock. The special committee and the
board recognized that the merger consideration represented a
94 percent premium to the closing price of CEM common stock on
the day Mr. Collins's first offer was announced and a 46
percent premium to the weighted average trading price of the
shares during the 12 months preceding that
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date. See "Information Regarding CEM - Market Prices of
Common Stock and Dividends."
- the financial advisor's opinion to the special committee and
the board to the effect that the merger consideration is fair
to CEM's shareholders from a financial point of view.
Brookwood analyzed the going concern value of CEM, using the
comparable companies, comparable transactions, discounted cash
flow and leveraged buyout methodologies. The special committee
believed that Brookwood's focus on going concern value was
appropriate. It concurred with Brookwood's conclusion
that indicia such as net book value or liquidation value were
less meaningful given the nature of CEM's assets and business
based on Brookwood's analysis that the net book value was
below the range of fair value determined by the other
methodologies employed by Brookwood and did not reflect the
going concern value of CEM and that Brookwood found no
evidence of hidden assets or other factors that might
lead Brookwood to believe that a liquidation value analysis
would be relevant. The special committee noted that a number
of the per share value calculations resulting from Brookwood's
comparable companies, comparable transactions and discounted
cash flow methodologies were in excess of the merger
consideration; however, the special committee concluded that
these methodologies were not the best indicators of fair value
for CEM. The special committee concurred with Brookwood's
conclusion that the leveraged buyout analysis was the most
relevant of the four valuation methodologies. The special
committee believed that the unwillingness of the three
most senior members of senior management to remain with CEM in
a transaction other than a management-led leveraged buyout
made CEM less attractive to potential purchasers because of
uncertainty as to whether CEM would be able to continue its
historical financial performance or achieve the financial
results of the Collins Projections without these senior
managers, who would be free to compete with CEM. The special
committee noted that Brookwood's comparable companies
methodology and the comparable transaction methodology relied
on historical financial performance and the discounted cash
flow methodology relied on the Collins Projections. The
special committee also noted that a number of the comparable
companies and comparable transactions used in Brookwood's
analyses were not truly comparable to CEM in terms of size,
market capitalization, financial performance or other relevant
factors. The special committee viewed this factor as further
supporting Brookwood's conclusion that the leveraged buyout
analysis is the most relevant to the merger. The special
committee noted that the merger consideration was near the
high end of the range of values calculated by Brookwood using
the leveraged buyout method. See " - Opinion of CEM's
Financial Advisor."
- the results of the multi-step process conducted by the special
committee's financial advisor to solicit competing offers.
This process involved contacting thirty-six potential
acquirors and resulted in the execution of twelve
confidentiality agreements, the receipt of six preliminary
indications of interest and the submission of three final
offers in addition to Mr. Collins's bid. The special committee
and the board considered the fact that the $11.15 per share
merger consideration was within the range of values indicated
by these other three
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final offers and was within 3.2 percent of the highest of the
three proposals, as well as the fact that each of the other
three proposals contained due diligence and management related
contingencies which the special committee and the board
believed created a substantial likelihood that the proposed
transactions would not be completed at the values in the
offers. Considering the results of the solicitation process,
the special committee and the board believed that it was
unlikely that there were any potential buyers with the
interest and ability to commit to a transaction at a greater
price per share than the $11.15 merger consideration and
without unacceptable contingencies. The special committee and
the board noted that the merger is not subject to any due
diligence contingencies. For these reasons and the other
reasons described in this section, the special committee and
the board concluded that the merger was the best offer
reasonably available to the public shareholders. See
" - Background of the Merger."
- the extensive negotiations between the special committee and
Mr. Collins, which resulted in his offer price being increased
by more than 32 percent. The special committee and the board
considered the fact that these negotiations were conducted
over a period of more than sixty days, during which time the
special committee received and rejected proposals or inquiries
from Mr. Collins at $8.40, $9.25, $11.00 and $11.10 per share.
At the time the merger agreement was executed, the special
committee and the board believed that the $11.15 merger
consideration was the highest price Mr. Collins could or would
be likely to offer. See " - Background of the Merger."
- the receipt by the special committee and the board of a signed
commitment letter from Banc of America to provide financing
for the merger. The special committee and the board also
considered the fact that the merger agreement does not permit
MJC Acquisition or Mr. Collins to abandon the merger in the
event that any of the conditions to the financing are not
satisfied. See " - Background of the Merger" and "Financing of
the Merger."
- the terms and conditions of the merger agreement, particularly
the provisions giving the board the right, subject to
conditions, to respond to unsolicited inquiries, to modify or
withdraw its recommendation and to pursue a more favorable
transaction with a third party. The special committee and the
board also considered the fact that the merger agreement
provided for the payment of liquidated damages equal to
approximately 2.9 percent of the aggregate transaction value,
as well as expense reimbursement obligations, which the
special committee and the board believed, under the
circumstances, would not have an unreasonably preclusive
effect on competing offers. See "The Merger - Nonsolicitation
Covenant" and " - Termination Fee."
- the requirement that the merger be approved by the holders of
two-thirds of the outstanding shares of CEM common stock,
which allows for an informed vote by the public shareholders
on the merits of the transaction without requiring a tender of
shares or other potentially coercive transaction structure,
and which implicitly requires (because Mr. Collins owns less
than 16 2/3 percent of the outstanding shares) that, for the
merger to be approved, holders of a majority of the
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outstanding shares, in addition to Mr. Collins, must vote to
approve the transaction. See "The Merger - Conditions."
In concluding that the merger is fair to and in the best interests of
the public shareholders, the special committee and the board of directors also
considered the following factors, each of which the special committee and the
board considered to be a negative factor:
- the fact that the merger consideration is not the highest
price per share offered to the special committee. The special
committee and the board considered the fact that as a result
of its solicitation process the special committee had received
two non-binding offers which--at $11.50 and $11.33 per
share--were higher than Mr. Collins's proposal. They also
considered the fact that both of these proposals were
contingent on, among other things, Mr. Collins's agreement not
to compete with CEM, as well as the fact that Mr. Collins had
confirmed in a letter to the board that he would not enter
into a non-competition agreement. See " - Background of the
Merger."
- the fact that consummation of the merger would preclude the
public shareholders from having the opportunity to participate
in the future growth prospects of CEM. In addition, the
special committee and the board of directors recognized that
Mr. Collins will have the opportunity to benefit from any
increases in the value of CEM following the merger as a result
of his increased equity interest in CEM and therefore may
receive a substantial economic benefit from the transaction.
See " - Purpose and Reasons of Mr. Collins for the Merger" and
"Effects of the Merger."
- the potential conflicts of interest of Mr. Collins resulting
from the foregoing benefits that may be realized by him. In
addition, the special committee and the board considered the
potential conflicts of interest of Messrs. Decker and Corliss
resulting from their stated support of Mr. Collins's
acquisition of CEM. The special committee and the board
believe, however, that the procedures followed in the process
of considering Mr. Collins's offer, soliciting alternative
proposals and negotiating the terms of the merger agreement
addressed these conflicts and were fair to the public
shareholders. See " - Background of the Merger" and
" - Conflicts of Interest."
- the fact that as part of its stock repurchase program CEM from
time to time has acquired shares at prices in excess of $11.15
per share. The special committee and the board considered the
fact that CEM's stock price had dropped from a high of $13.00
during the first fiscal quarter of 1999 to $5.75 prior to the
announcement of Mr. Collins's initial offer, and concluded
that, given adverse changes in the market for CEM stock and in
the industry sector generally, those transactions were not
relevant to the current value of CEM's shares. See
"Information Regarding CEM - Recent Stock Purchases."
The foregoing discussion of the information and factors considered by
the special committee and the board is not meant to be exhaustive, but includes
all material factors considered by the special committee and the board as part
of the determination that the merger and the merger agreement are fair to, and
in the best interests of, CEM and the public
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shareholders and the recommendation that the shareholders approve the merger and
the merger agreement. While each of the board and the special committee adopted
the analysis and conclusions of Brookwood as described in "Opinion of CEM's
Financial Advisor," it also considered all of the factors listed above in making
the determination that the merger and the merger agreement are fair to, and in
the best interests of, CEM and the public shareholders. The special committee
and the board did not assign relative weights or quantifiable values to those
positive and negative factors. Rather, the decision of the special committee and
the board was based on the subjective analysis by its members of those factors,
including the analysis and conclusions of Brookwood. The special committee and
the board each viewed its position and recommendations as being based on the
totality of the information presented to and considered by it. In addition,
based on the factors described above, including the appointment of the special
committee, its engagement of Brookwood and separate legal counsel to negotiate
on its behalf, the solicitation of other bidders and the requirement that the
merger be approved by a majority of the outstanding shares other than the shares
held by Mr. Collins and Mr. Collins's unwillingness to enter into a
non-competition agreement or continue his employment if CEM was sold to another
bidder, the board and the special committee also believe that the merger is
procedurally fair to the public shareholders.
OPINION OF CEM'S FINANCIAL ADVISOR
The special committee retained Brookwood to act as its financial
advisor and, as requested by the special committee, to (i) assist in identifying
and analyzing CEM's strategic alternatives, (ii) review and analyze any
proposals for any sale or business combination of CEM, including any proposal
from CEM's management, (iii) market CEM to prospective purchasers and (iv)
participate in negotiations concerning such a transaction. In its engagement
letter, Brookwood also agreed that, if requested by the special committee, it
would render an opinion as to the fairness of such a transaction, from a
financial point of view, to CEM's public shareholders. Prior to being engaged as
the financial advisor to the special committee, Brookwood had no prior
professional relationship with CEM.
At the request of the special committee, on December 29, 1999 Brookwood
rendered its oral opinion to the special committee and the board to the effect
that, as of that date and subject to the assumptions made, matters considered
and limits of the review undertaken by Brookwood described in its opinion, the
$11.15 merger consideration to be received by CEM's stockholders other than Mr.
Collins or his affiliates pursuant to the merger was fair from a financial point
of view to such stockholders. Brookwood subsequently confirmed this opinion in
writing by letter dated December 29, 1999.
The full text of Brookwood's written opinion is attached as Appendix B
to this proxy statement. We refer you to Brookwood's opinion, and you should
consider it as a part of this proxy statement since we are incorporating it by
this reference. The following description of Brookwood's opinion is only a
summary of it, and you should read the full opinion for a complete understanding
of the opinion's assumptions, considerations and limitations.
You should be aware that the Brookwood opinion only advises the special
committee and the board concerning the fairness from a financial point of view
of the merger consideration. The opinion does not address the merits of our
board of directors' decision to approve the merger.
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The opinion is not a recommendation to you that you vote for or against the
merger or that you take any other action regarding the merger.
In preparing its opinion, Brookwood, among other things:
- reviewed certain of our publicly available financial statements and
other business and financial information;
- reviewed certain of our internal financial statements, financial
forecasts and other data concerning CEM prepared by our management,
including the Collins Projections;
- met with certain members of our management to discuss CEM's business,
historical and projected financial results, financial condition and
future prospects;
- reviewed the historical stock price and trading volume for CEM common
stock;
- compared our financial performance and the price and trading volume
of CEM common stock with that of other publicly traded companies in
similar lines of business;
- compared the financial terms of the merger with the financial terms
of certain other transactions that Brookwood deemed comparable;
- prepared a discounted cash flow analysis and a leveraged acquisition
analysis of CEM;
- reviewed the financial terms and conditions set forth in the merger
agreement; and
- made other studies and inquiries, and took into account other matters
that Brookwood believed were relevant to forming its opinion,
including an assessment of general economic and market conditions.
Brookwood did not independently verify any of the information it obtained
for purposes of its opinion. Instead, Brookwood assumed the accuracy and
completeness of all such information. Brookwood relied upon our management's
assurances that information concerning our prospects, including the Collins
Projections, reflected the best currently available judgments and estimates of
management as to our likely future financial performance. As to all legal
matters, Brookwood relied on the advice of counsel to the special committee and
has assumed that the merger will be consummated in accordance with the terms of
the merger agreement. Brookwood did not make an independent inspection,
evaluation or appraisal of the assets or liabilities of CEM, nor did anyone
furnish Brookwood with any such evaluation or appraisal. The Brookwood opinion
is based on market, economic, and other conditions as they existed and could be
evaluated at the time the opinion was given.
No limitations were imposed by CEM, the special committee or the board on
the scope of Brookwood's investigation or the procedures Brookwood followed in
rendering its opinion.
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<PAGE> 33
In addressing the fairness, from a financial point of view, of the merger
consideration to be received by the unaffiliated shareholders of CEM, Brookwood
employed a variety of generally recognized valuation methodologies and
performed those which it believed were most appropriate for developing its
opinion. The preparation of a fairness opinion involves various determinations
of the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances. Therefore such an
opinion is not readily susceptible to partial analysis or summary description.
In arriving at its opinion, Brookwood did not attribute any particular weight
to any analysis or factor considered by it, but rather made qualitative
judgments about the significance and relevance of each analysis and factor.
Such analysis resulted in the calculation of ranges of implied per share values
for CEM common stock, including implied values that were greater than the
merger consideration, but Brookwood did not consider that any particular
implied value, whether less than or greater than the merger consideration, was
determinative of fairness.
Brookwood believes that its analyses must be considered as a whole and
that selecting portions of its analyses, without considering all factors and
analyses, would create an incomplete view of the process underlying its
opinion.
In performing its analyses, Brookwood made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of CEM. The analyses
performed by Brookwood do not purport to be an appraisal and are not
necessarily indicative of actual values, trading values or actual future
results that might be achieved, all of which may be significantly more or less
favorable than suggested by Brookwood's analyses. No public company that
Brookwood utilized as a comparison is identical or directly comparable to CEM,
and none of the comparable transactions utilized as a comparison is identical
or directly comparable to the merger. Accordingly, a purely mathematical
analysis based on such comparable companies or comparable business combinations
is not a meaningful method of using the relevant data; rather, these analyses
involve complex considerations and judgments concerning differences in
financial and operating characteristics and other factors that could affect the
transaction or the public share trading or other values of the companies that
are being compared.
In connection with its analyses, Brookwood utilized estimates and
forecasts of our future operating results contained in or derived from the
Collins Projections. Analyses based on forecasts of future results are not
necessarily indicative of actual future results, which may be significantly
more or less favorable than the forecasts. The analyses are inherently subject
to uncertainty, being based on numerous factors or events beyond the control of
CEM. Therefore, future results or actual values may be materially different
from these forecasts or assumptions. The Brookwood opinion was one of many
factors taken into consideration by the special committee in making its
determination to approve the merger agreement. Consequently, the analyses
described below should not be viewed as determinative of the opinion of either
the special committee or the board with respect to the value of CEM or whether
the special committee or the board would have been willing to agree to
different terms for the merger.
The following is a brief summary of the material analyses performed by
Brookwood in connection with rendering the Brookwood opinion to the special
committee and the board. The following summary includes information presented
in tabular form. In order to understand the financial analyses performed by
Brookwood, the tables must be read together with the
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<PAGE> 34
accompanying text. Also, for purposes of the financial analyses from which
these per share values are derived, Brookwood assumed that we would be operated
by a management team with the perceived ability to achieve the financial
results of the Collins Projections. The following analyses reflect
substantially the same methodologies used by Brookwood in its presentations to
the special committee on October 29, updated to reflect financial information
and market data that was available as of December 29, 1999:
Comparable Public Company Analysis. Brookwood reviewed and compared the
financial and stock market performance of CEM and certain ratios and multiples
of CEM to the financial and stock market performance and corresponding ratios
and multiples of seven publicly held companies in the analytical instruments
industry that Brookwood believed were generally comparable to the CEM. The
companies were Ametek, Inc., Dionex Corporation, Isco, Inc., Mettler-Toledo
International, Inc., O. I. Corporation, ThermoQuest Corporation and Varian,
Inc. (collectively, the "Comparable Companies").
Among other analyses, Brookwood calculated the enterprise value (that is,
equity market value, plus debt, less cash and equivalents) as a multiple of the
latest twelve months' net sales, operating income and operating cash flow (that
is, operating income plus depreciation and amortization) for each of the
Comparable Companies. All multiples were calculated using closing stock prices
on December 28, 1999. A summary of the enterprise value multiples generated
from this analysis is shown in the following table:
<TABLE>
<CAPTION>
Enterprise Value Multiples
--------------------------------------------------
Net Sales Operating Income Operating Cash Flow
--------- ---------------- -------------------
<S> <C> <C> <C>
High 5.2x 42.6x 25.4x
Nearest High 1.6x 16.1x 16.9x
Median 1.1x 12.4x 12.0x
Nearest Low 1.0x 8.8x 6.5x
Low 0.4x 5.7x 4.4x
</TABLE>
The nearest low multiple is the multiple just lower than the median
multiple and the nearest high multiple is just higher than the median multiple.
Brookwood selected the Comparable Companies because they have general
business, operating and financial characteristics generally similar to those of
CEM. However, Brookwood noted that no company used in the foregoing analysis is
identical or directly comparable to CEM and that the multiples shown in the
foregoing table that are above the median multiples relate to companies that
have had higher internal growth rates and a have much larger market
capitalization than CEM. Accordingly, Brookwood deemed the median and nearest
low multiples derived in the foregoing analysis to be most relevant. Although
Brookwood did not specifically quantify the relevance of this valuation
methodology compared to the other methodologies it used, because of the absence
of truly comparable companies, Brookwood considered this methodology to be less
relevant to its analysis than its discounted cash flow analysis and leveraged
buyout analysis.
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<PAGE> 35
Using the median and nearest low multiples shown above Brookwood
calculated the implied equity value per share of CEM's common stock on the
basis of the September 30, 1999 balance sheet, operating income and operating
cash flow for the twelve months ended September 30, 1999 and the shares and
options (which are assumed to be exercised) outstanding as of December 29,
1999. The following table presents the results of this analysis:
<TABLE>
<CAPTION>
Implied Equity Per Share Value of CEM Common Stock
----------------------------------------------------
Net Sales Operating Income Operating Cash Flow
--------- ---------------- -------------------
<S> <C> <C> <C>
Median $13.85 $13.90 $18.12
Nearest Low 13.41 10.92 11.59
</TABLE>
Comparable Transaction Analysis. Brookwood reviewed and compared the
publicly available financial data related to nine business combination
transactions in the analytical instruments industry that Brookwood felt were
generally comparable to the merger and that disclosed financial information
sufficient to provide valuation guidance (collectively, the "Comparable
Transactions"). A list of the Comparable Transactions follows:
<TABLE>
<CAPTION>
Acquiror Target Date
-------- ------ ----
<S> <C> <C>
Pall Corporation Gelman Sciences, Inc. Feb. 1997
Danaher Corporation Hach Company July 1999
Investor Group Industrial Scientific Corporation May 1999
Kirtland Capital Partners Instron Corporation Sep. 1999
FEI Company Micrion Corporation Aug. 1999
Thermedics Detection, Inc. Orion Research, Inc. May 1998
Stonington Partners Packard BioScience Company Mar. 1999
EG&G, Inc. Perkin-Elmer's Analytical Instruments Division May 1999
Roper Industries, Inc. Varlen Corporation - Petroleum Analyzers Division May 1998
</TABLE>
Among other analyses, Brookwood calculated enterprise values relative to
each of the Comparable Transaction companies' net sales, operating income and
operating cash flow. A summary of the enterprise value multiples generated from
this analysis is shown in the following table:
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<PAGE> 36
<TABLE>
<CAPTION>
Enterprise Value Multiples
--------------------------
Net Sales Operating Income Operating Cash Flow
--------- ---------------- -------------------
<S> <C> <C> <C>
High 2.6x 33.2x 19.8x
Nearest High 1.5x 10.3x 7.7x
Median 1.3x 10.0x 7.5x
Nearest Low 1.2x 9.6x 6.9x
Low 0.7x 6.0x 5.1x
</TABLE>
Brookwood chose the Comparable Transactions because the target companies
have general business, operating and financial characteristics similar to those
of CEM. However, Brookwood noted that no company or transaction used in the
foregoing analysis is identical or directly comparable to CEM or the merger and
that the Comparable Transactions include two transactions with very high
valuation multiples in which the consideration for the acquisitions was all
stock and the transactions were accounted for using the pooling-of-interests
method. Brookwood also noted that most of the acquired companies in the
Comparable Transactions were substantially larger than CEM. Therefore,
Brookwood deemed the median and nearest low multiples derived in the foregoing
analysis to be most relevant. Although Brookwood did not specifically quantify
the relevance of this valuation methodology compared to the other methodologies
it used, because of the absence of truly comparable transactions, Brookwood
considered this methodology to be less relevant to its analysis than its
discounted cash flow analysis and leveraged buyout analysis.
Using the median and nearest low multiples shown above, Brookwood
calculated the implied equity value per share of CEM's common stock on the
basis of the September 30, 1999 balance sheet, operating income and operating
cash flow for the twelve months ended September 30, 1999 and the shares and
options (which are assumed to be exercised) outstanding as of December 29,
1999. The following table presents the results of this analysis:
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<PAGE> 37
<TABLE>
<CAPTION>
Implied Equity Per Share Value of CEM Common Stock
--------------------------------------------------
Net Sales Operating Income Operating Cash Flow
--------- ---------------- -------------------
<S> <C> <C> <C>
Median $16.35 $11.94 $12.80
Nearest Low 15.16 11.65 12.10
</TABLE>
Discounted Cash Flow Analysis. Brookwood performed a discounted cash flow
analysis to estimate the present value of CEM under three different
projections. The "base case" projections reflect the Collins Projections
extended for one year. For purposes of the extension, Brookwood assumed that
the net sales, gross profit and operating cash flow for fiscal 2004 would be
the same as for fiscal 2003 as included in the Collins Projections and
confirmed the reasonableness of that assumption with Mr. Collins. Brookwood
developed "downside" projections based upon the Collins Projections but with
lower revenue growth and lower expenses. Brookwood developed "upside"
projections assuming revenue and profitability would be higher than the Collins
Projections from a development stage product that is outside CEM's core
commercial microwave product focus.
For each of the three scenarios, the discounted cash flow analysis of CEM
was determined by adding the present value, as of September 30, 1999, of
projected free cash flows through June, 30, 2004 plus the estimated value of
CEM as of June 30, 2004 using a range of terminal multiples of operating cash
flow. Free cash flow is defined as unlevered cash flow after tax obligations,
working capital and capital expenditures.
The range of estimated values for CEM at the end of the five-year period
was calculated by applying certain discount rates ranging from 12.0 percent to
16.0 percent and terminal value multiples of estimated operating cash flow in
2004 ranging from 5.0x to 7.0x. Brookwood arrived at these discount rates by
calculating an estimated cost of capital for CEM using, among other things, the
estimated cost of capital and capital structures of companies in CEM's industry
as determined according to CEM's SIC code by a recognized source. Brookwood
based its range of terminal value multiples on, among other things, its review
of the Comparable Companies and the Comparable Transactions. The following
table presents a summary of the implied equity values per share of CEM common
stock from this analysis:
<TABLE>
<CAPTION>
Implied Equity Per Share Value of CEM Common Stock
--------------------------------------------------
Case: Downside ----Base Case---- Upside
-------- ----------------------- ------
<S> <C> <C> <C> <C> <C>
Discount Rate: 16.0% 16.0% 14.0% 12.0% 12.0%
Terminal Multiple ----- ----- ----- ----- -----
5.0 x $10.76 $11.64 $12.21 $12.84 $15.29
6.0 x 11.65 12.63 13.29 14.01 16.83
7.0 x 12.52 13.63 14.37 15.18 18.37
</TABLE>
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<PAGE> 38
While Brookwood did not attribute any particular weight to the three
projection scenarios, the downside case is the case that is most consistent
with CEM's actual financial performance from fiscal 1995 through fiscal 1999.
Accordingly, Brookwood found the lower end of the range of implied equity per
share values derived from this analysis to be most relevant.
Leveraged Buyout Analysis. This analysis assumes a capital structure that
a financial purchaser might apply to CEM and still provide acceptable returns
to its providers of capital. Brookwood based the analysis on the base case,
upside and downside projections used in its discounted cash flow analysis.
Brookwood assumed that the amount of debt financing would be limited by a
certain multiple of the latest twelve months operating cash flow and the
estimated value of CEM's assets and that the providers of capital would require
certain targeted rates of return. Brookwood calculated the implied equity per
share value of CEM common stock for the three projection scenarios to be
$10.35, $10.60 and $11.30 based on a leveraged buyout analysis.
While Brookwood did not attribute any particular weight to the three
projection scenarios, the downside case is the case that is most consistent
with CEM's actual financial performance from fiscal 1995 through fiscal 1999.
Accordingly, Brookwood found the lower end of the range of implied equity per
share values derived from this analysis to be most relevant.
In rendering its opinion, Brookwood considered it significant that the
three most senior members of our senior management, including Mr. Collins, were
unwilling to remain with our company if it were purchased by another company
and they were unwilling to enter into non-compete agreements. Brookwood
believed that the unwillingness of these members of senior management to remain
with CEM in a transaction other than a management-led leveraged buyout made CEM
less attractive to potential purchasers because of uncertainty as to whether CEM
would be able to continue its historical financial performance or achieve the
financial results of the Collins Projections without these senior managers, who
would be free to compete with CEM. Brookwood noted that both the comparable
public company methodology and the comparable transaction methodology relied on
historical financial performance and the discounted cash flow methodology
relied on the Collins Projections. Brookwood considered the leveraged buyout
analysis to be the most relevant of the four valuation methodologies because a
leveraged buyout was the only transaction proposed to CEM that would result in
the retention of the management team. Brookwood noted that the merger
consideration is near the top end of the range of the leveraged buyout
analysis.
Other Analyses Performed and Factors Considered. Brookwood reviewed CEM's
historical stock price and volume, estimated trading volumes at different stock
prices and the weighted average stock price for different periods of time.
Brookwood also reviewed the historical trading volume of the Comparable
Companies.
Brookwood compared the merger consideration to CEM's pre-merger stock
price and estimated volume-weighted average stock price and calculated the
premium of the merger consideration to each as follows:
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<PAGE> 39
- 94 percent premium to the stock price prior to the public
announcement of Mr. Collins's initial proposal;
- 46 percent premium to CEM's estimated weighted average stock price
for the 12 months prior to the public announcement of Mr. Collins's
initial proposal; and
- 8 percent premium to CEM's estimated weighted average stock price for
the 24 months prior to the public announcement of Mr. Collins's
initial proposal.
Brookwood used estimated volume-weighted average stock prices in order to
consider the differences in daily trading volumes in CEM's stock in analyzing
the historical prices of CEM's stock.
Brookwood reviewed CEM's net book value (which it computed as
approximately $7.70 per share at December 28, 1999) and noted that immediately
prior to the announcement of Mr. Collins's initial offer to acquire CEM, CEM's
common stock was trading at prices below its net book value. Brookwood did not
consider CEM's net book value to be material for purposes of its fairness
opinion, however, because it believed that book value was substantially below
the low end of the value range under the other methodologies used by Brookwood
and that the going concern value of CEM was not reflected by the book value.
For these reasons, Brookwood did not feel the book value calculation provided
meaningful guidance as to a fair value for the Company. Brookwood did not
perform a liquidation value analysis of CEM because it found no evidence of
hidden assets or other factors that might lead Brookwood to believe that such
an analysis would be relevant for purposes of its fairness opinion.
The implied per share values presented in the above analyses did not take
into account all of the transaction expenses that are likely to be incurred in
an acquisition of CEM, because the level of such expenses is subject to
considerable variation depending on the nature of the purchaser and the
structure of the transaction. Specifically, the comparable company and
discounted cash flow analyses did not reflect any transaction expenses. The
comparable transaction analysis implicitly reflected the transaction expenses
related to each transaction. The leveraged buyout analysis reflected an
estimate of the buyer's financing fees only. Had the leveraged buyout analysis
considered all of the estimated expenses (see "Fees and Expenses") of the
merger, the implied per share value in the base case leveraged buyout analysis
would be reduced by approximately $.39 per share.
In rendering its opinion, Brookwood also discussed with CEM's management
their expectations as to financial performance during, and financial position
near the end of, the fiscal quarter ending December 31, 1999. Brookwood
determined that management's expectations as to the financial results for such
quarter did not affect its conclusions, which were based on analyses using
published financial data through the quarter ended September 30, 1999.
Pursuant to its engagement letter with Brookwood dated September 14, 1999,
CEM agreed to pay to Brookwood an aggregate fee of approximately $515,000 for
its services in connection with the merger. Of this amount, $130,000 has been
paid. The balance of approximately $385,000 will be payable at the closing of
the merger. The engagement letter also provides that CEM will reimburse
Brookwood for its reasonable travel, legal and other out-of-pocket expenses
incurred in connection with
35
<PAGE> 40
Brookwood's role thereunder and will indemnify Brookwood and its affiliates
from and against certain liabilities. These liabilities include liabilities
under the federal securities laws in connection with the engagement of
Brookwood by the special committee.
The special committee retained Brookwood on the basis of its experience
with mergers and acquisitions, financings and advising Boards of Directors and
shareholders regarding strategic alternatives. Brookwood is regularly engaged
in the valuation of businesses and their securities in connection with mergers,
acquisitions and private placements of securities. Brookwood is a
privately-owned investment banking firm which has been an NASD registered
broker-dealer since 1990.
PROJECTIONS
As discussed above, Mr. Collins prepared the Collins Projections with
respect to CEM's financial performance over a four-year period ending June 30,
2003. The Collins Projections were provided to Mr. Collins's potential sources
of funding to finance the merger. In addition, the Collins Projections were
used to develop the projections included in the materials provided to every
other potential acquiror that executed a confidentiality agreement. The Collins
Projections were also used by each of Brookwood and Wachovia Securities in
analyzing the value of CEM. The following is a summary of the Collins
Projections:
<TABLE>
<CAPTION>
COLLINS PROJECTIONS
(in thousands)
Fiscal Year Ending June 30,
----------------------------------------------
2000 2001 2002 2003
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $33,681 $37,049 $40,754 $44,829
Cost of goods sold 15,697 17,082 18,586 20,220
------- ------- ------- -------
Gross profit 17,984 19,967 22,168 24,609
Operating expenses 13,472 14,619 16,081 17, 689
------- ------- ------- -------
Operating cash flow 4,512 5,348 6,087 6,920
Other income 136 195 212 262
Capital expenditures 800 800 800 800
</TABLE>
CEM does not as a matter of course make public any projections as to future
performance or earnings, and the Collins Projections are included in this proxy
statement only because the information is available to Mr. Collins and was used
by the special committee and the board in evaluating the fairness of the merger.
The Collins Projections were not prepared with a view to public disclosure or
compliance with the published guidelines of the Commission or the guidelines
established by the American Institute of Certified Public Accountants regarding
projections or forecasts. The Collins Projections are subjective in many
respects and are thus susceptible to various interpretations and periodic
revision based on actual experience and business developments. The Collins
Projections were based on a number of assumptions that are beyond the control of
CEM or Mr. Collins or their respective financial advisors, including economic
forecasting (both general and specific to CEM's business), which is inherently
uncertain and subjective. None of CEM's or Mr. Collins's respective financial
advisors assumes
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<PAGE> 41
any responsibility for the accuracy of these projections. The inclusion of
projections in this proxy statement should not be regarded as an indication
that CEM, Mr. Collins, Brookwood, Wachovia Securities or any other person who
received these projections considers them an accurate prediction of future
events. Neither Mr. Collins nor CEM intends to update, revise or correct these
projections if they become inaccurate (even in the short term).
VALUATION ANALYSIS OF MR. COLLINS'S FINANCIAL ADVISOR
Mr. Collins engaged Wachovia Securities as his exclusive financial adviser
with respect to the merger. Wachovia Securities, which was formerly known as
Interstate/Johnson Lane Securities Corporation, is a nationally recognized
investment banking firm. As part of its investment banking business, Wachovia
Securities is regularly engaged in the valuation of businesses and securities,
mergers and acquisitions, negotiated underwritings, secondary distributions of
securities and private placements.
As part of its engagement, Wachovia Securities was asked by Mr. Collins to
provide him with a preliminary range of fair values of CEM to assist him in
determining an amount to bid for CEM and to assess the level of financing
necessary to complete a merger at a fair price. In addition, during the course
of negotiations with CEM, Wachovia Securities assisted Mr. Collins in deciding
the amount he would offer.
On September 30, 1999, Wachovia Securities presented a preliminary
assessment of the value of CEM to Mr. Collins. Wachovia Securities' report
consisted of a one-page summary and oral explanation by representatives of
Wachovia Securities of its procedures and methodologies. Wachovia Securities'
preliminary assessment was based upon information provided to it by Mr.
Collins. Accordingly, it did not involve a complete due diligence examination
of CEM or other procedures that are customarily involved in fairness opinions
or similar evaluations.
Wachovia Securities reported to Mr. Collins that it had evaluated CEM
using three methods of analysis:
- analysis of publicly-traded comparable companies;
- analysis of comparable mergers and acquisitions; and
- discounted cash flow analysis using historical and projected
financial information as to CEM that Mr. Collins had provided.
In its analysis of publicly-traded comparable companies, Wachovia
Securities used Instron Corporation, Isco, Inc. and O. I. Corporation as
comparable companies based on the products offered by those companies, although
Instron is significantly larger than CEM, and Giga-Tronics, Inc., Thermo Vision
Corporation, Rheometric Scientific, Inc., Intelligent Controls, Inc.,
Lifschultz Industries, Inc. and Scientific Measurement Systems, Inc. as
companies in the broader test instrumentation industry and with sales levels
similar to CEM's sales.
Wachovia Securities calculated commonly used industry multiples for these
companies based on the latest twelve months of financial statements with
respect to the following ratios:
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<PAGE> 42
- the sum of price per share multiplied by outstanding shares plus net
debt (that is, the amount of outstanding debt minus cash held by the
company) divided by total sales; and
- the sum of price per share multiplied by outstanding shares plus net
debt divided by earnings before interest and income tax expenses and
charges for depreciation and amortization (the term "EBITDA" is used
in this proxy statement to refer to earnings before interest and
income tax expenses and charges for depreciation and amortization).
The foregoing analysis using the three companies considered most comparable
based on products sold by those companies indicated an equity valuation per
share for CEM ranging from $8.33 to $8.57. The same analysis using the six
companies in the same general industry sector and with similar sales levels,
indicated an equity valuation per share for CEM ranging from $8.81 to $9.93.
In its analysis of comparable mergers and acquisitions Wachovia Securities
used the then-pending acquisition of Instron Corporation. Wachovia Securities
considered the pending sale of Instron to be comparable to the proposed merger
principally because of the similarity in products offered by the two companies,
but noted that Instron was significantly larger in size. Again, Wachovia
Securities calculated the pending Instron acquisition price as a multiple of
its total sales and as a multiple of its EBITDA. In addition, Wachovia
Securities applied a 20 percent discount to these multiples to account for the
difference in size between Instron and CEM. This analysis indicated an equity
valuation per share for CEM ranging from $9.04 to $9.54.
In connection with its discounted cash flow analysis, Wachovia Securities
relied upon the projections provided by Mr. Collins, which are discussed in
"Special Factors - Projections." Using these projections and Mr. Collins's
input, Wachovia Securities estimated CEM's EBITDA and free cash flow (that is,
EBITDA less tax expense, maintenance capital expenditures and net change in
working capital) over a five-year period ending June 30, 2004. It then used a
range of discount rates and multiples of free cash flow to arrive at an equity
value in current terms. Discount rates of 19 percent to 21 percent were based
on the build-up method, which considers Treasury yields, average betas and the
risk premium for equities. EBITDA multiples of three to five times were
estimated based on reviewing the comparable public companies. Employing these
criteria, Wachovia Securities arrived at equity values per share that ranged
from $7.68 to $10.18.
Wachovia Securities is an affiliate of Wachovia Bank, N.A. Since 1988,
Wachovia Bank has served as CEM's primary commercial bank and has a $3.6
million line of credit outstanding to the company. During this period, Wachovia
Bank has received customary fees and interest payments in connection with its
loans to CEM. As part of Mr. Collins's financing arrangement with Banc of
America, any outstanding balance under Wachovia Bank's line of credit will be
repaid at the closing of the merger and the line of credit will be terminated.
See "Financing of the Merger."
Under the term of its engagement letter with Mr. Collins, if the merger is
completed Wachovia Securities will be entitled to a fee of approximately
$500,000 plus reimbursement of
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its out-of-pocket expenses, less $50,000 paid by Mr. Collins to Wachovia
Securities at the time he engaged Wachovia Securities. Under the merger
agreement, CEM as the surviving corporation of the merger has agreed to
reimburse Mr. Collins for these fees and expenses.
You or any representative you designate in writing may review and copy
Brookwood's report or Wachovia Securities' report during regular business hours
at our principal offices, located at 3100 Smith Farm Road, Matthews, North
Carolina. In addition, we will provide you or any representative designated by
you with a copy of the report at no cost to you. See "Information regarding CEM
- - Incorporation of Documents by Reference."
CONFLICTS OF INTEREST
In considering the recommendations of the special committee and the board
of directors with respect to the merger, shareholders should be aware that
Michael J. Collins, who is President and Chief Executive Officer and a member
of the Company's board of directors, will own all of the outstanding equity of
CEM upon completion of the merger. The special committee and the board were
aware of Mr. Collins's conflict of interest and considered it among other
factors described under " - The Recommendation of the Special Committee and the
Board of Directors." The special committee considered Mr. Collins's post-merger
ownership of CEM to be a negative factor in its determination that the merger
is fair to the public shareholders.
It is anticipated that immediately after the merger, Michael J. Collins
will own all of the outstanding shares of CEM as the surviving corporation in
the merger. Immediately following consummation of the merger, current
executives of CEM, including Mr. Collins, will continue to serve in such roles.
The merger agreement requires that CEM provide indemnification to its
current and former directors and officers against liabilities (including
reasonable attorneys' fees) relating to actions or omissions arising out of
their being a director, officer, employee or agent of CEM at or prior to the
time the merger is completed (including the transactions contemplated by the
merger agreement). In addition, CEM is obligated for a period of six years from
the time the merger is completed to continue in effect directors' and officers'
liability insurance with respect to matters occurring prior to the time the
merger is completed, which insurance must contain terms and conditions no less
advantageous than are contained in CEM's current directors' and officers'
liability insurance policy. If, however, CEM's premiums for this insurance
increase, CEM is not obligated to expend annually more than 150 percent of the
current cost of this coverage.
Members of the special committee received fees for their service on that
committee equal to $500 per meeting. Messrs. Norelli and Chanon each received
fees totaling $14,000 for their service on the special committee. In addition,
Mr. Chanon received an $8,000 annual retainer for his service on the board of
directors and Mr. Norelli received a $39,000 annual retainer for his service as
chairman of the board of directors.
Ronald A. Norelli owns 12,900 shares of CEM common stock (5,900 of which
are held in a joint account with his wife), holds options to purchase 7,000
shares, some of which have an exercise price of less than $11.15 per share, and
holds 405 shares as custodian for his children. John L. Chanon owns 3,000
shares of CEM common stock and holds options to purchase 4,000 shares, some of
which have an exercise price of less than $11.15 per share. Mr. Chanon's son
owns 100 shares of Common Stock. George F. Krall holds options to purchase
5,000 shares of
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<PAGE> 44
common stock at an exercise price of $7.50 per share that do not become
exercisable until May 5, 2000. All of the foregoing shares will, upon
completion of the merger, be canceled in exchange for payment of $11.15 per
share. In addition, to the extent that any of these options have an exercise
price of less that $11.15, upon completion of the merger, these options will be
canceled in exchange for payment for each option share of the difference
between $11.15 minus the exercise price per share. Accordingly, upon completion
of the merger, the members of the board of directors, other than Mr. Collins,
will receive the following cash payments: Mr. Norelli will receive $142,835 for
his shares of common stock and the shares of common stock he owns jointly with
his wife and $12,350 for the aggregate unrealized gain on his stock options,
for a total cash payment of $156,185. In addition, Mr. Norelli will receive
$4,516 for the shares he holds as custodian for his children. Mr. Chanon will
receive $33,450 for his shares of common stock and $2,900 for the aggregate
unrealized gain on his stock options, for a total cash payment of $36,350. In
addition, Mr. Chanon's son will receive $1,115 for his shares. Mr. Krall will
receive will $18,250 for the aggregate unrealized gain on his stock options.
PURPOSE AND REASONS OF MR. COLLINS FOR THE MERGER
Mr. Collins's purpose for engaging in the transactions contemplated by the
merger agreement is to acquire ownership of CEM as a privately held company. He
believes that due to CEM's small size and the lack of equity research coverage
for both CEM stock and the analytical instruments industry in general (factors
he believes are in large measure beyond CEM's control), it is and will continue
to be difficult for CEM to attract new investor interest and for CEM
shareholders to get a fair price when selling their shares in the market. In
addition, trading volume in CEM stock has historically been low--at the time Mr.
Collins made his first proposal to acquire CEM the trading volume over the prior
12 months averaged approximately 4,200 shares a day. While he believes these
factors do and would continue to limit the ability of CEM shareholders,
including him, to receive a fair price in selling their shares in the market,
Mr. Collins also believes that CEM is a valuable company with the opportunity to
increase its revenues and net income in the future. Mr. Collins also believes
that the expenses and pressures of being a public company are significant for a
company the size of CEM and that eliminating those pressures and expenses would
enhance CEM's long-term success. He believes that the merger offers our public
shareholders the opportunity to obtain a fair value for their shares, with his
final offer of $11.15 per share representing a 94 percent premium to the closing
price of CEM common stock on the date he made his first offer to buy the
company.
Mr. Collins owns 454,692 shares of CEM common stock. In addition, Mr.
Collins beneficially owns 27,450 shares that are held by his wife as custodian
for their children and an additional 24,000 shares represented by options that
are exercisable or will be exercisable within 60 days. Immediately prior to
completion of the merger, Mr. Collins intends to acquire the 27,450 shares held
by his family and then contribute all 482,142 shares of CEM common stock then
held by him and loan up to $1.0 million in cash to MJC Acquisition. This
represents an investment by Mr. Collins of up to $5.4 million in MJC Acquisition
(based on the $11.15 per share to be received by other shareholders in the
merger). If the merger and financing are completed, Mr. Collins will own all of
CEM's outstanding equity interests. Upon completion of the merger, Mr. Collins
will receive $38,412 in payment of options issued to him by CEM that are
exercisable at per share prices below $11.15.
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<PAGE> 45
The following table compares Mr. Collins's and his family's actual
percentage ownership of CEM at December 31, 1999 and the book value of their
shares of CEM common stock at that date with Mr. Collins's percentage equity
ownership of CEM following the merger and the pro forma book value of that
interest as if the merger, use of approximately $12 million of CEM's cash to
fund merger payments to shareholders, borrowing of $19.4 million to finance the
merger and refinance existing CEM indebtedness and equity investment of $1.0
million all were completed on December 31, 1999. The table also compares the
amount of CEM's income before income taxes multiplied by Mr. Collins and his
family's ownership percentage for the fiscal year ended June 30, 1999 on an
actual basis and pro forma as if the merger, use of approximately $12 million
of CEM's cash to fund merger payments to shareholders, borrowing of $19.4
million to finance the merger and refinance existing CEM indebtedness and
equity investment of $1.0 million all had occurred on the first day of that
fiscal year.
<TABLE>
<CAPTION>
(dollars in thousands) Actual Pro forma
------ ---------
<S> <C> <C>
Collins's ownership percentage 15.7% 100.0%
=======
Book value of Collins's shares at December
31, 1999 $3,614 $(6,000)
=======
1999 income before income taxes multiplied
by Collins's ownership percentage $ 472 $ 505
=======
</TABLE>
Mr. Collins believes that if CEM is able to successfully continue its
business strategy, the value of his ownership interest in CEM will over time be
considerably greater than the $5.4 million they would be investing at the time
of the merger.
POSITIONS OF MR. COLLINS, MJC ACQUISITION AND MJC HOLDINGS AS TO FAIRNESS OF
THE MERGER
Mr. Collins has considered the analyses and findings of the special
committee and the board of directors (described in detail in "Special Factors
- -- Recommendation of the Board of Directors and the Special Committee") with
respect to the fairness of the merger to CEM's public shareholders. As of the
date of this proxy statement, Mr. Collins adopts the analyses and findings of
the special committee and the board of directors with respect to the fairness
of the merger and believes that the merger is both procedurally and
substantively fair to CEM's public shareholders. In adopting the analysis and
findings of the special committee and the board of directors, Mr. Collins notes
that the ability of CEM to effect the alternative transactions considered by
the special committee was affected by his personal decision not to agree to
continue to work for CEM if it was acquired by another bidder or to sign a
non-competition agreement preventing him from continuing to work in the
microwave instrument industry if he left CEM. Mr. Collins, who founded CEM, had
advised the special committee that as an entrepreneur he did not desire to
remain as an employee of CEM if it became a division of a larger company and
that he would not sign a non-competition agreement because a non-competition
agreement would prevent him from working in the industry he had worked in for
the past 22 years. Mr. Collins believes that he, like any other employee of
CEM, has the personal right to chose to leave the employment of the company or
to refuse to sign a non-competition agreement, and that his personal exercise
of that right does not affect the procedural
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<PAGE> 46
fairness of the merger. In addition, Mr. Collins notes that other employees of
CEM had similarly refused to sign retention or non-competition agreements.
As a member of the board of directors, Mr. Collins abstained in voting on
approval of the merger agreement and the recommendation to the shareholders
that they vote to approve the merger, but expressed his support for both
actions.
MJC Acquisition believes that the merger is both procedurally and
substantively fair to CEM's public shareholders and adopted the analysis of Mr.
Collins. Mr. Collins is, and at the time of the merger will be, the sole
officer, director and shareholder of MJC Acquisition.
CONDUCT OF CEM'S BUSINESS AFTER THE MERGER
Mr. Collins is continuing to evaluate CEM's business, assets, practices,
operations, properties, corporate structure, capitalization, management and
personnel and discuss what changes, if any, will be desirable. Subject to the
foregoing, Mr. Collins expects that the day-to-day business and operations of
CEM will be conducted substantially as they currently are being conducted by
CEM. Although assets held directly by CEM will be transferred to a wholly owned
subsidiary of CEM immediately following the merger, Mr. Collins does not
currently intend to dispose of any assets of CEM other than in the ordinary
course of business. Additionally, he does not currently contemplate any
material change in the composition of CEM's current management, although after
the merger he will be the sole member of the board of directors. Following the
merger, Mr. Collins intends to cause CEM to establish a qualified employee
stock ownership plan to permit CEM employees to own up to five percent of CEM's
shares.
EFFECTS OF THE MERGER
As a result of the merger, the public shareholders of CEM will be
entitled to receive $11.15 per share of CEM common stock. This represents a 94
percent premium over the closing price per share of CEM common stock on the day
Mr. Collins made his first offer to acquire CEM. The $11.15 per share merger
price also represents a nine percent premium to the $10.25 closing price per
share of CEM common stock on April 18, 2000. As a detrimental consequence of
the merger, public shareholders will no longer have an opportunity to continue
their equity interest in CEM as an ongoing corporation and therefore will not
share in the future earnings and potential growth of CEM. Upon completion of
the merger, CEM common stock will no longer be traded on the Nasdaq National
Market, price quotations will no longer be available and the registration of
CEM common stock under the Exchange Act will be terminated. The termination of
registration of the common stock under the Exchange Act will eliminate the
requirement to provide information to the Commission and will make most of the
provisions of the Exchange Act, such as the short-swing profit recovery
provisions of Section 16(b) and the requirement of furnishing a proxy or
information statement in connection with shareholders' meetings, no longer
applicable. The cost savings to CEM as a result of the termination of its
obligation to prepare public company reports is estimated to be approximately
$75,000 per year.
Mr. Collins will own all of the outstanding equity interests in CEM as the
surviving corporation of the merger. An investment in CEM following the merger
involves substantial risk
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<PAGE> 47
resulting from the limited liquidity of any such investment and the
substantially increased leverage associated with funding the merger.
Nonetheless, if CEM is able to successfully implement its business strategy,
Mr. Collins believes the value of his investment will be considerably greater
than the value he would be investing at the time of the merger. See
"Forward-Looking Information."
The receipt of cash pursuant to the merger will be a taxable transaction.
See "Federal Income Tax Consequences."
FINANCING OF THE MERGER
Banc of America has committed to provide up to $21 million to finance the
merger and to provide working capital following the merger. Of the $21 million
in financing, $18 million will be provided in term loans and up to $3 million
will be provided in a revolving credit facility (referred to herein as the
"Revolver") . The $18 million in term loans is divided between a six-year, $12
million term loan (referred to as "Term Loan A") and a seven-year, $6 million
term loan (referred to as "Term Loan B"). Banc of America's loans would be
provided directly to a newly organized subsidiary of MJC Acquisition which will
become a wholly owned subsidiary of CEM as a result of the merger. Immediately
following the merger, CEM will contribute all of its assets to this new
subsidiary. Prior to the date of the special meeting, Mr. Collins and MJC
Acquisition anticipate entering into more definitive loan agreements with Banc
of America, containing substantially the terms described in this section.
Mr. Collins reviewed financing proposals from several lenders prior to his
selection of Banc of America. Although Mr. Collins has no identified
alternative financing source in the event Banc of America does not provide the
financing described in this section, if that financing is not available he
would approach a number of the lenders that previously submitted financing
proposals. Mr. Collins believes that replacement financing would be available
if Banc of America does not provide the financing, although the replacement
financing may be on terms different from (and likely less advantageous to Mr.
Collins than) the financing to be provided by Banc of America.
CASH FINANCING FOR THE MERGER
We estimate that a total of approximately $32.1 million will be required
to complete the merger, including approximately $28.8 million to pay the merger
consideration, $387,846 to pay holders of stock options with exercise prices
below $11.15 per share, $2.0 million to pay fees and expenses related to the
transaction and approximately $1.0 million to repay existing indebtedness of
CEM. These funds and post-merger working capital are expected to come from the
following sources:
<TABLE>
<CAPTION>
Source of Funds Amount
- --------------- ------
<S> <C>
Subordinated loan to MJC Holdings by Mr. Collins........... $ 1,000,000
Cash and cash equivalents of CEM .......................... 12,045,000
Term Loan A ............................................... 12,000,000
Term Loan B ............................................... 6,000,000
Revolver .................................................. 3,000,000
-----------
$34,045,000
-----------
</TABLE>
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<PAGE> 48
As of March 31, 2000, CEM had cash and cash equivalents of approximately
$11.7 million. Banc of America requires the use of $11.05 million in cash held
by CEM to finance the merger. Based on historical and projected cash-flow trends
and projected cash needs for the current year, we believe CEM will have at least
$11.05 million in cash by the date of the special meeting. To the extent there
is a cash shortfall at closing, Mr. Collins has indicated that he will increase
his subordinated loan MJC Acquisition to fund the shortfall. Banc of America
also requires that Mr. Collins contribute his shares of CEM common stock to MJC
Acquisition. Mr. Collins's subordinated loan to CEM will bear interest at eight
percent per year and will be subordinated to all indebtedness owed to Banc of
America. The principal amount of the subordinated loan will be due after eight
years.
FINANCING CONDITIONS
The closing of the Banc of America financing transaction is subject to
Banc of America's satisfaction with:
- the fiscal year 2000 year-to-date financial statements of CEM;
- an environmental and occupational safety and health review of CEM's
properties and business practices;
- projected federal and state tax calculations, and insurance policies;
- all terms of the merger and the merger agreement;
- all terms of the loan agreements and related documents (including the
charter and any shareholder agreements of CEM as the surviving
corporation of the merger);
- the payment of all fees or other consideration agreed upon in
connection with the financing; and
- the absence of a material adverse change in the financial condition,
operations or business prospects of MJC Acquisition or CEM.
SECURITY FOR THE FINANCING
Banc of America's debt financing will be secured by a first priority lien
on all of the assets of MJC Acquisition and CEM as the surviving corporation of
the merger and its subsidiaries, including cash, cash equivalents, inventory,
accounts receivable, property, plant and equipment, intangibles, stock of
subsidiaries, insurance policies and contract rights. The pledge will also
cover all of MJC Acquisition's contract rights under the merger agreement. The
debt financing will also be secured by a guarantee by CEM and a pledge by CEM
of the stock of its subsidiaries following the merger.
Mr. Collins will agree to be personally liable to Banc of America for any
damages incurred by Banc of America as a result of his or CEM's fraud, waste,
misapplication of funds, any direct or indirect transfer of any collateral, or
the existence of liens on the collateral in
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<PAGE> 49
violation of the documents for the financing. Mr. Collins will also become
personally liable to repay the debt financing in the event of the voluntary
bankruptcy of MJC Acquisition or, following the merger, CEM or any subsidiary
obligated to repay the loan.
REPRESENTATIONS, WARRANTIES AND COVENANTS
The loan and equity investment documents evidencing the financing will
contain customary representations, warranties and covenants. The covenants will
include financial covenants establishing minimum earnings levels and minimum
ratios for earnings to debt expense. The covenants will also restrict CEM as
the surviving corporation of the merger and its subsidiaries from:
- making capital expenditures or incurring research and development
expenses beyond an established amount;
- incurring additional indebtedness, granting any liens or entering
into capital leases;
- disposing of material assets or making any material investments or
acquisitions;
- issuing additional shares of stock, repurchasing any shares of stock
or paying any dividends;
- increasing management compensation or engaging in transactions with
related parties;
- entering into a merger, consolidation or other change-in-control
transaction; and
- making changes in management contracts or replacing any key member of
management.
TERMS OF REVOLVER
Borrowings under the Revolver will be limited to an amount equal to 85
percent of eligible accounts receivable plus 50 percent of eligible inventory.
Eligibility of accounts receivable and inventory for inclusion in the base
available for borrowing will be based on customary factors, such as the age of
the account receivable.
The Revolver will bear interest at a floating rate equal to the 30-day
LIBOR rate plus 3.75 percent. The Revolver will also be subject to a facility
fee equal to 0.375 percent of the average undrawn amount, payable quarterly.
The Revolver includes a $750,000 letter of credit subfacility. Letter of
credit fees equal 3.75 percent of the amount of the letters of credit
outstanding, plus any fees required by the issuing bank for standby or
documentary letters of credit.
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<PAGE> 50
TERM LOAN A
Term Loan A will bear interest at a floating rate equal to the 30-day
LIBOR rate plus 4.5 percent. Term Loan A must be repaid under the following
circumstances:
- Scheduled repayments in equal quarterly installments based on the
following annual schedule:
<TABLE>
<S> <C>
year one $1,000,000
year two 1,500,000
year three 2,000,000
year four 2,250,000
year five 2,500,000
year six 2,750,000
</TABLE>
- Annual payments equal to 50 percent of excess cash flow applied to
scheduled principal payments in inverse order of maturity. Excess
cash flow is defined as EBITDA, less capital expenditures, less cash
taxes, less scheduled debt service.
- Payments equal to 100 percent of the net proceeds of asset sales and
equity offerings applied to scheduled principal payments in inverse
order of maturity.
TERM LOAN B
Term Loan B will bear interest at a floating rate equal to the 30-day
LIBOR rate plus 6.0 percent. Term Loan B must be repaid under the following
circumstances:
- Scheduled repayments of principal in four equal quarterly payments
commencing on the earlier of the sixth anniversary of the closing or
the full repayment of Term Loan A.
- After full repayment of Term Loan A, annual payments equal to 50
percent of excess cash flow applied to scheduled principal payments
in inverse order of maturity.
- After full repayment of Term Loan A, payments equal to 100 percent of
the net proceeds of asset sales, equity offerings and insurance
proceeds, applied to scheduled principal payments in inverse order of
maturity.
- Optional prepayment is permitted following full repayment of Term
Loan A.
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<PAGE> 51
INDEMNITY
Mr. Collins has agreed to indemnify Banc of America for any damages
related to the commitment letter if the financing is not consummated.
REPAYMENT
Mr. Collins intends to repay Banc of America's loans from cash generated
by CEM's operations.
THE MERGER
The merger agreement provides that, subject to conditions listed in the
merger agreement, MJC Acquisition, a newly-formed North Carolina corporation,
will merge with and into CEM, and that following the merger, the separate
existence of MJC Acquisition will cease and CEM will continue as the surviving
corporation.
The terms of and conditions to the merger are contained in the merger
agreement which is included in full as Appendix A to this proxy statement and
is incorporated by reference. The discussion in this proxy statement of the
merger and the summary description of the principal terms of the merger
agreement, while complete in all material respects, are subject to and
qualified in their entirety by reference to the merger agreement.
COMBINATION OF CORPORATIONS
The name of the surviving corporation after the completion of the merger
will continue to be "CEM Corporation" until it is changed in accordance
with applicable law. In addition, upon completion of the merger, the
separate corporate existence of MJC Acquisition will cease and CEM will be
the surviving corporation of the merger, with all assets and liabilities
of CEM and MJC Acquisition that existed immediately prior to the merger.
The articles of incorporation of CEM will be amended and restated
to conform to the articles of incorporation of MJC Acquisition as in effect
immediately prior to the Effective Time.
The bylaws of MJC Acquisition, as in effect immediately prior to
the Effective Time, will be the bylaws of the surviving corporation until
amended in accordance with applicable law, the articles of incorporation
of the surviving corporation and its initial bylaws.
The director of MJC Acquisition--Mr. Collins--immediately prior
to the Effective Time will be the initial director of the surviving
corporation, and Messrs. Chanon, Krall and Norelli will cease to be
directors of CEM. The officers of CEM immediately prior to the Effective
Time will be the initial officers of the surviving corporation.
CONVERSION OF SECURITIES
At the Effective Time, subject to the terms, conditions and procedures
included in the merger agreement, each share of CEM common stock issued and
outstanding immediately prior to the Effective Time (other than shares held by
MJC Acquisition) will, by virtue of the merger,
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<PAGE> 52
be converted into the right to receive an amount equal to $11.15 in cash,
without interest. Except for the right to receive this $11.15 per share cash
merger consideration, from and after the Effective Time, all shares (other than
shares held by MJC Acquisition), by virtue of the merger and without any action
on the part of any holder of CEM common stock, will no longer be outstanding and
will be canceled and retired and will cease to exist. Each holder of a
certificate formerly representing shares of CEM common stock (other than shares
held by MJC Acquisition) will, after the Effective Time, cease to have any
rights with respect to the shares of common stock represented by the certificate
other than the right to receive the $11.15 per share cash merger consideration
upon surrender of the certificate.
At the Effective Time, MJC Acquisition will deposit with a bank or trust
company designated by MJC Acquisition and reasonably satisfactory to CEM (the
agreed-upon bank or trust company is referred to as the "Disbursing Agent") an
amount equal to the total cash merger consideration to be paid to the
shareholders of CEM. All such funds will be held in trust for the benefit of
CEM's shareholders.
Each holder of certificates representing shares of CEM common stock will
surrender their certificates to the Disbursing Agent in exchange for the $11.15
per share cash merger consideration. This exchange must be made within six
months after the Effective Time.
No interest will be paid or accrue on the amount payable to any holder of
CEM common stock. For payment to be made to a person other than the registered
holder of the certificate surrendered, the registered holder of the certificate
must properly endorse the certificate, which must otherwise be in proper form
for transfer, all as determined by the Disbursing Agent. Further, the person
requesting payment will be required to pay any transfer or other taxes required
or the holder may establish to the satisfaction of the Disbursing Agent that
these taxes have been paid or that no taxes are due. Six months following the
Effective Time, CEM will be entitled to instruct the Disbursing Agent to
deliver to it any funds (including any accrued interest) that have not been
disbursed to holders of certificates formerly representing shares of common
stock. After that, holders who have not surrendered their share certificates
may look to CEM only as general creditors with respect to their $11.15 per
share cash merger consideration. Neither the Disbursing Agent nor any party to
the merger agreement will be liable to any holder of certificates formerly
representing shares of common stock for any amount paid to a public official
pursuant to any applicable abandoned property, escheat or similar law. Except
as described in this paragraph, CEM will pay all charges and expenses,
including those of the Disbursing Agent, in connection with the exchange of
shares for the cash merger consideration.
Each share of MJC Acquisition's common stock issued and outstanding
immediately prior to the merger will be converted at the Effective Time into
one share of common stock of CEM, as the surviving corporation of the merger.
CASH-OUT OF CEM STOCK OPTIONS
Outstanding stock options to purchase shares of CEM will be canceled or
terminated as of the Effective Time. All holders of unexercised stock options
with an exercise price of less than $11.15 per share will receive from the
surviving corporation, with respect to each share that could be purchased under
the stock option, an amount equal to the difference between $11.15 and the
exercise price of the stock option, less any applicable withholding taxes.
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<PAGE> 53
TRANSFER OF SHARES
No transfers of shares of CEM common stock will be made on the stock
transfer books at or after the Effective Time. If, after the Effective Time,
certificates representing shares of common stock are presented to CEM, these
shares will be canceled and exchanged for the cash merger consideration.
CONDITIONS
Each party's obligation to effect the merger is subject to the
satisfaction, at or prior to the Effective Time, of each of the following
conditions, any or all of which may be waived (other than the first listed
condition) at the appropriate party's discretion, to the extent permitted by
applicable law:
- the merger agreement must be approved in the manner required by
applicable law by the holders of 66 2/3 percent of the
outstanding shares of CEM common stock entitled to vote on the
merger;
- no action, suit or proceeding pending before any court or
governmental body that may have the effect of making illegal or
otherwise preventing, prohibiting or substantially delaying the
completion of the merger, or would result in an award of damages
that would have a material adverse effect on CEM, is pending;
and
- CEM and MJC Acquisition must receive evidence satisfactory to
them of the timely consent or approval of, or notice to, each
governmental authority or other person or entity whose consent
or approval, or to whom notice, is required in connection with
the execution or delivery and performance of the merger
agreement and the transactions contemplated by the merger
agreement or the absence of which would materially and adversely
affect CEM or the ability of any party to complete the
transactions contemplated by the merger agreement.
Neither CEM, Mr. Collins nor MJC Acquisition is aware of any consent, approval
or notice of the type described in the last-listed condition.
The obligations of CEM to effect the merger are subject to the
satisfaction, at or prior to the Effective Time, of each of the following
conditions, unless waived by CEM:
- the representations and warranties of MJC Acquisition and Mr.
Collins in the merger agreement must be true and correct in all
material respects (except that any representation and warranty
that is qualified as to materiality by reference to "Material
Adverse Effect" or any similar term must be true and correct) as
of the date of execution of the merger agreement and as of the
Effective Time (except for those representations and warranties
that are made as of a specific date);
- MJC Acquisition and Mr. Collins must have performed in all
material respects all obligations required to be performed by
them under the merger agreement that should have been performed
at or prior to the Effective Time; and
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<PAGE> 54
- CEM must receive a certificate of the President or Chief
Executive Officer of MJC Acquisition and Mr. Collins certifying
that these two conditions have been satisfied.
The obligations of MJC Acquisition and Mr. Collins to effect the merger
are subject to the satisfaction at or prior to the Effective Time of each of
the following conditions, unless waived by MJC Acquisition:
- the representations and warranties of CEM in the merger
agreement must be true and correct in all material respects
(except that any representation and warranty that is qualified
as to materiality by reference to "Material Adverse Effect" or
any similar term must be true and correct) as of the date of
execution of the merger agreement and as of the Effective Time
(except for those representations and warranties that are made
as of a specific date);
- CEM must have performed in all material respects all obligations
required to be performed by it under the merger agreement at or
prior to the Effective Time; and
- MJC Acquisition and Mr. Collins must receive a certificate of
the President or Chief Executive Officer of CEM certifying that
these two conditions have been satisfied.
After approval of the merger agreement by the shareholders of CEM, no
condition may be waived that reduces the amount or changes the form of the cash
merger consideration to be received by the shareholders of CEM, or that would
adversely affect the public shareholders, unless a waiver of such condition is
approved by the shareholders.
REPRESENTATIONS AND WARRANTIES
CEM made representations and warranties in the merger agreement regarding,
among other things: its organization and good standing; authority to enter into
the merger; its capitalization; its financial statements; the absence of
certain changes in the business of CEM since June 30, 1999; the content and
submission of forms and reports required to be filed by CEM with the
Commission; requisite governmental and other consents and approvals; compliance
with all applicable laws; absence of litigation to which CEM is a party;
obligations with brokers and finders; requisite tax filings; absence of
defaults under material contracts; employee benefits and environmental matters.
Mr. Collins and MJC Acquisition have made representations and warranties
in the merger agreement regarding, among other things: MJC Acquisition's
organization and good standing; authority to enter the transaction; MJC
Acquisition's capitalization; compliance with all applicable laws; requisite
governmental and other consents and approvals; accuracy of information supplied
by MJC Acquisition for submission on forms and reports required to be filed by
CEM with the Commission; financing for the merger; brokers and finders; the
absence of prior activities; and absence of litigation to which MJC Acquisition
is a party. In addition, Mr. Collins represented and warranted that he had
reviewed the representations and warranties made by CEM and to his actual
knowledge those representations and warranties were true and correct in all
material respects (except that any representation or warranty that is qualified
as to materiality by reference to "Material Adverse Effect" or any similar term
was true and correct).
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The representations and warranties of the parties in the merger agreement
will expire upon consummation of the merger, and upon such expiration none of
such parties or their respective officers, directors or principals will have
any liability whatsoever with respect to any of these representations or
warranties.
COVENANTS
In the merger agreement, CEM has agreed that prior to the Effective Time,
unless otherwise agreed to in writing by MJC Acquisition or as otherwise
contemplated by the merger agreement, CEM and each of its subsidiaries will
conduct business only in the ordinary course substantially consistent with past
practice and will not:
- amend its articles of incorporation or bylaws;
- declare, set aside or pay any dividend or make any other distribution
in respect of any of its shares of capital stock;
- issue, grant, sell, pledge, or transfer any shares of its capital
stock, stock options, warrants, securities or rights to acquire any
such shares, securities or rights of CEM, or propose or agree to do
any of the foregoing or make any other changes in its equity capital
structure;
- incur any indebtedness, directly or through guarantees or otherwise,
other than under existing credit facilities for current operations in
the ordinary course of its business or make loans other than to its
subsidiaries;
- acquire directly or indirectly by redemption or otherwise any shares
of the capital stock of CEM of any class or any options, warrants or
other rights to purchase any such shares;
- fail to use their reasonable best efforts to conduct their relations
with employees and their employee benefit plans only in the ordinary
and usual course consistent with past practices;
- amend, or enter into any additional, employment agreements with
officers or directors of CEM or make increases in employee
compensation or benefits except as permitted by the merger agreement;
- fail to use their reasonable best efforts to keep in place their
current material insurance policies;
- make any material tax election, or settle or compromise any material
tax liability;
- make any material change in its accounting principles or methods
except as may be required by a change in generally accepted
accounting principles;
- split, combine or reclassify any of the capital stock of CEM or issue
other securities in respect of or in substitution for its existing
capital stock;
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<PAGE> 56
- acquire any other business or entity whether by acquisition of
properties, assets or stock, merger or consolidation;
- agree to engage in any new developments;
- sell, lease, mortgage or otherwise encumber any of its assets other
than in the ordinary course of business;
- acquire or agree to acquire any assets other than in the ordinary
course of business consistent with past practice;
- make capital expenditures except capital expenditures contemplated by
the current capital expenditure budget;
- pay, discharge or satisfy material claims other than in the ordinary
course of business;
- waive, release, grant or transfer any rights of material value or
modify or change in any material respect any existing material
license, lease, contract or other document other than in the ordinary
course of business consistent with past practice or where those
actions would not have a material adverse effect;
- adopt a plan of complete or partial liquidation or merger;
- enter into any new collective bargaining agreement;
- settle or compromise any litigation against CEM or its subsidiaries,
except for settlements or compromises that do not exceed $10,000
individually and $50,000 in the aggregate;
- engage in any transaction or enter into any agreement with any
affiliate or other person covered under Item 404 of the Commission's
Regulation S-K;
- adopt new, or amend existing, employee benefit plans, including any
bonus, profit sharing, compensation, stock option, pension,
retirement, deferred compensation or other plan, other than increases
for individuals and arrangements for new employees in the ordinary
course of business consistent with past practice;
- grant employees any new or modified severance or other termination
arrangement;
- effectuate a plant closing or mass layoff without complying with
applicable law;
- fail to grant MJC Acquisition and its representatives, on a
confidential basis, access to the records and facilities of CEM; and
- fail to use its reasonable best efforts to cooperate with and assist
MJC Acquisition with respect to financing necessary to effect the
merger.
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<PAGE> 57
Each party also has agreed to provide prompt notice to the other upon
obtaining knowledge of:
- material litigation, claims, actions, proceedings, tax audits
or other investigations affecting such party or any of its
properties or assets, that if adversely resolved could have a
material adverse effect or could prevent, hinder or materially
delay the ability to complete the merger or the other
transactions contemplated by the merger agreement;
- notices of default under agreements and instruments where the
default would have a material adverse effect; and
- notice from a third party claiming that its consent is
required in connection with the transactions contemplated by
the merger agreement.
In addition, Mr. Collins agreed that, prior to the completion of the
merger, he would not do or fail to do, or cause any person to do or fail to do,
any act that would cause CEM to breach any of its representations and warranties
included in the merger agreement.
NONSOLICITATION COVENANT
Under the terms of the merger agreement, CEM has agreed not to permit
any of its officers, directors, affiliates, representatives or agents to,
directly or indirectly, solicit, initiate or encourage any "Acquisition
Proposal" or participate in any discussions or negotiations with, or encourage
any effort or attempt by, any third party to facilitate an "Acquisition
Proposal." Under the merger agreement, an "Acquisition Proposal" is defined to
mean any offer or proposal by any person or group concerning any tender or
exchange offer, proposal for a merger, share exchange, recapitalization,
consolidation or other business combination involving CEM or any of its
subsidiaries or divisions, or any proposal or offer to acquire in any manner,
directly or indirectly, a significant equity interest in, or a substantial
portion of the assets of, CEM or any of its subsidiaries, other than pursuant to
the transactions contemplated by the merger agreement. Further, the merger
agreement provides that all of CEM's representatives will be instructed to cease
the foregoing activities. However, CEM may, subject to obtaining a
confidentiality agreement, furnish information to and participate in discussions
and negotiations with a party who has made an unsolicited written Acquisition
Proposal after the date of the merger agreement if either CEM's board of
directors or its special committee has determined in good faith, based upon the
reasonably concluded advice of outside counsel, that failing to take such action
would violate CEM's board of directors' fiduciary duties under applicable law.
CEM is obligated to inform MJC Acquisition immediately of any Acquisition
Proposal, provide MJC Acquisition notice of its terms and conditions, and keep
MJC Acquisition advised of all material developments.
INDEMNIFICATION AND INSURANCE
The merger agreement provides that the current and former directors and
officers of CEM and any of its subsidiaries (including the members of the
special committee) will be indemnified by CEM, to the fullest extent permitted
by applicable law, against any costs, expenses, judgments, fines, losses,
claims, damages, liabilities and amounts paid in settlement in connection with
any pending, threatened or completed claim, action, suit, proceeding or
investigation, and will be advanced reasonable costs and expenses (including
attorneys' fees), in connection with any claim, action, suit, proceeding or
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<PAGE> 58
investigation arising out of or pertaining to the approval and consummation of
the transactions contemplated by the merger agreement. In addition, CEM is
required to maintain in effect, for a period of six years after the Effective
Time, CEM's policies of directors' and officers' liability insurance (provided
that CEM may substitute for policies of at least the same amounts and comparable
coverage). However, in no event will CEM be required to pay premiums for
insurance in excess of 150 percent of the premiums currently paid by CEM.
EXPENSES
The parties have agreed to pay their own costs and expenses in
connection with the merger agreement and the transactions contemplated by the
merger agreement. CEM has agreed to bear the cost incurred in the printing,
filing with the Commission and mailing to shareholders this proxy statement and
other materials in connection with the special meeting.
TERMINATION, AMENDMENT AND WAIVER
At any time prior to the Effective Time, the merger agreement may be
terminated by the mutual consent of the boards of directors of CEM and MJC
Acquisition.
Any party may terminate the merger agreement prior to the Effective
Time by written notice to the other parties if:
- the conditions precedent to closing have not occurred by May
31, 2000 unless the failure to close results from the party's
breach of any representation, warranty or covenant;
- approval of the shareholders of CEM necessary to complete the
merger has not been obtained;
- a court or other governmental entity issues an order or takes
any action enjoining, restraining or prohibiting the merger
and such order or action becomes final and nonappealable.
In addition, MJC Acquisition may terminate the merger agreement prior
to the Effective Time by written notice to CEM if:
- CEM breaches any representation, warranty or covenant in the
merger agreement in any material respect and fails to cure the
breach within 15 days after written notice;
- the Board withdraws or modifies its approval or recommendation
of the merger agreement or the merger;
- CEM enters into a definitive agreement with any party
regarding an Acquisition Proposal; or
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<PAGE> 59
- a third party commences a tender or exchange offer for 25
percent or more of the common stock and the board of directors
has recommended that CEM's shareholders tender their shares in
connection with the offer.
CEM may terminate the merger agreement prior to the Effective Time by
written notice to MJC Acquisition if:
- MJC Acquisition or Mr. Collins breaches any representation,
warranty or covenant in the merger agreement in any material
respect and fails to cure the breach within 15 days after
written notice;
- the board of directors or the special committee withdraws or
modifies its approval or recommendation of the merger
agreement or the merger after having determined in good faith,
and based upon the reasonably concluded advice of counsel,
that continuing to recommend the merger agreement and the
merger would violate the fiduciary duties of the board;
- the board of directors or the special committee has determined
that CEM has entered into a definitive agreement with any
party with respect to a transaction the proposal of which
qualifies as an Acquisition Proposal, provided that the board
or the special committee has first determined in good faith
based upon reasonably concluded advice of counsel that failing
to take such action would violate the board's fiduciary
duties; or
- a third party commences a tender or exchange offer for 25
percent or more of the common stock which has not been
solicited, initiated or encouraged by CEM and the board of
directors has recommended that the shareholders of CEM tender
their shares in connection with the offer, provided that the
board or the special committee has first determined in good
faith based upon the reasonably concluded written advice of
counsel that failing to take such action would violate the
board's fiduciary duties.
Subject to the provisions of applicable law, the merger agreement may
be modified or amended, and provisions waived, by written agreement of the
parties. However, after approval of the merger agreement by the shareholders of
CEM, no amendment or waiver of a provision may be made which reduces the amount
or changes the form of the cash merger consideration to be received by the
shareholders, or that would adversely affect the shareholders of CEM, unless
such amendment or waiver of a provision is approved by the shareholders. With
respect to any decision regarding a material modification, amendment or waiver
of the merger agreement, the board of directors, in the exercise of its
fiduciary duty and in accordance with any applicable law or regulation, will
make a determination as to whether resolicitation of the shareholders is
required.
TERMINATION FEE
In the event that the merger agreement is terminated by CEM due to:
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<PAGE> 60
- the board or the special committee withdrawing or modifying
its approval or recommendation of the merger agreement or the
merger in connection with the exercise of its fiduciary
duties;
- CEM entering into a definitive agreement with any party with
respect to an Acquisition Proposal following a good faith
determination based on reasonably concluded advice of counsel
that the failure to do so would violate the board's fiduciary
duty; or
- the commencement by a third party of an unsolicited tender
offer for 25 percent or more of the common stock which the
board has recommended to CEM's shareholders,
then in any of these events, CEM is required to promptly pay MJC Acquisition
$1,000,000 plus MJC Acquisition's reasonable out-of-pocket fees and expenses not
to exceed $800,000 in the aggregate (the "Termination Fee").
The Termination Fee shall also be due in the event that MJC Acquisition
terminates the merger agreement due to:
- the board's withdrawal or modification of its approval or
recommendation of the merger agreement or the merger;
- CEM enters into a definitive agreement with any party with
respect to an Acquisition Proposal; or
- a third party commences a tender or exchange offer for 25
percent or more of the common stock which has been recommended
by the board to CEM's shareholders.
Additionally, the Termination Fee will be due to MJC Acquisition if:
- an Acquisition Proposal is publicly made or disclosed to CEM
after the date of the merger agreement that is a superior to
the merger from a financial point of view (a "Superior
Proposal");
- the merger agreement is terminated because of an uncured
breach of any CEM representation, warranty or covenant, the
merger does not occur by May 31, 2000, the shareholders of CEM
do not approve the merger, or a court of competent
jurisdiction or other governmental entity prevents the
consummation of the merger; and
- CEM completes, or enters into a definitive agreement with
respect to, a transaction that would qualify as a Superior
Proposal within nine months after the termination of the
merger agreement.
Further, in the event that the merger agreement is terminated due to
the failure to complete the merger by May 31, 2000 (and all of the conditions to
closing have been met or fulfilled), CEM will be obligated to reimburse MJC
Acquisition for its reasonable out-of-pocket fees and expenses.
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<PAGE> 61
REGULATORY APPROVALS/THIRD PARTY CONSENTS
CEM is not aware of any license or regulatory permit that is material
to the business of CEM and that is likely to be adversely affected by the merger
or of any approval or other action by any state, federal or foreign government
or governmental agency that would be required prior to effecting the merger.
ACCOUNTING TREATMENT
The merger will be treated as a purchase business combination for
accounting purposes.
FEES AND EXPENSES
Assuming the merger is consummated, CEM will pay costs and fees in
connection with the merger, financing and the related transactions, which are
estimated to be as follows:
<TABLE>
<CAPTION>
Expense or Fee Estimated Amount
-------------- ----------------
<S> <C>
Financial advisory fees and expenses........... $1,025,000
Loan commitment fees........................... 315,000
Legal fees..................................... 425,000
----------
Disbursement agent's fees*..................... 5,000
Accounting fees................................ 150,000
Printing and mailing expenses*................. 20,000
Solicitation expenses*......................... 3,500
Commission filing fees*........................ 5,832
----------
Miscellaneous.................................. 70,668
----------
Total..................................... $2,020,000
==========
</TABLE>
- -------------
* To be paid by CEM in the event that the merger is not completed. In
addition, in the event the merger is not completed, CEM will pay or
have paid the fees and expenses of Brookwood (which in the case the
merger was not approved would be approximately $150,000) and the
special committee's counsel.
In addition to the expenses listed above, in connection with the loans
to be provided by Banc of America to finance the merger, MJC Acquisition has
agreed that immediately following the merger CEM, as the survivor of the merger,
will issue to Banc of America warrants to purchase shares of non-voting common
stock of CEM representing twenty percent of the fully diluted shares of all
common stock of CEM at a nominal exercise price. The non-voting common-stock
would be convertible into shares of voting common stock subject to applicable
restrictions under federal banking regulations. The warrants will contain
provisions entitling Banc of America to require CEM to purchase the warrants
after five years at a formula price based on CEM's earnings or the then fair
market value of the underlying shares if that amount is higher. In addition,
after six years, CEM may repurchase 50 percent of the warrants at a premium to
the price described above. The warrants will expire in 10 years. CEM will also
grant customary registration rights to Banc of America with respect to the
shares purchased under the warrants.
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<PAGE> 62
For a description of CEM's obligation, even in some cases if the merger
is not consummated, to pay or reimburse MJC Acquisition for expenses incurred by
MJC Acquisition in connection with the merger, see "The Merger -- Expenses" and
" -- Termination Fee." See "Special Factors -- Opinion of CEM's Financial
Advisor" for a description of the fees to be paid to Brookwood in connection
with its engagement. For a description of fees paid to the members of the
special committee, see "Special Factors -- Conflicts of Interest."
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
considerations relevant to the merger that are generally applicable to holders
of CEM common stock. This discussion is based on currently existing provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), existing and
proposed Treasury Regulations thereunder and current administrative rulings and
court decisions, all of which are subject to change. Any such change, which may
or may not be retroactive, could alter the tax consequences to the holders of
CEM common stock as described in this proxy statement. Special tax consequences
not described below may be applicable to particular classes of taxpayers,
including financial institutions, broker-dealers, persons who are not citizens
or residents of the United States or who are foreign corporations, foreign
partnerships or foreign estates or trusts as to the United States and holders
who acquired their stock through the exercise of an employee stock option or
otherwise as compensation.
The receipt of the $11.15 per share cash merger consideration in the
merger by holders of CEM common stock will be a taxable transaction for federal
income tax purposes. Each holder's gain or loss per share will be equal to the
difference between $11.15 and the holder's basis per share in the common stock.
This gain or loss generally will be a capital gain or loss. In the case of
individuals, trusts and estates, this capital gain will be subject to a maximum
federal income tax rate of 20 percent for shares of common stock held for more
than 12 months prior to the date of disposition. For shares held less than 12
months the gain or loss will be a short-term capital gain or loss. As a general
rule, short-term capital gains are taxed at ordinary income rates.
A holder of CEM common stock may be subject to backup withholding at
the rate of 31 percent with respect to the merger consideration received, unless
the holder (a) is a corporation or comes within other exempt categories and,
when required, demonstrates this fact or (b) provides a correct taxpayer
identification number ("TIN"), certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholdings rules. To prevent the possibility of backup federal income tax
withholding on payments made to certain holders with respect to shares of common
stock under the merger, each holder must provide the disbursing agent with his
correct TIN by completing a Form W-9 or Substitute Form W-9. A holder of CEM
common stock who does not provide CEM with his or her correct TIN may be subject
to penalties imposed by the Internal Revenue Service (the "IRS"), as well as
backup withholding. Any amount withheld under these rules will be creditable
against the holder's federal income tax liability. CEM (or its agent) will
report to the holders of common stock and the IRS the amount of any "reportable
payments," as defined in Section 3406 of the Code, and the amount of tax, if
any, that is withheld.
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The foregoing tax discussion is included for general information only
and is based upon present law. Each holder of common stock should consult his or
her own tax advisor as to the specific tax consequences of the merger to that
holder, including the application and effect of federal, state, local and other
tax laws and the possible effect of changes in such tax laws.
INFORMATION REGARDING CEM
We engage in one line of business--the development, manufacture, sale
and service of microwave-based instrumentation for testing, analysis and process
control in analytical laboratory and industrial markets. These sample
preparation products provide advantages of speed and simplicity compared to
traditional methods of testing and analysis. Our products are used in the
general analytical laboratory market and in many manufacturing and processing
industries, including chemical and food processing. A significant amount of our
sales consists of consumable supplies, parts and service for our instrumentation
products.
CEM was organized as a North Carolina corporation in 1971. Our
principal executive offices are located at 3100 Smith Farm Road, Matthews, North
Carolina 28106. Our telephone number is (704) 821-7015.
We have attached a copy of our Annual Report on Form 10-K for the
fiscal year ended June 30, 1999 as Appendix C to this proxy statement and our
Quarterly Report on Form 10-Q for the period ended December 31, 1999 as Appendix
D. These documents contain more detailed information about us.
INCORPORATION OF DOCUMENTS BY REFERENCE
We are incorporating by reference the following documents that we have
previously filed with the Commission, copies of which are attached as appendices
to this proxy statement:
- Our Annual Report on Form 10-K for the fiscal year ended June
30, 1999; and
- Our Quarterly Reports on Form 10-Q for each of the fiscal
quarters ended September 30, 1999 and December 31, 1999.
In addition, we are incorporating by reference all documents we file in
response to the requirements of Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act after the date of this proxy statement and before the date of the
special meeting. Accordingly, those documents will be considered a part of this
proxy statement from the date they are filed.
If you would like copies of these documents or the reports by Wachovia
Securities or Brookwood regarding their valuation of CEM, please contact Richard
N. Decker at CEM Corporation, 3100 Smith Farm Road, Matthews, North Carolina
28106 or by telephone at (704) 821-7015 or by email at [email protected].
We will send these documents to you by first-class mail within one business day
after receiving your request. In addition, you may inspect and copy, at CEM's
principal offices during business hours and upon five-business days' notice, the
following corporate documents of CEM: articles of incorporation and all
amendments currently in effect, bylaws, minutes of shareholders' meetings, all
written communications to shareholders in the past three years, a list of the
names and
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business addresses of the current directors; records of any final action taken
by the board of directors or any committee of the board, accounting records and
a list of the shareholders of record.
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents our selected historical financial data and
other operating information for the five fiscal years ended June 30, 1999, which
are derived from our audited consolidated financial statements. The consolidated
financial statements for the five fiscal years ended June 30, 1999 have been
audited by PricewaterhouseCoopers LLP, independent auditors. Our historical
financial data for the six month periods ended December 31, 1999 and 1998 are
derived from our unaudited condensed consolidated financial statements. The
unaudited condensed consolidated financial statements include all adjustments,
consisting of normal recurring accruals, that we consider necessary for a fair
presentation of the consolidated financial position and consolidated results of
operations for these periods. Operating results for the six months ended
December 31, 1999 are not necessarily indicative of the results that may be
expected for the entire fiscal year ending June 30, 2000. The data are qualified
by reference to, and should be read in conjunction with, our audited
consolidated financial statements, related notes and other financial information
included in Exhibit 13 to our Annual Report on Form 10-K for the fiscal year
ended June 30, 1999 and our consolidated unaudited financial statements included
as Item 1 of Part I of our Quarterly Report on Form 10-Q for the period ended
December 31, 1999. Both our Form 10-K and Form 10-Q accompany this proxy
statement, and the financial statements included in those reports are
incorporated into this proxy statement by reference.
<TABLE>
<CAPTION>
For the six months
For the years ended June 30 ended December 31
-------------------------------------------------------- --------------------
In thousands, except ratios and per share 1999 1998 1997 1996 1995 1999 1998
data -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement and Cash Flows
Net sales $ 32,077 $ 32,362 $ 30,075 $ 31,477 $ 31,611 $ 16,441 $ 15,643
Gross profit 16,967 17,332 16,594 18,381 18,270 8,478 8,071
Income from operations 2,647 3,049 2,378 4,136 4,479 1,377 1,254
Net income 2,036 2,424 1,837 2,908 3,179 943 984
Net income per share
Basic .66 .71 .52 .80 .88 .31 .31
Diluted .66 .70 .52 .78 .85 .31 .31
Average shares outstanding
Basic 3,093 3,435 3,530 3,626 3,630 3,044 3,126
Diluted 3,102 3,469 3,550 3,748 3,735 3,044 3,155
Net cash provided by operating activities 2,850 3,744 4,883 2,020 3,134 2,536 1,186
Net cash used in investing activities (1,433) (2,417) (359) (917) (3,495) (586) (643)
Net cash used in financing activities (1,512) (4,196) (569) (1,347) (80) (92) (1,253)
Ratio of earnings to fixed changes* 23.6 28.8 21.0 31.7 92.6 20.4 22.7
</TABLE>
<TABLE>
<CAPTION>
As of June 30 As of December 31
-------------------------------------------------------- --------------------
1999 1998 1997 1996 1995 1999 1998
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet
Current assets $ 22,060 $ 18,942 $ 20,804 $ 19,311 $ 18,466 $ 23,270 $ 17,596
Total assets 28,556 28,298 29,214 27,584 26,653 29,799 27,105
Working capital 15,899 13,636 16,409 15,549 14,047 16,872 13,642
Long-term debt, net of current maturities 173 1,177 1,229 1,417 1,578 320 1,266
Shareholders' equity 22,095 21,719 23,480 22,351 20,592 22,954 21,789
</TABLE>
- -------------------------
* For purposes of computing the ratio of earnings to fixed charges,
earnings consist of income from continuing operations before income
taxes and cumulative effect of
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accounting changes plus fixed charges. Fixed charges consist of
interest expense and an estimate of the interest cost in rental
expense.
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Principal Employment; Five-year
Name and Business Address Employment History; Other Directorships
- -------------------------------- ------------------------------------------------------------------------
<S> <C>
Michael J. Collins* President and Chief Executive Officer of CEM since 1978
3100 Smith Farm Road
P.O. Box 200
Matthews, North Carolina 28106
Ronald A. Norelli* President and Chief Executive Officer of Norelli & Company (strategic
100 North Tryon Street management consulting firm) since 1981; Director of Pluma,
Suite 5160 Inc.(manufacturer and distributor of fleece and jersey products) since
Charlotte, North Carolina 28202 1998 following an engagement of Norelli & Company. Mr. Norelli acted as
interim CEO of Pluma, Inc. from January 31, 1999 through May 9, 1999.
Pluma, Inc. filed a bankruptcy petition under the federal bankruptcy
laws on May 14, 1999. Mr. Norelli is a Certified Turnaround
Professional, and has from time-to-time served in interim senior
executive positions of companies that were clients of Norelli & Company.
John L. Chanon* Area Partner of Tatum CFO Partners LLP since 1996; Senior Vice President
Suite 1590 - Finance of Harris-Teeter, Inc. (regional supermarket chain) 1993-1996;
129 West Trade Street President of Jordan Graphics, Inc. (printing company) 1989-1993;
Charlotte, North Carolina 28202 Harris-Teeter, Inc. and Jordan Graphics, Inc. are a subsidiary and
former subsidiary, respectively, of Ruddick Corporation (holding company)
George F. Krall* Director since 1999. President and Chief Executive Officer, Mebane
7411 Oakwood Street Packaging Group since 1995; President and Chief Operating Officer 1992 -
P.O. Box 408 1995; President Wilkata Packaging Corporation 1987 - 1992; Director
Mebane, North Carolina 27302 Paperboard Packaging Council.
Richard N. Decker Vice President - Finance, Chief Financial Officer, Secretary and
3100 Smith Farm Road Treasurer of CEM since 1995; Secretary, Treasurer and Chief Financial
P.O. Box 200 Officer 1993-1995; Vice President-Finance of the Water and Gas Meter
Matthews, North Carolina 28106 Division of Schlumberger Limited Corporation 1982-1993.
</TABLE>
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- ----------------------
* Director. Mr. Norelli is Chairman of the Board of Directors. Mr.
Collins has served as a director since 1971. Mr. Norelli has served as a
director since 1985. Mr. Chanon has served as a director since 1987. Mr. Krall
has served as a director since 1999.
None of CEM's directors or executive officers has during the last five
years been convicted in a criminal proceeding (excluding traffic violations or
similar misdemeanors), or been a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result of such proceeding
was or is subject to a judgment, decree or final order enjoining future
violations of, or prohibiting activities subject to, federal or state securities
laws or finding any violation of such laws. Each of CEM's directors and
executive officers is a citizen of the United States.
STOCK OWNERSHIP
The following table shows, as of April 7, 2000, the holdings of the CEM
common stock by any entity or person known to CEM to be the beneficial owner of
more than five percent of the outstanding shares, each director and each
executive officer and by all directors and executive officers as a group.
<TABLE>
<CAPTION>
Name and Address of Number of Shares and Nature Percent of Common Stock
Beneficial Owner of Beneficial Ownership Outstanding(1)
- ------------------------------------ --------------------------- -----------------------
<S> <C> <C>
Michael J. Collins(2) 506,892 16.5%
David L. Babson & Co., Inc.(3) 365,400 11.9%
T. Rowe Price Associates, Inc.(4) 299,000 9.8%
Dimensional Fund Advisors Inc.(5) 257,100 8.4%
Royce & Associates, Inc.(6) 201,400 6.6%
James Wiggins(7) 170,900 5.6%
Richard N. Decker(8) 33,984 *
Ronald A. Norelli(9) 20,305 *
John L. Chanon(10) 7,100 *
George F. Krall 0 *
Directors and Executive Officers(11) 567,531 18.1%
</TABLE>
- -------------
* Less than 1%.
(1) Based on the number of shares outstanding plus, for each shareholder,
options that are currently exercisable or are exercisable within 60
days of April 7, 2000 that are held by the shareholder.
(2) Includes 24,000 shares subject to options that are currently
exercisable or are exercisable within 60 days of April 5, 2000 and
27,450 shares held by Mr. Collins's wife as custodian for their
children. Mr. Collins's business address is 3100 Smith Farm Road,
Matthews, North Carolina 28106.
(3) Based on a Schedule 13G filed with the Commission on January 25, 2000.
David L. Babson & Company, Inc. ("Babson") is an investment adviser.
Babson has sole voting power and sole dispositive power over all of the
shares. Babson's address is One Memorial Drive Cambridge, Massachusetts
02142-1300.
(4) Based on a Schedule 13G fled with the Commission on February 2, 2000.
The shares are owned by the T. Rowe Price Small-Cap Value Fund, in
respect of which T. Rowe Price Associates, Inc. ("Price Associates")
serves as investment adviser. Price Associates has sole dispositive
power but no voting power over such shares. For purposes of the
reporting requirements of the Securities Exchange Act of 1934, Price
Associates is deemed to be
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a beneficial owner of such securities; however, Price Associates
expressly disclaims that it is, in fact, the beneficial owner of such
securities. Price Associate's address is 100 E. Pratt Street,
Baltimore, Maryland 21202.
(5) Based on a Schedule 13G filed with the Commission on February 3, 2000.
All of the shares owned by Dimensional Fund Advisors Inc.
("Dimensional") are held in portfolios of DFA Investment Dimensions
Group Inc., a registered open-end investment company, or in a series of
the DFA Investment Trust Company, a Delaware business trust, or the DFA
Group Trust and DFA Participation Group Trust, investment vehicles for
qualified employee benefit plans, all of which Dimensional serves as
investment manager. Dimensional disclaims beneficial ownership of all
such shares. Dimensional's address is 1299 Ocean Avenue, 11th Floor,
Santa Monica, California 90407.
(6) Based on a Schedule 13G filed with the Commission on February 2, 2000.
Royce & Associates, Inc. ("Royce") has sole voting and dispositive
power over all shares. Royce's address is 1414 Avenue of the Americas,
New York, New York 10019. Charles M. Royce may be deemed a controlling
person of Royce.
(7) Based on a Schedule 13G filed with the Commission on February 17, 2000.
Mr. Wiggins has sole dispositive power over all shares, sole voting
power over 113,550 shares and shared voting power over 57,350 shares.
Mr. Wiggins address is Phronesis, L.P., 197 East Broad Street, Suite
200, Columbus, Ohio 43215.
(8) Includes 32,250 shares subject to options that are currently
exercisable or are exercisable within 60 days of April 7, 2000.
(9) Includes 7,000 shares subject to options that are currently exercisable
or are exercisable within 60 days of April 7, 2000, 405 shares held as
custodian for his children and 5,900 shares held in a joint account
with his wife.
(10) Includes 4,000 shares subject to options that are currently exercisable
or are exercisable within 60 days of April 7, 2000 and 100 shares held
by his son.
(11) Includes 67,250 shares subject to options that are currently
exercisable or are exercisable within 60 days of April 7, 2000.
In addition to Mr. Collins, the other members of the board of directors
who together own 15,900 shares, or 0.5 percent of the outstanding shares, and
Mr. Decker, CEM's other executive officer, who owns 1,734 shares, or 0.06
percent of the outstanding shares, plan to vote their shares in favor of the
merger. Each of these directors and Mr. Decker plan to do so because they
believe that $11.15 per share consideration to shareholders to be paid in the
merger is fair based on the analysis of the Board of Directors, the special
committee and its financial advisor described earlier in this proxy statement.
RECENT STOCK PURCHASES
We started a share repurchase program in January 1991 and suspended the
program in July 1999. The following table includes the amount of common stock we
repurchased, the range of prices per share we paid and the average purchase
price per share we paid during each quarterly period presented below.
63
<PAGE> 68
<TABLE>
<CAPTION>
Fiscal Years Ended or Ending June 30,
- ----------------------------------------------------------------------------------------------------
1998
- ----------------------------------------------------------------------------------------------------
Number of Shares Range of Prices Average Price
---------------- --------------- ----------------
<S> <C> <C> <C>
First Quarter 0 -- --
Second Quarter 0 -- --
Third Quarter 20,500 $10.875 - $11.50 $ 11.24
Fourth Quarter 301,552 10.75 - 13.548 12.94
<CAPTION>
- ----------------------------------------------------------------------------------------------------
1999
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter 91,000 $10.375 - 11.75 $ 11.20
Second Quarter 13,800 9.75 - 11.50 11.28
Third Quarter 15,700 8.25 - 10.125 8.77
Fourth Quarter 16,600 7.375 - 8.438 7.94
<CAPTION>
- ----------------------------------------------------------------------------------------------------
2000
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter 2,600 $7.125 - 7.50 $ 7.29
Second Quarter 0 -- --
Third Quarter 0 -- --
Fourth Quarter* 0 -- --
</TABLE>
- -------------------------------
* Through April 18, 2000
On January 1, 2000, Mr. Collins exercised options granted by CEM to
acquire 2,000 shares at an exercise price per share of $10.25, and on May 26,
1998 he acquired 4,000 shares and 3,970 shares upon the exercise of options at a
per share price, respectively, of $7.875 and $7.75.
MARKET PRICES OF COMMON STOCK AND DIVIDENDS
CEM common stock is traded on the Nasdaq National Market (symbol:
CEMX). The following table sets forth the high and low sales prices per share
for each quarterly period for the two most recent fiscal years and for the
current fiscal year to date.
<TABLE>
<CAPTION>
Fiscal Years Ended or Ending June 30,
-----------------------------------------------------------------------------------------------
1998 1999 2000
------------------------------- ------------------------------- -------------------------------
High Low High Low High Low
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 10.50 $ 7.50 $ 13.00 $ 10.00 $ 7.50 $ 6.125
Second Quarter 11.25 9.00 11.375 9.125 10.75 5.625
Third Quarter 11.50 9.25 10.00 8.00 10.75 10.188
Fourth Quarter 13.50 8.75 8.50 6.875 10.688* 10.188*
</TABLE>
- ---------------
* Through April 18, 2000.
The book value of a share of CEM common stock as of December 31, 1999
was $7.54. On [April 18,] 2000, the last day prior to printing of this proxy
statement on which CEM's common stock was traded, the closing price per share of
CEM common stock as reported by the Nasdaq National Market was $[10.625].
64
<PAGE> 69
CEM has never paid any cash dividends on its common stock. Under the
merger agreement, CEM has agreed not to pay any dividends on the common stock
prior to the completion of the merger.
INFORMATION REGARDING MJC ACQUISITION AND MR. COLLINS
MJC Acquisition is a recently incorporated North Carolina corporation
organized by Mr. Collins for the purpose of effecting the merger. Its principal
executive offices are located at 3100 Smith Farm Road, Matthews, North Carolina
28106. Its telephone number is (704) 821-7015. Michael J. Collins is the sole
shareholder, director and executive officer of MJC Acquisition.
Neither MJC Acquisition nor Mr. Collins is required to file reports
with the Commission under Sections 13(a), 13(c), 14 or 15(d) of the Exchange
Act.
Neither MJC Acquisition nor any of its executive officers or director
nor any person controlling MJC Acquisition, including Mr. Collins, or any of
their or his respective affiliates has during the last five years been convicted
in a criminal proceeding (excluding traffic violations or similar misdemeanors),
or been a party to a civil proceeding of a judicial or administrative body of
competent jurisdiction and as a result of such proceeding was or is subject to a
judgment, decree or final order enjoining future violations of, or prohibiting
activities subject to, federal or state securities laws or finding any violation
of such laws.
All information contained in this proxy statement concerning Mr.
Collins and MJC Acquisition is based upon statements and representations made by
them or their representatives to us or our representatives.
INDEPENDENT AUDITORS
The consolidated balance sheets as of June 30, 1999 and 1998, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three fiscal years in the period ended June 30, 1999, included
in our Annual Report on Form 10-K attached as Appendix C to this proxy statement
have been audited by PricewaterhouseCoopers LLP, independent auditors, as stated
in their report. A representative of PricewaterhouseCoopers LLP will be at the
special meeting to answer appropriate questions from shareholders and will have
the opportunity to make a statement if so desired.
SHAREHOLDER PROPOSALS
Our annual meeting of shareholders is normally held in November of each
year. In October 1999, in light of Mr. Collins's initial proposal to acquire
CEM, we postponed indefinitely the date of the annual meeting of shareholders
initially scheduled to be held November 4, 1999. If the proposal to approve the
merger is not approved at the special meeting, the annual meeting of
shareholders will be held in July 2000. Proposals of shareholders intended to be
presented at the annual meeting of shareholders must be submitted, by registered
or
65
<PAGE> 70
certified mail, to the attention of the CEM's Secretary at our principal
executive offices by May 31, 2000 in order to be considered for inclusion in our
proxy statement and form of proxy for the annual meeting. In addition, if a
proposal is submitted after that date, proxies will have the authority to vote
in their discretion on the proposal. If the merger is completed, the annual
meeting of shareholders may be scheduled for another date after the Effective
Time.
OTHER MATTERS
We know of no other business to be presented at the special meeting. If
other matters do properly come before the special meeting, or any adjournment or
adjournments thereof, the individuals named in the proxy have the discretion to
vote on these other matters according to their best judgment unless the
authority to do so is withheld as marked by a shareholder on the proxy.
66
<PAGE> 71
APPENDIX A
AGREEMENT AND PLAN OF MERGER
Dated as of December 29, 1999
by and among
CEM CORPORATION,
MJC ACQUISITION CORPORATION
AND
MICHAEL J. COLLINS
A-1
<PAGE> 72
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
TABLE OF CONTENTS
ARTICLE I
MERGER AND ORGANIZATION
<S> <C> <C>
Section 1.1 The Merger.................................................................. [A-vi]
Section 1.2 Effective Time.............................................................. [A-vi]
Section 1.3 Effect of Merger............................................................ [A-2]
ARTICLE II
CONVERSION OF SECURITIES AT THE EFFECTIVE TIME
Section 2.1 Conversion of Securities of CEM and Acquiror................................ [A-3]
Section 2.2 Payment of Cash for CEM Common Stock........................................ [A-3]
Section 2.3 Exchange of Acquiror Common Stock Certificate............................... [A-5]
ARTICLE III
ADDITIONAL AGREEMENTS IN CONNECTION WITH THE MERGER
Section 3.1 Shareholders' Approval...................................................... [A-5]
Section 3.2 Proxy Materials and Schedule 13E-3.......................................... [A-6]
Section 3.3 Termination of CEM Stock Option Plans....................................... [A-6]
Section 3.4 Reasonable Best Efforts; Consents; Other Filings............................ [A-7]
Section 3.5 Financing................................................................... [A-7]
Section 3.6 Conduct of Business by CEM Pending the Merger............................... [A-7]
Section 3.7 Notification of Certain Matters............................................. [A-10]
Section 3.8 Access to CEM's Books and Records........................................... [A-11]
Section 3.9 Acquisition Proposals....................................................... [A-11]
Section 3.10 Director and Officer Protection............................................. [A-12]
Section 3.11 Actions of Collins Pending the Closing...................................... [A-12]
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF CEM
Section 4.1 Organization and Good Standing.............................................. [A-13]
Section 4.2 Authorization; Binding Agreement............................................ [A-13]
Section 4.3 Capitalization.............................................................. [A-14]
Section 4.4 Financial Statements........................................................ [A-14]
Section 4.5 Absence of Certain Changes or Events........................................ [A-15]
Section 4.6 SEC Reports and Other Documents............................................. [A-15]
Section 4.7 Governmental and Other Consents and Approvals............................... [A-15]
Section 4.8 No Violation................................................................ [A-16]
Section 4.9 Litigation.................................................................. [A-16]
Section 4.10 Governmental Approvals; Compliance with Law................................. [A-17]
Section 4.11 Brokers and Finders......................................................... [A-17]
</TABLE>
A-i
<PAGE> 73
<TABLE>
<S> <C> <C>
Section 4.12 Fairness Opinions and Approval by Committee................................... [A-17]
Section 4.13 Taxes......................................................................... [A-17]
Section 4.14 Employee Benefits............................................................. [A-19]
Section 4.15 Environmental Matters......................................................... [A-20]
Section 4.16 Board Recommendation.......................................................... [A-21]
Section 4.17 Required Company Vote......................................................... [A-22]
Section 4.18 State Takeover Statutes....................................................... [A-22]
Section 4.19 Material Contract Defaults.................................................... [A-22]
Section 4.20 Information in Proxy Statement................................................ [A-22]
Section 4.21 Properties.................................................................... [A-23]
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND COLLINS
Section 5.1 Organization and Good Standing................................................ [A-23]
Section 5.2 Authorization; Binding Agreement.............................................. [A-23]
Section 5.3 No Violation.................................................................. [A-24]
Section 5.4 Governmental and Other Consents and Approvals................................. [A-24]
Section 5.5 Proxy and Schedule 13E-3 Information.......................................... [A-25]
Section 5.6 Financing..................................................................... [A-25]
Section 5.7 Brokers and Finders........................................................... [A-25]
Section 5.8 No Prior Activities........................................................... [A-26]
Section 5.9 Litigation.................................................................... [A-26]
Section 5.10 Surviving Corporation Not Rendered Insolvent.................................. [A-25]
Section 5.11 No Conflicting Knowledge...................................................... [A-25]
ARTICLE VI
CONDITIONS
Section 6.1 Conditions to Each Party's Obligation to Effect the Merger.................... [A-26]
Section 6.2 Conditions to Obligation of CEM to Effect the Merger.......................... [A-27]
Section 6.3 Conditions to Obligations of Acquiror to Effect the Merger.................... [A-27]
ARTICLE VII
TERMINATION; NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
COVENANTS; WAIVER AND AMENDMENT
Section 7.1 Termination................................................................... [A-28]
Section 7.2 Non-Survival of Representations, Warranties and Covenants..................... [A-30]
Section 7.3 Amendment..................................................................... [A-30]
Section 7.4 Waiver........................................................................ [A-30]
Section 7.5 Effect of Termination......................................................... [A-30]
Section 7.6 Certain Payments.............................................................. [A-31]
ARTICLE VIII
GENERAL AGREEMENTS
Section 8.1 Notice........................................................................ [A-32]
Section 8.2 Entire Agreement.............................................................. [A-33]
Section 8.3 Parties in Interest........................................................... [A-33]
Section 8.4 Publicity..................................................................... [A-33]
</TABLE>
A-ii
<PAGE> 74
<TABLE>
<S> <C> <C>
Section 8.5 Headings..................................................................... [A-33]
Section 8.6 Interpretation............................................................... [A-34]
Section 8.7 Subsidiaries................................................................. [A-34]
Section 8.8 Successors and Assigns....................................................... [A-34]
Section 8.9 Governing Law................................................................ [A-34]
Section 8.10 Costs and Expenses........................................................... [A-34]
Section 8.11 Counterparts................................................................. [A-34]
Section 8.12 Specific Performance......................................................... [A-34]
Section 8.13 Conciliation and Arbitration................................................. [A-35]
</TABLE>
A-iii
<PAGE> 75
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
AAA........................................................................................................... 8.13
Acquiror Common Stock......................................................................................... 2.1(b)
Acquiror...................................................................................... Introductory Paragraph
Acquisition Proposal............................................................................................. 3.9
Advisor......................................................................................................... 4.11
Agreement..................................................................................... Introductory Paragraph
Articles of Merger.......................................................................................... Recitals
Cash Merger Consideration..................................................................................... 2.1(a)
CEM .......................................................................................... Introductory Paragraph
CEM Common Stock.............................................................................................. 2.1(a)
CEM Share..................................................................................................... 2.1(a)
CEM Shares.................................................................................................... 2.1(a)
Closing.......................................................................................................... 1.2
Code............................................................................................................ 4.13
Committee........................................................................................................ 3.1
Company Benefit Plans........................................................................................ 4.14(a)
Company ERISA Affiliate...................................................................................... 4.14(c)
Definitive Proxy Statement.................................................................................... 3.2(a)
Disbursing Agent.............................................................................................. 2.2(a)
Disclosure Schedules.................................................................................... Section 3.12
Dispute......................................................................................................... 8.13
Effective Time................................................................................................... 1.2
Environmental Claim..................................................................................... Section 4.15
Environmental Laws...................................................................................... Section 4.15
Environmental Permits................................................................................... Section 4.15
ERISA........................................................................................................ 4.14(a)
Exchange Act..................................................................................................... 4.4
Expenses...................................................................................................... 7.6(c)
Fee........................................................................................................... 7.6(a)
Financing Letters................................................................................................ 5.6
Financing........................................................................................................ 5.6
Government Approvals............................................................................................ 4.10
Hazardous Materials..................................................................................... Section 4.15
Interim Financial Statements............................................................................. Section 4.4
Indemnified Party............................................................................................... 3.10
Knowledge........................................................................................................ 8.6
Material Adverse Change.......................................................................................... 4.1
Material Adverse Effect.......................................................................................... 4.1
Merger...................................................................................................... Recitals
North Carolina Act.......................................................................................... Recitals
Permitted Investments......................................................................................... 2.2(a)
Person........................................................................................................ 2.2(b)
Plan of Merger.............................................................................................. Recitals
</TABLE>
A-iv
<PAGE> 76
<TABLE>
<S> <C>
Preferred Stock.................................................................................................. 4.3
Preliminary Proxy Statement................................................................................... 3.2(a)
Returns...................................................................................................... 4.13(a)
Rules........................................................................................................... 8.13
Schedule 13E-3................................................................................................ 3.2(b)
SEC........................................................................................................... 3.2(a)
Special Meeting.................................................................................................. 3.1
Stock Options.................................................................................................... 3.3
Subsidiaries..................................................................................................... 8.7
Superior Proposal..................................................................................... Section 7.6(a)
Surviving Corporation............................................................................................ 1.1
Tax Affiliate................................................................................................ 4.13(a)
Tax.......................................................................................................... 4.13(a)
Taxes........................................................................................................ 4.13(a)
WARN.......................................................................................................... 3.6(s)
Year-End Financial Statements.................................................................................... 4.4
</TABLE>
A-v
<PAGE> 77
This AGREEMENT AND PLAN OF MERGER (the "Agreement") is dated as of
December 29, 1999 and is by and among CEM CORPORATION, a North Carolina
corporation ("CEM"), MJC ACQUISITION CORPORATION, a North Carolina corporation
("Acquiror"), and MICHAEL J. COLLINS, an individual residing in North Carolina
("Collins").
RECITALS
The boards of directors of CEM and Acquiror deem it advisable for the
mutual benefit of CEM and Acquiror and their respective shareholders,
respectively, that Acquiror be merged with and into CEM (the "Merger") upon the
terms and subject to the conditions set forth in the Plan of Merger (the "Plan
of Merger"), which is set forth in the Articles of Merger in substantially the
form attached hereto as EXHIBIT A (the "Articles of Merger"), and in accordance
with the North Carolina Business Corporation Act (the "North Carolina Act").
The board of directors of Acquiror have approved and adopted this
Agreement. The board of directors and Special Committee of CEM have adopted
this Agreement and have resolved, subject to the terms of this Agreement, to
recommend to the shareholders of CEM to vote to approve this Agreement in
conjunction with their approval of the Plan of Merger.
In consideration of the mutual covenants, agreements, representations
and warranties contained herein, and for the purpose of setting forth certain
terms and conditions of the Merger, and the mode of carrying the same into
effect, CEM, Acquiror and Collins hereby agree as follows:
ARTICLE I
MERGER AND ORGANIZATION
1.1 The Merger. Acquiror shall be merged with and into CEM at the
Effective Time (as defined below), upon the terms and subject to the conditions
hereinafter set forth, as permitted by and in accordance with the North
Carolina Act. CEM, as the surviving corporation following the effectiveness of
the Merger, is sometimes referred to herein as the "Surviving Corporation."
CEM, Acquiror and Collins agree that upon written notice of Acquiror to CEM
delivered at least 20 business days prior to the date of the Special Meeting,
Acquiror, CEM and Collins shall amend this Agreement to provide that the merger
contemplated hereby shall be the merger of CEM into Acquiror with Acquior being
the surviving corporation of such merger and to make other necessary changes to
so conform the Plan of Merger and Articles of Merger (as such terms are defined
herein).
1.2 Effective Time. If this Agreement is not terminated pursuant to
ARTICLE VII hereof, as soon as practicable after all conditions to the Merger
set forth in ARTICLE VI hereof shall have been satisfied or waived, CEM and
Acquiror shall cause the Articles of Merger to be executed, acknowledged and
filed with the Secretary of State of the State of North Carolina as provided in
the North Carolina Act. The Merger shall be consummated and the closing of the
transactions contemplated by this Agreement (the "Closing") shall occur
immediately upon the filing of the Articles of Merger with the Secretary of
State of the State of North Carolina (the date and time of
A-vi
<PAGE> 78
such filing and Closing being referred to herein as the "Effective Time"). The
Closing shall take place at the offices of Robinson, Bradshaw & Hinson, P.A.,
101 North Tryon Street, Suite 1900, Charlotte, North Carolina 28246, or at such
other place as the parties may mutually agree.
1.3 Effect of Merger. The parties agree to the following provisions
with respect to the Merger:
(a) The name of the Surviving Corporation shall from and
after the Effective Time shall become and continue to be "CEM
Corporation" until changed in accordance with applicable law.
(b) The articles of incorporation of CEM shall be amended and
restated to conform to the articles of incorporation of Acquiror as in
effect immediately prior to the Effective Time; provided, however,
that, at the Effective Time, Article 1 of the articles of
incorporation of the Surviving Corporation shall be amended to read as
follows: "The name of the corporation is CEM Corporation" and Article
2 shall be amended to provide that the number of authorized shares of
common stock of the corporation shall be 100.
(c) The bylaws of Acquiror, as in effect immediately prior to
the Effective Time, shall be the bylaws of the Surviving Corporation
until thereafter amended in accordance with law, the articles of
incorporation of the Surviving Corporation and such bylaws.
(d) At the Effective Time, the separate corporate existence
of Acquiror shall cease, and CEM as the Surviving Corporation and
successor shall succeed to Acquiror as set forth in Section 55-11-06
of the North Carolina Act.
(e) The directors of Acquiror immediately prior to the
Effective Time will be the initial directors of the Surviving
Corporation, and the officers of CEM immediately prior to the
Effective Time will be the initial officers of the Surviving
Corporation, in each case until their successors are elected and
qualified.
(f) If, at any time after the Effective Time, the Surviving
Corporation shall consider or be advised that any deeds, bills of
sale, assignments or assurances or any other acts or things are
necessary, desirable or proper (i) to vest, perfect or confirm, of
record or otherwise, in the Surviving Corporation its right, title or
interest in, to or under any of the rights, properties or assets of
CEM acquired or to be acquired as a result of the Merger, or (ii)
otherwise to carry out the purposes of this Agreement, the Surviving
Corporation and its proper officers and directors or their designees
shall be authorized to execute and deliver, in the name and on behalf
of the CEM, all such deeds, bills of sale, assignments and assurances
and do, in the name and on behalf of CEM, all other acts and things
necessary, desirable or proper to vest, perfect or confirm its right,
title or interest in, to or under any of the rights, properties or
assets of CEM acquired or to be acquired as a result of the Merger and
otherwise to carry out the purposes of this Agreement.
A-2
<PAGE> 79
ARTICLE II
CONVERSION OF SECURITIES AT THE EFFECTIVE TIME
2.1 Conversion of Securities of CEM and Acquiror. At the Effective
Time, pursuant to this Agreement and by virtue of the Merger and without any
action on the part of CEM, Acquiror or the holders of any of the following
securities:
(a) Each share of common stock, par value $.05 per share, of
CEM ("CEM Common Stock") (shares of CEM Common Stock being hereinafter
collectively referred to as "CEM Shares" and individually as a "CEM
Share") issued and outstanding immediately prior to the Effective Time
(other than any CEM Shares to be cancelled pursuant to SECTION 2.1(B))
shall be cancelled, extinguished and shall be converted automatically
into the right to receive an amount equal to $11.15 in cash, without
interest (the "Cash Merger Consideration"), payable to the holder
thereof, as provided in SECTION 2.2, upon surrender of the certificate
formerly representing the CEM Shares being converted into the right to
receive the Cash Merger Consideration, less any required withholding
taxes;
(b) Each CEM Share held in the treasury of CEM and each CEM
Share owned by Acquiror (including CEM Shares contributed to Acquiror
by agreement with Acquiror), if any, immediately prior to the
Effective Time shall be cancelled without any conversion thereof and
no payment or distribution shall be made with respect thereto; and
(c) Each share of Acquiror's common stock, $.01 par value
("Acquiror Common Stock"), that is issued and outstanding immediately
prior to the Effective Time shall be converted into one newly issued,
fully paid and nonassessable share of common stock of the Surviving
Corporation.
2.2 Payment of Cash for CEM Common Stock.
(a) At the Effective Time, Collins shall cause Acquiror to,
and Acquiror shall, irrevocably deposit or cause to be deposited with
a bank or trust company to be designated by Acquiror and reasonably
satisfactory to CEM that is organized and doing business under the
laws of the United States or any state thereof and has a combined
capital and surplus of at least $100,000,000 (the "Disbursing Agent"),
as agent for the holders of shares of CEM Common Stock, cash in the
aggregate amount required to effect conversion of shares of CEM Common
Stock into the Cash Merger Consideration at the Effective Time
pursuant to SECTION 2.1(A) hereof. Pending distribution pursuant to
SECTION 2.2(B) hereof of the cash deposited with the Disbursing Agent,
such cash shall be held in trust for the benefit of the holders of CEM
Common Stock and the fund shall not be used for any other purposes,
and Acquiror and Surviving Corporation may direct the Disbursing Agent
to invest such cash, provided that such investments (i) shall be
obligations of or guaranteed by the United States of America,
commercial paper obligations receiving the highest rating from either
Moody's Investors Services, Inc. or Standard & Poor's Corporation, or
certificates of deposit, bank repurchase agreements or bankers
acceptances of domestic commercial banks with capital exceeding
$250,000,000
A-3
<PAGE> 80
(collectively "Permitted Investments") or money market funds that are
invested solely in Permitted Investments and (ii) shall have
maturities that will not prevent or delay payments to be made pursuant
to SECTION 2.2(B) hereof. Each holder of a certificate or certificates
representing shares of CEM Common Stock cancelled at the Effective
Time pursuant to SECTION 2.1(A) hereof may thereafter surrender such
certificate or certificates to the Disbursing Agent, as agent for such
holder of shares of CEM Common Stock, which shall effect the exchange
of such certificate or certificates on such holder's behalf for a
period ending six months after the Effective Time. Any interest and
other income resulting from such investments shall be paid to
Acquiror.
(b) After surrender to the Disbursing Agent of any
certificate that prior to the Effective Time shall have represented
any shares of CEM Common Stock, the Disbursing Agent shall promptly
distribute to the individual, corporation, partnership, joint venture,
association, joint stock company, trust, fund, unincorporated
association, organization or other entity (each, a "Person") in whose
name such certificate shall have been registered a check representing
the amount of Cash Merger ------ Consideration into which such shares
of CEM Common Stock shall have been converted at the Effective Time
pursuant to SECTION 2.1(A) hereof. Until so surrendered and exchanged,
each such certificate shall, after the Effective Time, be deemed to
represent only the right to receive such Cash Merger Consideration,
and until such surrender and exchange, none of the Cash Merger
Consideration shall be paid to the holder of such outstanding
certificate in respect thereof. The Surviving Corporation shall
promptly after the Effective Time cause to be distributed to such
holders appropriate materials to facilitate such surrender.
(c) If any cash deposited with the Disbursing Agent for
purposes of payment in exchange for shares of CEM Common Stock remains
unclaimed following the expiration of six months after the Effective
Time, such cash shall be delivered to the Surviving Corporation by the
Disbursing Agent, and thereafter the Disbursing Agent shall not be
liable to any Persons claiming any amount of such cash, and the
surrender and exchange shall be effected directly with the Surviving
Corporation (subject to applicable abandoned property, escheat and
similar laws). No interest shall accrue or be payable with respect to
any amounts that any such holder shall be so entitled to receive. The
Surviving Corporation or the Disbursing Agent shall be authorized to
pay the cash attributable to any certificate theretofore issued that
has been lost or destroyed, upon receipt of satisfactory evidence of
ownership of the shares of CEM Common Stock represented thereby and of
appropriate indemnification.
(d) None of Acquiror, Collins, the Surviving Corporation or
the Disbursing Agent shall be liable to any Person in respect of any
shares of retained CEM Common Stock (or dividends or distributions
with respect thereto) or cash delivered to a public official pursuant
to any applicable abandoned property, escheat or similar law. If any
certificates representing shares of CEM Common Stock shall not have
been surrendered prior to two years after the Effective Time (or
immediately prior to such earlier date on which any cash, if any, in
lieu of fractional shares of retained CEM Common Stock or any
dividends or distributions with respect to retained CEM Common Stock
in respect of such certificate would otherwise escheat to or become
the property of any governmental entity), any such cash, dividends or
distributions in respect of such certificate shall, to the
A-4
<PAGE> 81
extent permitted by applicable law, become the property of the
Surviving Corporation, free and clear of all claims or interest of any
Person previously entitled thereto.
(e) If payment is to be made to a Person other than the
Person in whose name a surrendered certificate, which prior to the
Effective Time shall have represented any shares of CEM Common Stock,
is registered, it shall be a condition to such payment that the
certificate so surrendered shall be endorsed or shall otherwise be in
proper form for transfer, and that the Person requesting such payment
shall have paid any transfer and other taxes required by reason of
such payment in a name other than that of the registered holder of the
certificate surrendered or shall have established to the satisfaction
of the Surviving Corporation or the Disbursing Agent that such tax
either has been paid or is not payable.
(f) From and after the Effective Time, the holders of shares
of CEM Common Stock outstanding immediately prior to the Effective
Time shall cease to have any rights with respect to such shares of CEM
Common Stock except as otherwise provided herein or by law.
(g) From and after the Effective Time, there shall be no
transfers on the stock transfer books of the Surviving Corporation of
any shares of CEM Common Stock that were outstanding immediately prior
to the Effective Time. If, after the Effective Time, certificates for
shares of CEM Common Stock are presented to the Surviving Corporation,
they shall be cancelled and promptly exchanged for Cash Merger
Consideration except as provided in SECTION 2.2(B) and (D).
2.3 Exchange of Acquiror Common Stock Certificate. Immediately after
the Effective Time, upon surrender by the record holder of the certificate,
duly endorsed in blank, representing the shares of Acquiror Common Stock
outstanding immediately prior to the Effective Time, the Surviving Corporation
shall deliver to such record holder a share certificate, registered in such
holder's name, representing the number of shares of common stock of the
Surviving Corporation to which such record holder is so entitled by virtue OF
SECTION 2.1(B). Such certificate will bear a legend restricting the
transferability of such shares of the Surviving Corporation except in
accordance with applicable federal and state securities laws.
ARTICLE III
ADDITIONAL AGREEMENTS IN CONNECTION WITH THE MERGER
3.1 Shareholders' Approval. CEM shall take all actions reasonably
necessary in accordance with applicable law and its articles of incorporation
and bylaws to convene a meeting of its shareholders as soon as reasonably
practicable for the purpose of considering and approving this Agreement and the
Merger (the "Special Meeting"). In connection with the Special Meeting, the
board of directors of CEM shall recommend that the shareholders of CEM vote to
approve this Agreement and the Merger unless the Special Committee of such
board of directors (the "Committee") has determined at any time prior to the
Special Meeting in good faith, after consultation with and based upon the
reasonably concluded advice of counsel to the
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Committee, that making such recommendation would violate the fiduciary duties
of the board of directors under applicable law.
3.2 Proxy Materials and Schedule 13E-3.
(a) In connection with the Special Meeting, CEM shall prepare
and file a preliminary proxy statement relating to the transactions
contemplated by this Agreement and the Merger (the "Preliminary Proxy
Statement") with the United States Securities and Exchange Commission
(the "SEC") and shall use its reasonable best efforts to respond to
the comments of the SEC and to cause a definitive proxy statement to
be mailed to CEM's shareholders (the "Definitive Proxy Statement") all
as soon as reasonably practicable; provided, that prior to the filing
of each of the Preliminary Proxy Statement and the Definitive Proxy
Statement, CEM shall consult with Acquiror and Collins with respect to
such filings and shall afford Acquiror and Collins reasonable
opportunity to comment thereon. Acquiror and Collins shall provide CEM
with any information for inclusion in the Preliminary Proxy Statement
and the Definitive Proxy Statement that may be required under
applicable law and is reasonably requested by CEM.
(b) CEM, Acquiror and Collins shall, and shall cause any
other Person that may be deemed to be an affiliate of CEM to, prepare
and file concurrently with the filing of the Preliminary Proxy
Statement a Statement on Schedule 13E-3 ("Schedule 13E-3") with the
SEC. If at any time prior to the Special Meeting any event should
occur that is required by applicable law to be set forth in an
amendment of, or supplement to, the Schedule 13E-3, CEM, Acquiror and
Collins shall, and shall cause such Person to, file such amendments or
supplements.
3.3 Termination of CEM Stock Option Plans. Except as disclosed in
ITEM 3.3 of the Disclosure Schedules, as defined in SECTION 3.12 of this
Agreement, all outstanding stock options issued by CEM (collectively, the
"Stock Options"), including without limitation those issued under the CEM
Corporation 1986 Nonqualified Stock Option Plan, the 1987 Stock Option Plan,
the 1993 Management Equity Plan and the 1993 Nonqualified Stock Option Plan,
shall terminate upon the Merger. With respect to each Stock Option not
otherwise terminated by its terms upon the effectiveness of the Merger, CEM
shall obtain at the earliest practicable date and prior to the Effective Time
the written consent of each holder to the cancellation of such holders' Stock
Options (irrespective of their exercise price and whether or not then currently
exercisable) to take effect on the Effective Time or shall take appropriate
action to amend the relevant plans to provide for such cancellation. At the
Effective Time, the Surviving Corporation shall pay each holder of Stock
Options, to the extent such Stock Options have not been previously exercised or
cancelled, (x) cash in an amount equal to the product of (i) the difference
between $11.15 and the exercise price of such Stock Options (but in no event
less than $0.00), multiplied by (ii) the number of shares of CEM Common Stock
subject to such Stock Options, less (y) the amount of all applicable
withholding taxes.
3.4 Reasonable Best Efforts; Consents; Other Filings. Upon the terms
and subject to the conditions herein provided, and subject to the duties of the
board of directors of CEM under applicable law, as it or the Committee may be
advised by counsel, each party hereto shall use its reasonable best efforts to
take, or cause to be taken, all reasonable action and to do, or cause to
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be done and to assist and cooperate with the other parties hereto in doing, all
things necessary, proper or advisable under applicable laws and regulations and
their respective articles of incorporation and bylaws to consummate and make
effective, as soon as reasonably practicable, the transactions contemplated by
this Agreement, subject, however, to the requisite vote of shareholders of CEM.
Such actions shall include, without limitation, using reasonable best efforts
to (i) defend any lawsuits or other legal proceedings, whether judicial or
administrative and whether brought derivatively or on behalf of third parties
(including governmental agencies or officials), challenging this Agreement or
the consummation of the transactions contemplated thereby or hereby, and (ii)
effect all necessary registrations, filings and submissions of information
requested by governmental authorities. Upon the terms and subject to the
conditions hereof, and subject to the duties of the board of directors of CEM
under applicable law, as it, or the Committee, may be advised by counsel, each
of the parties hereto shall use its reasonable best efforts to take, or cause
to be taken, all reasonable actions and to do, or cause to be done, all things
necessary to satisfy the other conditions of Closing set forth herein and to
cooperate with all reasonable requests made by the other party. Without
limiting the generality of the foregoing, and notwithstanding anything in this
Agreement to the contrary, CEM shall use reasonable efforts to obtain all
consents, amendments to or waivers from other parties under the terms of all
leases and other agreements between CEM and such parties required as a result
of the transactions contemplated by this Agreement the failure of which to
obtain would have a Material Adverse Effect (as defined in SECTION 4.1) and
shall use reasonable efforts to obtain all necessary consents, approvals and
authorizations as are required to be obtained under any federal or state law or
regulation.
3.5 Financing. Each of Acquiror and Collins shall use its reasonable
best efforts to arrange the Financing (as defined in SECTION 5.6) and to
satisfy any and all conditions set forth in the Financing Letters. Acquiror and
Collins shall keep CEM informed of the status of the Financing, including
providing written notice to CEM promptly (and in any event within two business
days) of any material adverse developments relating to the Financing. CEM shall
use its reasonable best efforts to cooperate and assist Acquiror with respect
to the Financing, the expense of which shall be borne by Acquiror, and upon
consummation of the Merger, the Surviving Corporation; provided, that CEM shall
not be obligated to obtain any extraordinary consents, waivers or approvals to
loan agreements, leases or other contracts, to agree to a material adverse
modification of the terms of such documents or to prepay or incur additional
obligations to other parties.
3.6 Conduct of Business by CEM Pending the Merger. CEM covenants and
agrees that, prior to the Effective Time or earlier termination of this
Agreement as provided herein, unless Acquiror shall otherwise agree in writing
and except as contemplated by this Agreement:
(a) CEM shall, and shall cause each of its subsidiaries to,
act and carry on its respective business in the ordinary course of
business substantially consistent with past practice and use its
respective reasonable best efforts to preserve substantially intact
its current material business organizations, keep available the
services of its current officers and employees (except for
terminations of employees in the ordinary course of business) and
preserve its material relationships with others having significant
business dealings with it;
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(b) CEM shall not (i) amend its articles of incorporation or
bylaws, or (ii) declare, set aside or pay any dividend or other
distribution or payment in cash, stock or property in respect of any
of its shares of capital stock;
(c) Neither CEM nor any of its subsidiaries shall (i) except
as set forth in ITEM 3.6(C) of the Disclosure Schedules, issue, grant,
sell, pledge or transfer or agree or propose to issue, grant, sell,
pledge or transfer any shares of capital stock, stock options,
warrants, securities or rights of any kind or rights to acquire any
such shares, securities or rights of CEM, any of its subsidiaries or
any successor thereto, (ii) acquire directly or indirectly by
redemption or otherwise any shares of the capital stock of CEM of any
class or any options, warrants or other rights to purchase any such
shares except as otherwise provided in this Agreement, or (iii) enter
into or modify any contract, agreement, commitment or arrangement with
respect to any of the foregoing;
(d) Except in the ordinary course of business consistent with
past practice or as disclosed in ITEM 3.6(D) of the Disclosure
Schedules, neither CEM nor any of its subsidiaries shall (i) incur any
indebtedness for borrowed money or guarantee any such indebtedness of
another Person, issue or sell any debt securities or warrants or other
rights to acquire any debt securities of CEM or any of its
subsidiaries, guarantee any debt securities of another Person, enter
into any "keep well" or other agreement to maintain any financial
statement condition of another Person or enter into any arrangement
having the economic effect of any of the foregoing, or (ii) make any
loans, advances or capital contributions to, or investments in, any
other Person, other than to CEM or any direct or indirect wholly owned
subsidiary of CEM;
(e) Each of CEM and its subsidiaries shall use its reasonable
best efforts to keep in place its current insurance policies that are
material (either individually or in the aggregate) to the conduct of
its business; and notwithstanding such efforts, if any such policy is
cancelled, CEM shall use its reasonable best efforts to replace such
policy or policies;
(f) Neither CEM nor any of its subsidiaries shall make any
material tax election, file any amended tax returns or settle or
compromise any material federal, state, local or foreign income tax
liability;
(g) Neither CEM nor any of its subsidiaries shall make any
material change in its accounting principles or methods except insofar
as may be required by a change in generally accepted accounting
principles;
(h) Neither CEM nor any of its subsidiaries shall split,
combine or reclassify any capital stock of CEM or any subsidiary or
issue or authorize the issuance of any other securities in respect of,
in lieu of or substitution for shares of capital stock of CEM or any
subsidiary;
(i) Except as disclosed in ITEM 3.6(K) of the Disclosure
Schedules, neither CEM nor any of its subsidiaries shall acquire or
agree to acquire by merging or consolidating with, or by purchasing a
substantial portion of the stock or assets of, or by any other
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manner, any business or any corporation, partnership, joint venture,
association or other business organization or division thereof;
(j) Neither CEM nor any of its subsidiaries shall sell,
lease, license, mortgage or otherwise encumber or subject to any lien
or otherwise dispose of any of its properties or assets, except in the
ordinary course of business consistent with past practice;
(k) Except as disclosed in ITEM 3.6(K) of the Disclosure
Schedules, neither CEM nor any of its subsidiaries shall acquire or
agree to acquire any assets, other than in the ordinary course of
business consistent with past practice or make or agree to make any
capital expenditures except capital expenditures contemplated by the
current capital expenditure budget;
(l) Neither CEM nor any of its subsidiaries shall (x) pay,
discharge or satisfy any material claims (including claims of
shareholders), liabilities or obligations (absolute, accrued, asserted
or unasserted, contingent or otherwise), except for the payment,
discharge or satisfaction of (i) liabilities or obligations in the
ordinary course of business consistent with past practice or in
accordance with their terms as in effect on the date hereof, including
without limitation all liabilities disclosed in ITEM 3.6(D) of the
Disclosure Schedules or (ii) claims settled or compromised to the
extent permitted by SECTION 3.6(O), or (y) waive, release, grant, or
transfer any rights of material value or modify or change in any
material respect any existing material license, lease, contract or
other document, other than in the ordinary course of business
consistent with past practice or except where such actions would not,
individually or in the aggregate, have a Material Adverse Effect;
(m) Neither CEM nor any of its subsidiaries shall adopt a
plan of complete or partial liquidation or resolutions providing for
or authorizing such a liquidation or a dissolution, merger,
consolidation, restructuring, recapitalization or reorganization;
(n) Neither CEM nor any of its subsidiaries shall enter into
any collective bargaining agreement;
(o) Neither CEM nor any of its subsidiaries shall settle or
compromise any litigation (whether or not commenced prior to the date
of this Agreement) other than settlements or compromises of litigation
where the settlement is limited solely to monetary payment and the
release of claims and the amount paid (after giving effect to
insurance proceeds actually received) in settlement or compromise does
not exceed $10,000, provided that the aggregate amount paid in
connection with the settlement or compromise of all such litigation
matters shall not exceed $50,000;
(p) Neither CEM nor any of its subsidiaries shall engage in
any transaction with, or enter into any agreement, arrangement, or
understanding with, directly or indirectly, any of CEM's affiliates,
including without limitation any transactions, agreements,
arrangements or understandings with any affiliate or other Person
covered under Item 404 of SEC Regulation S-K that would be required to
be disclosed under such Item 404, other
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than such transactions of the same general nature, scope and magnitude
as are disclosed in documents filed by CEM with the SEC as described
in SECTION 4.6;
(q) Neither CEM nor any of its subsidiaries shall adopt or
amend (except as may be required by law) any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred
compensation, employment or other employee benefit plan, agreement,
trust, fund or other arrangement for the benefit or welfare of any
employee, officer or director, or former employee, officer or
director, or, other than increases for individuals and arrangements
for new employees (other than, in each case, officers and directors)
in the ordinary course of business consistent with past practice,
increase the compensation or fringe benefits of or loan or advance
money or other property to any employee, officer or director, or
former employee, officer or director, or pay any benefit not required
by any existing plan, arrangement or agreement;
(r) Neither CEM nor any of its subsidiaries shall grant to
employees any new or modified severance or termination arrangement or
increase or accelerate any benefits payable under its severance or
termination pay policies in effect on the date hereof;
(s) Neither CEM nor any of its subsidiaries shall effectuate
a "plant closing" or "mass layoff", as those terms are defined in the
Worker Adjustment and Retraining Notification Act of 1988 ("WARN"),
affecting in whole or in part any site of employment, facility,
operating unit or employee of CEM or any subsidiary, without notifying
Acquiror or its affiliates in advance and without complying with the
notice requirements and other provisions of WARN; and
(t) Neither CEM nor any of its subsidiaries shall authorize
any, or commit or agree to do any of the things described in clauses
(a) through (s) or anything that would make any representation or
warranty of CEM in this Agreement untrue or incorrect in any material
respect as of the date hereof or as of the Effective Time, as if made
on such date, except to the extent such representations and warranties
expressly relate to a specific date (in which case such
representations and warranties shall be true and correct as of such
date).
3.7 Notification of Certain Matters. Each of the parties hereto
shall, promptly upon obtaining knowledge of any of the following occurring
subsequent to the date of this Agreement and prior to the Effective Time,
notify all other parties to this Agreement of: (a) any material claims,
actions, proceedings, tax audits or investigations commenced or, to its
knowledge, threatened in writing, involving or affecting such party or any of
its subsidiaries or any of their properties or assets, that if adversely
resolved could have a Material Adverse Effect on such party or could prevent,
hinder or materially delay the ability of such party to consummate the Merger
or the transactions contemplated by this Agreement, (b) any notice of, or other
communication relating to, a default or event that, with notice or lapse of
time or both, would become a default, received by such party or any of its
subsidiaries, under any agreement, lease, indenture or instrument to which such
party or any of its subsidiaries is a party or is subject where such a default
could have a Material Adverse Effect on such party, or (c) any notice or other
communication from any third party alleging that the consent of such third
party is or may be required in connection with the transactions contemplated by
this Agreement. As used in this
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SECTION 3.7, with respect to CEM, the term "Material Adverse Effect" shall have
the meaning given to it in SECTION 4.1 and, with respect to Acquiror or
Collins, the term "Material Adverse Effect" shall mean any effect that is
materially adverse to the business, assets, prospects, operations, properties,
financial condition or results of operations of Acquiror and its subsidiaries
taken as a whole.
3.8 Access to CEM's Books and Records. Upon reasonable notice, CEM
shall afford Acquiror and its representatives and representatives of all
prospective sources of Financing reasonable access during normal business hours
to the properties, books, records and personnel of CEM and its subsidiaries and
such additional information concerning the business and properties of CEM and
its subsidiaries as Acquiror and its representatives may reasonably request.
3.9 Acquisition Proposals. Any offer or proposal by any Person or
group concerning any tender or exchange offer, proposal for a merger, share
exchange, recapitalization, consolidation or other business combination
involving CEM or any of its subsidiaries or divisions, or any proposal or offer
to acquire in any manner, directly or indirectly, a significant equity interest
in, or a substantial portion of the assets of, CEM or any of its subsidiaries,
other than pursuant to the transactions contemplated by this Agreement, is
hereby defined as an "Acquisition Proposal". CEM shall not, nor shall it permit
any of its officers, directors, affiliates, representatives or agents to,
directly or indirectly, (a) take any action to solicit, initiate or encourage
any Acquisition Proposal, or (b) participate in any discussions or negotiations
with or encourage any effort or attempt by any other Person or take any other
action to facilitate an Acquisition Proposal. From and after the date hereof,
CEM, its subsidiaries and all officers, directors, employees of, and all
investment bankers, attorneys and other advisors and representatives of, CEM
and its subsidiaries shall cease doing any of the foregoing. Notwithstanding
the foregoing, CEM or any such Persons may, directly or indirectly, subject to
a confidentiality agreement containing customary terms, furnish to any party
information and access in response to a request for information or access made
incident to an Acquisition Proposal made after the date hereof and may
participate in discussions and negotiate with such party concerning any written
Acquisition Proposal made after the date hereof (provided that neither CEM nor
any such Person, after the date hereof, solicited, initiated or encouraged such
Acquisition Proposal), if the Committee shall have determined in good faith
based upon the reasonably concluded advice of outside counsel that failing to
take such action would violate CEM's board of directors' fiduciary duties under
applicable law. During the term of this Agreement, the board of directors of
CEM shall notify Acquiror immediately if any Acquisition Proposal is made and
shall in such notice indicate in reasonable detail the identity of the offeror
and the terms and conditions of such Acquisition Proposal and shall keep
Acquiror promptly advised of all material developments that could culminate in
the board of directors withdrawing, modifying or amending its recommendation of
the Merger and the other transactions contemplated by this Agreement. During
the term of this Agreement, CEM shall not waive or modify any provisions
contained in any confidentiality agreement entered into relating to a possible
acquisition (whether by merger, stock purchase, asset purchase or otherwise) or
recapitalization of CEM unless the Committee shall have determined in good
faith based on reasonably concluded advice of outside counsel that failing to
take such action would violate CEM's board of directors' fiduciary duties under
applicable law.
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3.10 Director and Officer Protection. CEM shall indemnify, defend and
hold harmless, and from and after the Effective Time the Surviving Corporation
shall indemnify, defend and hold harmless the present and former directors,
officers, fiduciaries, employees and agents of CEM and its subsidiaries (each
an "Indemnified Party") against all costs and expenses (including reasonable
attorney's fees), judgments, fines, losses, claims, damages, liabilities and
settlement amounts relating to or in connection with any threatened or actual
claim, action, suit or proceeding or investigation (whether asserted before or
after the Effective Time) based in whole or in part on facts arising out of the
Indemnified Party being a director, officer, fiduciary, employee or agent of
CEM at or prior to the Effective Time (including the transactions contemplated
by this Agreement) to the fullest extent permitted under applicable law,
whether or not CEM or the Surviving Corporation is insured against any such
matter. In the event of any such threatened or actual claim, action, suit,
proceeding or investigation, (A) CEM and (after the Effective Time) the
Surviving Corporation shall pay any expenses in advance of the final
disposition of such matter to each Indemnified Party as such expenses are
incurred to the fullest extent permitted under applicable law, provided CEM or
the Surviving Party, as the case may be, receives from the Indemnified Party to
whom expenses are advanced an undertaking to repay such advances as required
under applicable law , (B) the Indemnified Parties may retain one counsel
satisfactory to them and reasonably satisfactory to CEM or the Surviving
Corporation (provided, however, that if it is inappropriate due to actual or
potential differing interests between such Indemnified Parties, each group of
Indemnified Parties may retain their own separate counsel), and CEM and the
Surviving Corporation shall pay all fees and expenses of such counsel within 30
days after statements therefor are received and (C) CEM and the Surviving
Corporation shall use their respective reasonable best efforts to assist in the
vigorous defense of any such matter. Without limiting the foregoing, in any
case in which approval by the Surviving Corporation is required to effectuate
any indemnification, the Surviving Corporation shall direct, at the election of
the Indemnified Party, that the determination of any such approval shall be
made by independent counsel mutually agreed to by the Surviving Corporation and
the Indemnified Party. The Surviving Corporation shall maintain in effect for a
period of six years after the Effective Time directors' and officers' liability
insurance with respect to matters occurring prior to the Effective Time, which
insurance shall contain terms and conditions no less advantageous than are
contained in CEM's current directors' and officers' liability insurance policy;
provided, the Surviving Corporation shall not be required to pay an annual
premium for such insurance in excess of one and one-half times the current
annual premium. This SECTION 3.10 is intended for the irrevocable benefit of
and to grant third party rights to, the Indemnified Parties and shall be
binding on all successors and assigns of Collins, Acquiror, CEM and the
Surviving Corporation. Each of the Indemnified Parties shall be entitled to
enforce the covenants contained in this SECTION 3.10. In the event the
Surviving Corporation or any of its respective successors or assigns (i)
consolidates with or merges into any other Person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger
or (ii) transfers all or substantially all of its properties and assets to any
Person, then, and in each case, the Surviving Corporation shall take such
actions so that there is a reasonable expectation that successors and assigns
of the Surviving Corporation shall assume the obligations of the Surviving
Corporation set forth in this SECTION 3.10.
3.11 Actions of Collins Pending the Closing. Collins covenants and
agrees that, prior to the Effective Time, he will not do or fail to do or cause
any Person to do or fail to do any act that will cause CEM to breach any of its
representations and warranties set forth in Article IV hereof
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or fail to fulfill any of its covenants and agreements hereunder; provided that
any action or failure to act by CEM shall not be attributed to or deemed to be
caused by Collins solely by reason of his service as a director, officer or
employee thereof.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF CEM
CEM represents and warrants to Acquiror and Collins as follows:
4.1 Organization and Good Standing. Each of CEM and its subsidiaries
is a duly organized and validly existing corporation in good standing under the
laws of the jurisdiction of its incorporation with all requisite power and
authority (corporate and other) to own, lease and operate its properties and
conduct its business and is duly qualified and in good standing as a foreign
corporation authorized to do business in each of the jurisdictions in which the
character of the properties owned or held under lease by it or the nature of
the business transacted by it makes such qualification necessary, except where
the failure to be so qualified would not, individually or in the aggregate,
have a Material Adverse Effect on CEM and its subsidiaries, taken as a whole.
CEM has heretofore delivered to Acquiror accurate and complete copies of its
and its subsidiaries' certificates or articles of incorporation and bylaws, as
currently in effect. For the purposes of this Agreement "Material Adverse
Change" or "Material Adverse Effect" means any change or effect that is
materially adverse to the business, assets, prospects, operations, properties,
financial condition or results of operations of CEM and its subsidiaries taken
as a whole.
4.2 Authorization; Binding Agreement. CEM has all requisite
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby
have been duly and validly authorized by CEM's board of directors and, except
for the approval of this Agreement and the Merger by the shareholders of CEM in
accordance with the North Carolina Act and the articles of incorporation and
bylaws of CEM, no other corporate proceedings on the part of CEM are necessary
to authorize this Agreement and the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by CEM, and subject
to the requisite approval of the shareholders of CEM, constitutes the legal,
valid and binding agreement of CEM, enforceable against CEM in accordance with
its terms, except as such enforceability may be limited by (a) bankruptcy,
insolvency, reorganization, moratorium or other laws, now or hereafter in
effect, relating to or limiting creditors' rights generally, and (b) general
principles of equity (whether considered in an action in equity or at law)
which provide, among other things, that the remedies of specific performance
and injunctive and other forms of equitable relief are subject to equitable
defenses and to the discretion of the court before which any proceedings
therefor may be brought.
4.3 Capitalization. The authorized capital stock of CEM consists of
10,000,000 shares of CEM Common Stock and 1,000,000 shares of preferred stock,
$5.00 par value per share (the "Preferred Stock"). As of the close of business
on the business day immediately preceding the
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date hereof, 3,043,443 shares of CEM Common Stock were outstanding and no
shares of Preferred Stock were outstanding. As of the date hereof, 432,179
shares of CEM Common Stock were reserved for issuance upon exercise of
outstanding Stock Options. All of the outstanding shares of capital stock of
CEM and the subsidiaries of CEM have been duly authorized and validly issued
and are fully paid and nonassessable. All issued and outstanding shares of
capital stock of the subsidiaries of CEM are owned by CEM or a subsidiary of
CEM free and clear of all liens, charges, encumbrances, claims and options of
any nature. Except for the Stock Options, neither CEM nor any subsidiary of CEM
has or as of the Effective Time will have granted any outstanding security,
call, option, warrant, subscription or other right, or entered into any
agreement or commitment that either (a) obligates CEM or any of its
subsidiaries to issue, sell or transfer or cause to be issued, delivered or
sold any shares of the capital stock of CEM or any subsidiary of CEM, or (b)
restricts the transfer of, or otherwise encumbers, shares of CEM Common Stock.
4.4 Financial Statements. All consolidated financial statements of
CEM and its subsidiaries (including the notes to such financial statements)
included in CEM's Annual Report on Form 10-K for the fiscal year ended June 30,
1999 (the "Year-End Financial Statements") or in CEM's Quarterly Report on Form
10-Q for the period ending September 30, 1999 (the "Interim Financial
Statements"), in each case filed pursuant to the Securities Exchange Act of
1934, as amended (the "Exchange Act"), (a) are in accordance with the books and
records of CEM and its subsidiaries in all material respects, (b) present
fairly in all material respects the consolidated financial position, results of
operations, changes in shareholders' equity and cash flow of CEM and its
subsidiaries as of the respective dates and for the respective periods
indicated and (c) have been prepared in conformity with generally accepted
accounting principles applied in all material respects on a consistent basis
through all the periods involved, subject in the case of the Interim Financial
Statements to normal year-end adjustments and the absence of certain notes
thereto. CEM has no liabilities that are required by generally accepted
accounting principles to be disclosed on a balance sheet other than (i) those
disclosed in the Interim Financial Statements, (ii) those arising in the
ordinary course of business since September 30, 1999 or as disclosed in ITEMS
3.6(C) and (D) of the Disclosure Schedules, and (iii) liabilities that would
not, individually or in the aggregate, have a Material Adverse Effect.
4.5 Absence of Certain Changes or Events. Since June 30, 1999, (a)
there has not been any Material Adverse Change, (b) there has not been any
damage, destruction or loss, whether covered by insurance or not, having or
that, individually or in the aggregate, could have a Material Adverse Effect,
(c) there has not been any condition, event or occurrence that, individually or
in the aggregate, has had or is reasonably likely to have a Material Adverse
Effect or is reasonably likely to give rise to a Material Adverse Change, (d)
CEM and its subsidiaries have conducted their respective businesses only in the
ordinary course consistent with past practices, (e) CEM has not changed its
accounting principles or methods in any material respect except insofar as may
be required by a change in generally accepted accounting principles, (f) there
has not been any declaration, setting aside or payment of any dividend or other
distribution (whether in cash, stock or property) with respect to the equity
interests of CEM or any of its subsidiaries, other than dividends paid by
wholly owned subsidiaries, and (g) CEM and its subsidiaries have not (i)
increased the compensation or fringe benefits of any present or former
director, officer or employee of CEM or its subsidiaries (except for increases
in salary or wages in the ordinary course of business consistent with past
practice), (ii) granted any severance or
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termination pay to any present or former director or officer of CEM or its
subsidiaries or, other than in the ordinary course of business, to any other
employee of CEM or its subsidiaries; (iii) loaned or advanced money or other
property by CEM or its subsidiaries to any of their present or former
directors, officers or employees, or (iv) established, adopted, entered into,
amended or terminated any Company Benefit Plan (as defined in SECTION 4.14).
4.6 SEC Reports and Other Documents. Since June 30, 1996, CEM has
filed all reports required to be filed by it with the SEC and all such reports
complied as to form in all material respects with applicable requirements of
law. Each report required to be filed by CEM with the SEC since June 30, 1996
did not on the date of filing of such reports and, except to the extent revised
or superseded by a subsequent filing with the SEC prior to the date hereof does
not, contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
4.7 Governmental and Other Consents and Approvals. No consent,
waiver, approval, license or authorization of or designation, declaration or
filing with any governmental agency or authority or other public Persons in the
United States is required in connection with the execution or delivery by CEM
of this Agreement or the consummation by CEM of the transactions contemplated
hereby, other than (a) the approval of this Agreement and the Merger by the
shareholders of CEM, (b) filing in the State of North Carolina articles of
merger in accordance with the North Carolina Act, (c) filings required under
the Exchange Act, and (d) such other consents, waivers, approvals, licenses or
authorizations, the failure of which to be obtained will not have a Material
Adverse Effect or will not, individually or in the aggregate, materially and
adversely affect the ability of CEM to consummate the transactions contemplated
hereby.
4.8 No Violation. Except as set forth in ITEM 4.8 of the Disclosure
Schedules, the execution and delivery of this Agreement, the filing by CEM of
articles of merger in connection with the Merger in the State of North Carolina
in accordance with the North Carolina Act, the consummation by CEM of the
transactions contemplated hereby, or compliance by CEM with any of the
provisions hereof, will not:
(a) violate any provision of the articles of incorporation or
bylaws of CEM or any comparable charter or organizational documents of
its subsidiaries;
(b) cause CEM or any of its subsidiaries to violate in any
material respect (i) any statute or law or any judgment, decree,
order, regulation or rule of any court or governmental authority
applicable to CEM or any of its subsidiaries or any of their
respective properties, or (ii) the award of any arbitrator or panel of
arbitrators that in either case, individually or in the aggregate,
would be reasonably likely to have a Material Adverse Effect;
(c) cause the acceleration of the maturity of any debt or
obligation of CEM and its subsidiaries that individually or in the
aggregate would be reasonably likely to have a Material Adverse
Effect; or
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(d) with or without notice or lapse of time, or both,
violate, or be in conflict with, or constitute a default under, or
permit the termination of, or give rise to a right of termination,
cancellation or acceleration of or "put" right with respect to any
obligation or to loss of a benefit under, or, except as expressly
contemplated by this Agreement, require the consent of any Person
under, or result in the creation of any lien upon any property of CEM
or any of its subsidiaries under, any agreement, indenture, lease,
instrument, permit, concession, franchise, or license applicable to
CEM or any of its subsidiaries or to which CEM or any of its
subsidiaries is a party or by which CEM or any of its subsidiaries (or
their respective properties) may be bound that individually or in the
aggregate would be reasonably likely to have a Material Adverse
Effect.
4.9 Litigation. There is no legal action, suit, arbitration or other
legal, administrative or other governmental investigation, inquiry or
proceeding (whether federal, state, local or foreign) pending or, to the
knowledge of CEM, threatened against or affecting CEM, any of its subsidiaries
or any of their respective properties, assets, business, franchises or
governmental approvals before any court or governmental department, commission,
board, bureau, agency, instrumentality or arbitrator, that, individually or in
the aggregate, would be reasonably likely to have a Material Adverse Effect or
would be reasonably likely to materially and adversely affect the ability of
CEM to carry out, or prevent or make unduly burdensome, the Merger or the
transactions contemplated by this Agreement, nor is there any judgment, decree,
injunction, rule or order of any governmental entity or arbitrator outstanding
against CEM or any of its subsidiaries having, or that in the future would be
reasonably likely to have, any such effect.
4.10 Governmental Approvals; Compliance with Law. CEM and its
subsidiaries possess from the appropriate agency, commission, board or
governmental authority, whether federal, state or local, all licenses, permits,
authorizations, approvals, franchises and rights ("Government Approvals") that
are necessary for CEM and its subsidiaries to engage in the business currently
conducted by each of them, except in those instances in which failure to
possess Government Approvals, individually or in the aggregate, could not have
a Material Adverse Effect. Each of CEM and its subsidiaries has been, is and as
of the Effective Time will be in compliance with all applicable federal, state
and local laws, statutes, ordinances, rules and regulations except where the
failure to so comply, individually or in the aggregate, would be reasonably
likely to not have a Material Adverse Effect.
4.11 Brokers and Finders. Except for Brookwood Associates,
Inc. ("Advisor"), which has been engaged, pursuant to an engagement letter dated
September 14, 1999, a true and complete copy of which has been delivered to
Acquiror, to provide financial advisory services to the Committee of CEM and,
as requested by the Committee, to provide advice to the board of directors of
CEM with respect to whether the consideration to be received by the holders of
CEM Common Stock is fair to them from a financial point of view, no broker,
finder or investment banker is entitled to any brokerage, finder's or other fee
or commission in connection with the Merger or in connection with any
transaction involving CEM based upon arrangements made by or on behalf of CEM.
4.12 Fairness Opinions and Approval by Committee. On or prior to the
date hereof, the Committee unanimously approved the terms of this Agreement and
received an opinion from Advisor as of such date, which opinion shall be
confirmed in writing substantially to the effect
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that, from a financial point of view, the consideration to be received by the
holders of CEM Common Stock pursuant to the Merger is fair to them (which
opinion, to the extent required or requested by the SEC, shall be updated in
writing to the date of the Definitive Proxy Statement), a true and complete
copy of which written opinion has been or will promptly be delivered to
Acquiror following its receipt by the Committee.
4.13 Taxes. Except as would not be reasonably likely to have a
Material Adverse Effect, individually or in the aggregate:
(a) All Returns (as defined below) required to be filed by or
with respect to CEM and Tax Affiliates (as defined below) have been
filed on a timely basis; all such Returns are correct and complete in
all material respects; there are no deficiencies for Taxes that have
been proposed, asserted or assessed against CEM or Tax Affiliates that
remain unpaid; and CEM and its Tax Affiliates have paid or made
adequate provision in all material respects in the Year-End Financial
Statements (other than reserves for deferred income Taxes established
to reflect differences between book basis and Tax basis of assets and
liabilities) for the payment of all Taxes, whether or not shown on any
Return. As used in this SECTION 4.13, the term "Tax" or "Taxes" means
all federal, state, local, foreign and other net income, gross income,
gross receipts, franchise, sales, use, withholding, employment,
property alternative or add-on minimum, environmental (including Taxes
under Section 59A of the Internal Revenue Code of 1986, as amended
(the "Code")) or other taxes, fees, assessments or charges of any kind
whatsoever, together with any interest and any penalties, additions to
tax or additional amounts with respect thereto; the term "Returns"
means all returns, declarations, reports, statements and other
documents required to be filed in respect of Taxes, including any
schedule or attachment thereto, and including any amendment thereof;
and the term "Tax Affiliate" means any subsidiaries of CEM and any
individual or entity for whose Taxes CEM or any of its subsidiaries is
or could be held liable, whether by reason of being a member of an
affiliated, consolidated, combined, unitary, or other similar group
for Tax purposes, by reason of being a successor, member or general
partner, by agreement, or otherwise (but only with respect to the
Taxes and taxable periods(s) or portions thereof with respect to which
CEM or such subsidiaries is or could be held liable for such Taxes).
(b) ITEM 4.13 of the Disclosure Schedules lists all Returns
in respect of federal or North Carolina income taxes that have been
audited, and indicates such Returns that are currently the subject of
audit; neither CEM nor any Tax Affiliate has granted any extension or
waiver of the statute of limitations period on the assessment of any
material Taxes, which period (after giving effect to such extension or
waiver) has not expired; neither CEM nor any Tax Affiliate has granted
a power of attorney with respect to any matter relating to any
material Tax; and no claim has been made by an authority in a
jurisdiction where CEM or any Tax Affiliate does not file Returns that
it is or may be subject to Tax in that jurisdiction.
(c) CEM and each Tax Affiliate has withheld and or will
withhold and pay all Taxes required to have been paid in connection
with amounts paid or owing to any employee, independent contractor,
shareholder, partner, or other third party at or prior to the
Effective Time.
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(d) Neither CEM nor any Tax Affiliate is a party to any Tax
allocation, sharing, or similar agreement, or has been a member of an
affiliated group filing a consolidated federal income tax Return
(other than a group the common parent of which is CEM).
(e) Neither CEM nor any Tax Affiliate has made any payments,
is obligated to make any payments, or is a party to any agreement that
under certain circumstances could obligate it to make any payments
that will not be deductible under Code Section 280G or would
constitute compensation in excess of the limitation set forth in
Section 162(m) of the Code.
(f) No consent under Section 341(f) of the Code has been
filed with respect to CEM or any Tax Affiliates.
(g) Neither CEM nor any Tax Affiliate has been a United
States real property holding corporation within the meaning of Section
897(c)(2) of the Code during the applicable period specified in
Section 897(c)(1)(A)(ii) of the Code.
(h) No material claim for unpaid Taxes has become a lien or
encumbrance of any kind against the property of CEM or any Tax
Affiliates.
4.14 Employee Benefits.
(a) A list of all employee benefit plans, programs,
arrangements, funds, policies, practices, or contracts and samples of
representative employment agreements with respect to which, through
which, or under which the CEM or any of CEM's subsidiaries has any
liability to provide benefits or compensation to or on behalf of
employees, former employees, or independent contractors of CEM or any
of CEM's subsidiaries, whether formal or informal, whether or not
written, including but not limited to any employee benefit plan
(within the meaning of Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")), any multiemployer plan
(as defined in Section 3(37) and Section 4001(a)(3) of ERISA), stock
purchase, stock option, severance, employment, change in control,
fringe benefit, collective bargaining, bonus, incentive, and deferred
compensation arrangement (collectively, the "Company Benefit Plans"),
have been disclosed in writing to Acquiror. CEM has made available to
Acquiror a true and complete copy of the following documents, if
applicable, with respect to each Company Benefit Plan: (i) all
documents setting forth the terms of the Company Benefit Plan, or if
there are no such documents evidencing the Company Benefit Plan, a
full description of the Company Benefit Plan, (ii) the ERISA summary
plan description and any other written summary of plan provisions
provided to participants or beneficiaries for each such Company
Benefit Plan, (iii) the annual report (Form 5500 series), required
under ERISA or the Code, filed for the most recent plan year and most
recent financial statements or periodic accounting of related plan
assets with respect to each Company Benefit Plan, and (iv) the most
recent favorable determination letter, opinion, or ruling from the
Internal Revenue Service for each Company Benefit Plan, the assets of
which are held in trust, to the effect that such trust is exempt from
federal income tax.
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(b) Except as would not be reasonably likely, individually or
in the aggregate, to have a Material Adverse Effect: each Company
Benefit Plan has at all times been maintained, by its terms and in
operation, in accordance with the Code, ERISA, and other applicable
laws; each Company Benefit Plan that is intended to be qualified under
Section 401(a) of the Code, and related trust that is intended to be
tax-exempt under Section 501(a) of the Code, has received a favorable
determination letter from the Internal Revenue Service to the effect
that such plan is qualified under the Code and such trust is
tax-exempt, and any such determination letter remains in effect and
has not been revoked; all contributions required to be made prior
Closing under the terms of each Company Benefit Plan, the Code, ERISA,
or other applicable law have been or will be timely made, and adequate
reserves have been provided for by CEM with respect to all accrued
benefits attributable to service on or prior to the Closing; and other
than the acceleration of the vesting of stock options granted under
the Company's 1993 Management Equity Plan, no Company Benefit Plan
provides for an increase in benefits on or after the Closing.
(c) Except as would not be reasonably likely, individually or
in the aggregate, to have a Material Adverse Effect: each Company
Benefit Plan may be amended or terminated at any time without any
obligation or liability other than for benefits accrued prior to such
amendment or termination, or as required to be vested pursuant to
applicable law as a result of such amendment or termination; there are
no actions, audits, suits, or claims that are pending or, to the
knowledge of CEM, threatened against any Company Benefit Plan, except
claims for benefits made in the ordinary course of the operation of
such plans; neither CEM nor any of its subsidiaries is subject to any
material liability, tax, or penalty whatsoever to any Person
whomsoever as a result of CEM or any of its subsidiaries engaging in a
prohibited transaction under ERISA or the Code; and no event has
occurred and no condition exists that would subject CEM (either
directly or by reason of its affiliation with any trade or business
(whether or not incorporated) that together with the Company is
treated as a single employer under Section 414(b), (c), (m), or (o) of
the Code ("Company ERISA Affiliate")) to any material liability, tax,
or penalty imposed by ERISA, the Code, or other applicable law.
(d) Neither CEM nor any Company ERISA Affiliate maintains,
nor has at any time established or maintained, nor has at any time
been obligated to make, or made, contributions to or under any plan
subject to Title IV of ERISA.
4.15 Environmental Matters. Except as would not be reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect:
(a)(i) CEM and its subsidiaries, taken as a whole, hold and
are in compliance with all Environmental Permits, and CEM and its
subsidiaries are otherwise in compliance with all applicable
Environmental Laws, (ii) there are no instances of such noncompliance
in the past that remain unresolved and (iii) there are no
circumstances that are reasonably expected to prevent or interfere
with such compliance in the future;
(b) None of CEM or its subsidiaries has received any
Environmental Claim, and none of CEM or its subsidiaries is aware
after reasonably inquiry of any threatened
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Environmental Claim or of any circumstances, conditions or events that
could reasonably be expected to give rise to an Environmental Claim;
(c) None of CEM or its subsidiaries has entered into or
agreed to any consent decree, order or agreement under any
Environmental Law, and none of CEM or its subsidiaries is subject to
any judgment, decree or order relating to compliance with any Law or
to investigation, cleanup, remediation or removal of any Hazardous
Material;
(d) There are no underground storage tanks, surface
impoundments, landfills or disposal areas present at any facility
currently or formerly owned, leased, operated or otherwise used by CEM
or any of its subsidiaries in violation of any applicable
Environmental Law or that is reasonably expected to lead to any
Environmental Claim or liability to CEM or any of its subsidiaries;
and
(e) There are no past (including, without limitation, with
respect to assets or businesses formerly owned, leased or operated by
CEM or any of its subsidiaries) or present actions, activities,
events, conditions or circumstances, with respect to or against CEM or
its subsidiaries, including without limitation the release, threatened
release, emission, discharge, generation, treatment, storage,
transport or disposal of Hazardous Materials, that violates any
Environmental Laws, constitutes a breach of CEM's obligations under
any contract or agreement, or is reasonably expected to give rise to
any Environmental Claim.
For purposes of this Agreement, the following terms shall have the following
meanings:
"Environmental Claim" means any written notice, claim, demand, action,
suit, complaint or proceeding by any Person alleging liability or potential
liability (including without limitation liability or potential liability for
investigatory costs, cleanup costs, governmental response costs, natural
resource damages, property damage, personal injury, fines or penalties) arising
out of, relating to, based on or resulting from (i) the presence, storage,
transport, discharge, emission, release or threatened release of any Hazardous
Materials at, in, under, about, to or from any location, whether owned, leased
or operated by CEM or any of its subsidiaries, used by any such parties as a
disposal site or facility or otherwise, or (ii) circumstances forming the basis
of any violation or alleged violation of any Environmental Law or Environmental
Permit or (iii) otherwise relating to obligations or liabilities under any
Environmental Laws.
"Environmental Laws" means all applicable federal, state and local
statutes, rules, regulations, ordinances, orders, decrees and common law
relating in any manner to contamination, pollution or protection of human
health or the environment, including without limitation the Comprehensive
Environmental Response, Compensation and Liability Act, the Solid Waste
Disposal Act, the Clean Air Act, the Toxic Substances Control Act, the
Occupational Safety and Health Act, the Emergency Planning and
Community-Right-to-Know Act, and the Safe Drinking Water Act, all as amended,
and similar state laws.
"Environmental Permits" means all permits, licenses, registrations and
other governmental authorizations required for CEM and the operations of CEM
and its subsidiaries' facilities and otherwise to conduct its business under
Environmental Laws.
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"Hazardous Materials" means all hazardous or toxic substances, wastes,
materials or chemicals, petroleum (including crude oil or any fraction thereof)
and petroleum products, asbestos and asbestos-containing materials,
polychlorinate biphenyls, pollutants, contaminants and all other materials and
substances regulated pursuant to, or that form the basis of liability under,
any Environmental Law.
4.16 Board Recommendation. The board of directors of CEM, at a
meeting duly called and held, has by unanimous vote of those directors present
(who constituted 100% of the directors then in office other than Collins who
recused himself from such vote because of his interest in Acquiror and in the
transactions contemplated by this Agreement) (i) determined that this Agreement
and the transactions contemplated hereby are fair to and in the best interests
of the shareholders of CEM and (ii) resolved to recommend that the holders of
the shares of CEM Common Stock approve this Agreement and the transactions
contemplated herein, including the Merger.
4.17 Required Company Vote. The affirmative vote of at least 66 2/3%
of the outstanding shares of CEM Common Stock is the only vote of the holders
of any class or series of CEM's securities necessary to approve this Agreement
and the Merger under the North Carolina Act or CEM's articles of incorporation.
4.18 State Takeover Statutes. No state takeover statute or similar
statute or regulation of the State of North Carolina applies or purports to
apply to this Agreement, the Merger, or any of the other transactions
contemplated hereby. No provision of the articles of incorporation, bylaws or
other governing instruments of CEM or any of its subsidiaries would, directly
or indirectly, restrict or impair the ability of Acquiror or its affiliates to
vote, or otherwise to exercise the rights of a shareholder with respect to,
securities of CEM and its subsidiaries that may be acquired or controlled by
Acquiror or its affiliates or permit any shareholder to acquire securities of
CEM on a basis not available to Acquiror in the event that Acquiror were to
acquire securities of CEM, and neither CEM nor any of its subsidiaries has any
rights plan, preferred stock or similar arrangement that have any of the
aforementioned consequences. The board of directors of CEM has duly and validly
approved and taken all corporate action required to be taken by the board of
directors for the consummation of the transactions contemplated by this
Agreement.
4.19 Material Contract Defaults. Neither CEM nor any of its
subsidiaries is, or has received any notice or has any knowledge that any other
party is, in default in any respect under any material contract, agreement,
commitment, arrangement, lease, policy or other instrument to which it or any
of its subsidiaries is a party or by which it or any such subsidiary is bound,
except for those defaults that, individually or in the aggregate, could not
have a Material Adverse Effect; and there has not occurred any event that with
the lapse of time or the giving of notice or both would constitute such a
default.
4.20 Information in Proxy Statement. The Definitive Proxy Statement
(including any amendment thereof or supplement thereto), at the date mailed to
CEM shareholders and at the time of the Special Meeting, will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading, provided,
however, that no representation is made by CEM with respect to statements made
therein based
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on information supplied by Acquiror or Collins for inclusion in the Definitive
Proxy Statement. The Definitive Proxy Statement will comply in all material
respects with the provisions of the Exchange Act and the rules and regulations
thereunder.
4.21 Properties.
(a) CEM and its subsidiaries hold good and valid leasehold
title to leased real property they occupy, free of all liens except
for liens that, individually or in the aggregate, would be reasonably
likely to not have a Material Adverse Effect or liens securing
indebtedness described on ITEM 3.6(D) of the Disclosure Schedules or
reflected in the Interim Financial Statements of CEM. Except as would
not be reasonably likely, individually or in the aggregate, to have a
Material Adverse Effect: all real property leases are in full force
and effect and grant in all respects the leasehold estates or rights
of occupancy or use they purport to grant; there are no existing
defaults (either on the part of CEM or any of its subsidiaries or any
other party thereto) under any real property lease and no event has
occurred that, with notice or the lapse of time, or both, would
constitute a default (either on the part of CEM or any of its
subsidiaries or any other party thereto) under any of the real
property leases; and the consummation of the Merger will not result in
the occurrence of a default under any of the real property leases
(whether pursuant to a "change in control" provision in the real
property leases or otherwise).
(b) Except with respect to liens securing indebtedness
described on ITEM 3.6(D) of the Disclosure Schedules or reflected in
the Interim Financial Statements of CEM, each of CEM and its
subsidiaries have good and sufficient, valid and marketable title to
all other real property used by it in its business, free and clear of
all liens and other encumbrances that, individually or in the
aggregate, would be reasonably likely to have a Material Adverse
Effect.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND COLLINS
Acquiror hereby represents and warrants to CEM, and Collins (except
with respect to SECTION 5.10 hereof) hereby represents and warrants to CEM, as
follows:
5.1 Organization and Good Standing. Acquiror is a duly organized and
validly existing corporation in good standing under the laws of the state of
North Carolina. Acquiror has heretofore delivered to CEM accurate and complete
copies of its articles of incorporation and bylaws as currently in effect.
Acquiror has no subsidiary or owns or holds any capital stock, security or
investment in any other Person other than shares of CEM Common Stock and bank
accounts, certificates of deposit, money market or similar short-term
investments.
5.2 Authorization; Binding Agreement. Acquiror has all requisite
corporate power and authority to execute and deliver this Agreement and to
consummate the Merger and the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the Merger and the
transactions contemplated hereby have been duly and validly authorized by its
respective board of directors, and this Agreement has been adopted by
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the shareholders of Acquiror in accordance with the North Carolina Act and its
articles of incorporation and bylaws. No other corporate proceedings on the
part of Acquiror are necessary to authorize this Agreement, the Merger and the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Acquiror and Collins and constitutes a legal, valid
and binding agreement of each of Acquiror and Collins, enforceable against
Acquiror and Collins in accordance with its terms except as such enforceability
may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or
other similar laws, now or hereafter in effect, relating to or limiting
creditors, rights generally, and (b) general principles of equity (whether
considered in an action in equity or at law), which provide, among other
things, that the remedies of specific performance and injunctive and other
forms of equitable relief are subject to equitable defenses and to the
discretion of the court before which any proceedings therefor may be brought.
5.3 No Violation. Neither the execution and delivery of this
Agreement, the filing of the Articles of Merger nor the consummation by
Acquiror and Collins of the transactions contemplated hereby, nor compliance by
Acquiror and Collins with any of the provisions hereof, will:
(a) violate any provision of the articles of incorporation or
bylaws of Acquiror;
(b) cause Acquiror to violate in any material respect any
statute or law or any judgment, decree, order, regulation or rule of
any court or governmental authority applicable to Acquiror or any of
its properties or the award of any arbitrator or panel of arbitrators;
(c) cause the acceleration of the maturity of any debt or
obligation of Acquiror; or
(d) with or without notice or lapse of time, or both,
violate, or be in conflict with, or constitute a default under, or
permit the termination of, or give rise to a right of termination,
cancellation or acceleration of or "put" right with respect to any
obligation or to loss of a benefit under, or except as expressly
contemplated by this Agreement, require the consent of any Person
under, or result in the creation of any lien upon any property of
Acquiror under, any agreement, indenture, lease, instrument, permit,
concession, franchise, or license applicable to Acquiror or to which
Acquiror is a party or by which Acquiror (or its properties) may be
bound, that in the aggregate could have a material adverse effect on
Acquiror.
5.4 Governmental and Other Consents and Approvals. No consent,
waiver, approval, license or authorization of or designation, declaration or
filing with any governmental agency or authority or other public Persons in the
United States is required in connection with the execution or delivery by
Acquiror of this Agreement or the consummation by Acquiror of the Merger or the
transactions contemplated hereby, other than (a) filings in the State of North
Carolina in accordance with the North Carolina Act, (b) filings required under
the Exchange Act and (c) such other consents, waivers, approvals, licenses or
authorizations, the failure of which to be obtained will not have a material
adverse effect on Acquiror or on the ability of Acquiror to consummate the
transactions contemplated hereby.
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5.5 Proxy and Schedule 13E-3 Information. The information furnished
to CEM by Acquiror and/or Collins specifically for inclusion in the Definitive
Proxy Statement and the Schedule 13E-3, or any amendment or supplement thereto,
or specifically for inclusion in any other documents filed with the SEC by CEM
in connection with the Merger, shall, with respect to the Definitive Proxy
Statement at the time the Definitive Proxy Statement is mailed and at the time
of the Special Meeting, and, with respect to the Schedule 13E-3 and such other
documents, at the time of filing with the SEC and at the time of such Special
Meeting, not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
5.6 Financing.
(a) Collins, on behalf of Acquiror, has accepted a commitment
for financing necessary or appropriate to consummate the Merger in an
amount up to $21,000,000 in debt financing and an additional $400,000
in equity financing (the "Financing"). Such amount, plus cash of CEM
at the Closing and additional funds to be contributed by Collins
through Acquiror, is sufficient to fund the consummation of the
transactions contemplated hereby, including, without limitation, (i)
to fund the payment of the Cash Merger Consideration plus the expenses
related to the Merger and obtaining the Financing, (ii) refinance
CEM's outstanding indebtedness and (iii) provide for the working
capital needs of the Surviving Corporation. Neither Collins nor
Acquiror has any reason to believe that any condition to the Financing
cannot or will not be waived or satisfied prior to the Effective Date.
True and correct copies of the letters or other documents evidencing
such commitment (the "Financing Letters") have been delivered to the
Committee.
(b) Collins has sufficient personal financial resources to
make capital contributions to Acquiror necessary to permit, with the
cash of CEM at the Closing and the proceeds of the Financing, Acquiror
to fund the consummation of the transactions contemplated hereby,
including, without limitation, (i) to fund the payment of the Cash
Merger Consideration plus the expenses related to the Merger and
obtaining the Financing, (ii) refinance CEM's outstanding indebtedness
and (iii) provide for the working capital needs of the Surviving
Corporation.
5.7 Brokers and Finders. Except for Wachovia Securities, Inc., the
fees and expenses of which shall be paid by Acquiror, neither Acquiror nor
Collins has engaged any broker, finder or investment banker which engagement
would require the payment of any brokerage, finder's or other fees by CEM in
connection with the transaction contemplated hereby.
5.8 No Prior Activities. Acquiror has not incurred, and will not as
of the Effective Time have incurred, directly or through any subsidiary, any
liabilities or obligations, except those incurred in connection with its
organization or with the negotiation of this Agreement and the Financing.
Except in connection with this Agreement and the Merger (including without
limitation the Financing Letters), Acquiror has not engaged in any business
activities of any type or kind whatsoever, or entered into any agreements or
arrangements with any Person or become subject to or bound by any obligation or
undertaking.
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5.9 Litigation. There is no legal action, suit, arbitration or other
legal, administrative or other governmental investigation, inquiry or
proceeding (whether federal, state, local or foreign) pending or, to the
knowledge of Acquiror or Collins, threatened against or affecting Acquiror,
Collins or any of their respective properties, assets, business, franchises or
governmental approvals before any court or governmental department, commission,
board, bureau, agency, instrumentality or arbitrator, that, individually or in
the aggregate, would be reasonably likely to have a material adverse effect on
the business, assets, prospects, operations, properties, financial condition or
results of operations of Acquiror or could materially and adversely affect the
ability of Acquiror or Collins to carry out, or prevent or make unduly
burdensome, the Merger or the transactions contemplated by this Agreement.
5.10 Surviving Corporation Not Rendered Insolvent. Assuming that CEM
complies with its covenants and agreements hereunder and there is no Material
Adverse Change affecting CEM after the date hereof and prior to the Effective
Time, immediately after the Effective Time, after giving effect to the Merger,
the Financing, and any other transactions contemplated by this Agreement to
occur at or before the Effective Time, the Surviving Corporation will not (i)
be insolvent or (ii) have unreasonably small capital with which to engage in
its business.
5.11 No Conflicting Knowledge. Collins has reviewed the
representations and warranties of CEM set forth in Article IV hereof and to his
actual knowledge (a) such representations and warranties (to the extent
supplemented or modified by definitive Disclosure Schedules) are true and
correct in all material respects and (b) such representations and warranties
that are by their terms qualified as to materiality by the term "Material
Adverse Effect" or similar terms are true and correct.
ARTICLE VI
CONDITIONS
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the satisfaction at or prior to the Effective Time of the following conditions
unless waived in accordance with 7.4:
(a) This Agreement and the Merger shall have been approved at
or prior to the Effective Time by the holders of 66 2/3% of the
outstanding shares of CEM Common Stock entitled to vote thereon; and
(b) No action, suit or proceeding shall be pending before any
court or governmental body in which an unfavorable judgment or decree
could prevent or substantially delay the consummation of the Merger,
cause the Merger to be rescinded or, with respect to any litigation in
connection with the Merger, result in an award of damages that could
have a Material Adverse Effect; and
(c) CEM, Acquiror and Collins shall have been furnished with
evidence satisfactory to them of the timely consent or approval of, or
notice to, each governmental authority or other Person whose consent
or approval, or to whom notice, is required in connection with the
execution or delivery by CEM, Acquiror or Collins of this
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Agreement or consummation of the transactions contemplated hereby or
the absence of which would result in a Material Adverse Effect or
would materially and adversely affect the ability of CEM, Acquiror or
Collins to consummate the transactions contemplated hereby, other than
any such consent, approval, notice required solely as a result of an
amendment to the Agreement required by Acquiror pursuant to SECTION
1.1 hereof.
6.2 Conditions to Obligation of CEM to Effect the Merger. The
obligations of CEM to effect the Merger shall be subject to the satisfaction at
or prior to the Effective Time of the following additional conditions, unless
waived by CEM:
(a) The representations and warranties of Acquiror and
Collins set forth in ARTICLE V hereof shall be true and correct in all
material respects (except that any such representation and warranty
that is qualified as to materiality by reference to "Material Adverse
Effect" or any similar term shall be true and correct) as of the date
of this Agreement and as of the Effective Time as though made on and
as of the Effective Time, and CEM shall have received a certificate
from Acquiror signed by its President or Chief Executive Officer and
from Collins to that effect, provided that such signatory for Acquiror
shall not have any personal liability in connection therewith;
(b) Acquiror and Collins shall have performed in all material
respects all of its or his respective obligations required to be
performed under this Agreement prior to the Effective Time, and CEM
shall have received a certificate from Acquiror signed by its
President or Chief Executive Officer and from Collins to that effect,
provided that such signatory for Acquiror shall not have any personal
liability in connection therewith.
6.3 Conditions to Obligations of Acquiror to Effect the Merger. The
obligations of Acquiror and Collins to effect the Merger shall be subject to
the satisfaction at or prior to the Effective Time of the following additional
conditions, unless waived by Acquiror and Collins:
(a) The representations and warranties of CEM set forth in
ARTICLE IV hereof shall be true and correct in all material respects
(except that any such representation and warranty that is qualified as
to materiality by reference to "Material Adverse Effect" or any
similar term shall be true and correct) as of the date of this
Agreement and as of the Effective Time as though all of such
representations were made on and as of the Effective Time by CEM, and
Acquiror shall have received a certificate of CEM signed by the Chief
Financial Officer or a Vice President of CEM to that effect, provided
that such signatory or signatories shall not have any personal
liability in connection therewith, and provided, further, that
notwithstanding the foregoing Acquiror will remain obligated to effect
the Merger despite such breach by CEM to the extent that the
circumstances that resulted in such breach also resulted in a breach
by Collins of his representations and warranties set forth in SECTION
5.11 hereof or his covenant set forth in SECTION 3.11 hereof; and
(b) CEM shall have performed in all material respects all
obligations required to be performed by it under this Agreement prior
to the Effective Time and Acquiror shall have received a certificate
of CEM signed by the Chief Financial Officer or a Vice President of
CEM to that effect, provided that such signatory or signatories shall
not have any personal liability in connection therewith, and provided,
further, that notwithstanding
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the foregoing Acquiror will remain obligated to effect the Merger
despite such breach by CEM to the extent that the circumstances that
resulted in such breach also resulted in a breach by Collins of his
representations and warranties set forth in SECTION 5.11 hereof or his
covenant set forth in SECTION 3.11 hereof.
ARTICLE VII
TERMINATION; NON-SURVIVAL OF REPRESENTATIONS,
WARRANTIES AND COVENANTS; WAIVER AND AMENDMENT
7.1 Termination. This Agreement may be terminated, and the Merger
abandoned, at any time prior to the Effective Time, by:
(a) mutual written consent of the boards of directors of CEM
and Acquiror;
(b) Acquiror, by written notice to CEM at any time prior to
the Effective Time, (i) in the event CEM has breached any
representation, warranty, or covenant contained in this Agreement in
any material respect, Acquiror has notified CEM of the breach and such
breach cannot be or has not been cured within 15 days after the giving
of such notice, or (ii) if the Closing shall not have occurred on or
before May 31, 2000 and any condition precedent in SECTION 6.1 or 6.3
hereof shall not have been met or fulfilled (unless the failure
results primarily from Acquiror breaching any representation,
warranty, or covenant contained in this Agreement);
(c) CEM, by written notice to Acquiror and Collins at any
time prior to the Effective Time, (i) in the event Acquiror or Collins
has breached any representation, warranty, or covenant contained in
this Agreement in any material respect, CEM has notified Acquiror and
Collins of the breach and such breach cannot be or has not been cured
within 15 days after the giving of such notice, or (ii) if the Closing
shall not have occurred on or before May 31, 2000 and any condition
precedent in SECTION 6.1 or 6.2 hereof shall not have been met or
fulfilled (unless the failure results primarily from CEM breaching any
representation, warranty, or covenant contained in this Agreement);
(d) CEM, by written notice to Acquiror, if (i) the board of
directors of CEM or the Committee has withdrawn or modified its
approval or recommendation of this Agreement or the Merger in
accordance with SECTION 3.1; (ii) the board of directors of CEM or the
Committee has determined that CEM enter into a definitive agreement
with a Person with respect to a transaction the proposal of which
qualifies as an Acquisition Proposal; provided that the board of
directors of CEM or the Committee, as the case may be, has first
determined in good faith based upon the reasonably concluded advice of
outside counsel that failing to take such action would violate CEM's
board of directors' fiduciary duties under applicable law; or (iii)
(A) a third party commences a tender offer or exchange offer for 25%
or more of the outstanding shares of CEM Common Stock and that tender
offer or exchange offer is not solicited, initiated or encouraged
after the date hereof by CEM or any of its officers, directors,
affiliates, representatives or agents, and (B) the board of directors
of CEM has recommended that the shareholders of CEM tender
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their shares in such tender of exchange offer; provided that the board
of directors of CEM or the Committee has first determined in good
faith upon the reasonably concluded advice of outside counsel that
failing to take such action would violate CEM's board of directors'
fiduciary duties under applicable law; and provided further, that
termination under this SECTION 7.1(D) shall be of no effect unless and
until CEM pays the Fee referred to in SECTION 7.6(A) and deposits
$800,000 with a mutually acceptable escrow agent for reimbursement to
Acquiror of Expenses (as defined in SECTION 7.6(C));
(e) Acquiror, by written notice to CEM, if (i) the board of
directors of CEM has withdrawn or modified its approval or
recommendation of this Agreement or the Merger; (ii) CEM enters into a
definitive agreement with a Person with respect to a transaction the
proposal of which qualifies as an Acquisition Proposal; or (iii) (A) a
third party commences a tender offer or exchange offer for 25% or more
of the outstanding shares of CEM Common Stock and (B) the board of
directors of CEM recommends that the shareholders of CEM tender their
shares in such tender or exchange offer;
(f) CEM or Acquiror, by written notice to the other, if upon
a vote at the Special Meeting, any approval of the shareholders of CEM
necessary to consummate the Merger and the transactions contemplated
hereby shall not have been obtained; or
(g) any of the parties, by written notice to the other, if
any court of competent jurisdiction or other governmental entity shall
have issued an order, decree or ruling or taken any other action
permanently enjoining, restraining or otherwise prohibiting the Merger
and such order, decree, ruling or other action shall have become final
and nonappealable.
Any action to be taken to terminate this Agreement under this Section
must be taken by, or pursuant to authority granted by, the boards of directors
of CEM or Acquiror, as applicable. Any such action by CEM also must be
authorized by the Committee.
7.2 Non-Survival of Representations, Warranties and Covenants. The
respective representations and warranties of CEM, Acquiror and Collins
contained herein or in any certificate delivered pursuant hereto shall expire
with, and be terminated and extinguished upon, consummation of the Merger, and
thereafter neither Surviving Corporation, CEM, Acquiror nor any officer,
director or principal thereof nor Collins shall be under any liability
whatsoever with respect to any such representation or warranty. This SECTION
7.2 shall have no effect upon any other covenant or agreement of the parties
hereto, whether to be performed before or after the consummation of the Merger.
7.3 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto; provided,
however, that after approval of this Agreement by the shareholders of CEM, no
amendment may be made that reduces the amount or changes the form of
consideration to be received in the Merger or otherwise changes or effects any
change that would adversely affect the holders of CEM Common Stock without the
further approval of the shareholders of CEM in accordance with SECTION 6.1(A).
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7.4 Waiver. At any time prior to the Effective Time, whether before
or after the Special Meeting, any party hereto, by action taken by its board of
directors, may (i) extend the time for the performance of any of the
obligations or other acts of any other party hereto or (ii) subject to the
proviso contained in SECTION 7.3, waive compliance with any of the agreements
of any other party or with any conditions (other than the condition in SECTION
6.1(A)) to its own obligations. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in an instrument
in writing signed on behalf of such party by a duly authorized officer, and, in
the case of CEM, authorized by the Committee.
7.5 Effect of Termination. In the event of the termination of this
Agreement under SECTION 7.1, this Agreement shall thereafter become void and
have no effect and no party hereto shall have any liability to any other party
hereto or its shareholders or directors or officers in respect thereof, except
that (i) the provisions of SECTION 7.6 and ARTICLE VIII shall survive any such
termination if such obligations arose at or before the time of such termination
and (ii) in the event of a termination pursuant to SECTIONS 7.1 (B) or (C),
nothing contained in this SECTION 7.5 shall relieve any party from liability
for any breach of this Agreement.
7.6 Certain Payments.
(a) Provided that neither Acquiror nor Collins is in material
breach of its or his respective obligations under this Agreement, in
the event that:
(1) this Agreement is terminated pursuant to SECTION
7.1(D) or 7.1(E); or
(2) (A) an Acquisition Proposal is commenced,
publicly proposed, publicly disclosed or communicated to CEM
at any time after the date of this Agreement and such
Acquisition Proposal would, if consummated, be superior (as
compared to the Merger) to CEM's shareholders from a
financial point of view (a "Superior Proposal") , (B) this
Agreement is terminated pursuant to SECTION 7.1(B), 7.1(F) or
7.1(G), and (C) CEM, either on or prior to the date that is
nine months after such termination of this Agreement,
consummates with any Person a transaction the proposal of
which would otherwise qualify as a Superior Proposal or
enters into a definitive agreement with a Person with respect
to a transaction the proposal of which would otherwise
qualify as a Superior Proposal;
then in any such event, CEM shall pay Acquiror $1,000,000 (the "Fee") in
immediately available funds, plus all Expenses (as defined below) up to
$800,000 in the aggregate. Expenses shall be payable to Acquiror in immediately
available funds within three business days after receipt by CEM of reasonable
documentation therefor.
(b) Provided that neither Acquiror nor Collins is in
material breach of its obligations under this Agreement, if
this Agreement is terminated by Acquiror pursuant to SECTION
7.1(B), then CEM shall promptly reimburse Acquiror for all
Expenses.
(c) "Expenses" means all out-of-pocket expenses and
fees (including without limitation fees and expenses payable
to all banks, investment banking firms, other financial
institutions and other persons and their respective agents
and counsel for
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arranging, committing to provide or providing any Financing
(including fees payable to such persons based on whether
Acquiror is entitled to receive the Fee) and all fees of
counsel, accountants, experts and consultants to Acquiror or
its affiliates, and all printing and advertising expenses)
actually incurred or accrued by Acquiror or its affiliates or
on their behalf in connection with this Agreement or the
transactions contemplated hereby (including without
limitation the financing thereof) and actually incurred or
accrued by banks, investment banking firms, other financial
institutions and other persons and assumed by Acquiror or its
affiliates in connection with the negotiation, preparation,
execution and performance of this Agreement, the structuring
and financing of the transactions contemplated hereby and any
financing commitments or agreements relating thereto.
(d) Except as set forth in this SECTION 7.6, all
costs and expenses incurred in connection with this Agreement
shall be paid by the party incurring such expenses, whether
or not the Merger is consummated; provided, however, that
upon consummation of the Merger, the Surviving Corporation
shall reimburse Acquiror and its Affiliates for all Expenses.
(e) In the event that CEM shall fail to pay the Fee
or any Expenses when due, the term "Expenses" shall be deemed
to include the costs and expenses actually incurred or
accrued by Acquiror (including without limitation fees and
expenses of counsel) in connection with the collection under
and enforcement of this SECTION 7.6, together with interest
on such unpaid Fee and Expenses, commencing on the date that
the Fee or Expenses became due, at a per annum rate equal to
the rate of interest publicly announced by Wachovia Bank,
National Association, from time to time, as such bank's prime
rate plus two percentage points.
ARTICLE VIII
GENERAL AGREEMENTS
8.1 Notice. All notices, requests and other communications to any
party shall be in writing and shall be given by hand delivery, telecopy or a
nationally recognized overnight courier,
(a) If to Acquiror or Collins:
MJC Acquisition Corporation
c/o Michael J. Collins
3100 Smith Farm Road
P.O. Box 200
Charlotte, North Carolina 28106
Facsimile No.: (704) 821-4362
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<PAGE> 107
with copies to:
Robinson, Bradshaw & Hinson, P.A.
101 North Tryon Street, Suite 1900
Charlotte, North Carolina 28246
Attention: Stephen M. Lynch
Facsimile No.: (704) 373-3955
(b) If to CEM or the Special Committee, to:
CEM Corporation
c/o Special Committee,
John L. Chanon
Tatum CFO Partners LLP
Suite 1590
129 West Trade Street
Charlotte, North Carolina 28202
Facsimile No.: (704) 376-6397
with copies to:
Parker, Poe, Adams & Bernstein, LLP
201 South College Street, Suite 2500
Charlotte, North Carolina 28244
Attention: Roy L. Smart, III
Facsimile No.: (704) 334-4706
or to such other address or telecopier number as such party may hereafter
specify for the purpose of notice to the other parties. Any such notice,
request or other communication shall be deemed to have been given and received
on the day on which it is delivered by hand or telecopied (or, if such day is
not a business day in North Carolina or if the notice or other communication is
not so delivered or telecopied during normal business hours, at the place of
receipt, on the next following business day) or on the next following business
day if delivered by overnight courier.
8.2 Entire Agreement. This Agreement (including the documents and
instruments referred to herein) constitute the entire agreement and supersedes
all other prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereof.
8.3 Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and, except to the extent
expressly set forth in SECTION 3.10, nothing in this Agreement is intended to
confer upon any other Person any rights or remedies of any nature whatsoever
under or by reason of this Agreement.
8.4 Publicity. The written release to the public by any party of any
information relating to the Merger shall be approved in advance by the other
parties, which approval shall not be unreasonably withheld or delayed.
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8.5 Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
8.6 Interpretation. As used herein, "knowledge" (or words to such
effect) of CEM shall mean actual knowledge of the officers of CEM after
reasonable inquiry.
8.7 Subsidiaries. When a reference is made in this Agreement to
subsidiaries of CEM, the word "subsidiaries", means any corporation at least
the majority of whose outstanding voting securities are directly or indirectly
owned by CEM
8.8 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the respective successors and
assigns of the parties hereto.
8.9 Governing Law. This Agreement shall be governed in all respects,
including validity, interpretation and effect, by the internal laws of the
State of North Carolina, without giving effect to the principles of conflict of
laws thereof, except the laws of the state of incorporation of a party shall
govern its internal corporate affairs.
8.10 Costs and Expenses. Except as provided in SECTION 7.6 and in
this SECTION 8.10, all costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such expenses. All expenses incurred in the printing, filing with the
SEC (including filing fees required with respect to the Preliminary Proxy
Statement, Definitive Proxy Statement and Schedule 13E-3) and mailing to
shareholders of CEM of proxy statements, notices and other materials in
connection with the Special Meeting shall be borne by CEM.
8.11 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
8.12 Specific Performance. The parties hereto agree that irreparable
damage would occur in the event that any provision of this Agreement was not
performed in accordance with the terms hereof and the parties shall be entitled
to the remedy of specific performance of the terms hereof, in addition to any
other remedy at law or equity.
8.13 Conciliation and Arbitration. If any dispute, claim or
difference arises out of or relates to this Agreement (a "Dispute"), such
Dispute shall be finally settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association ("AAA")
effective as of the commencement of the arbitration (the "Rules"), except as
such Rules may be modified as provided herein. The arbitration shall be held in
Charlotte, North Carolina, unless the parties mutually agree to have the
arbitration held elsewhere, and judgment upon the award made therein may be
entered by any court having jurisdiction thereof. The arbitral tribunal shall
be composed of three arbitrators, each of whom shall be experienced commercial
litigators admitted to practice law in the State of North Carolina. Acquiror
and the Company shall each appoint one arbitrator. If such parties fail to
nominate an arbitrator in accordance with the preceding sentence within thirty
days from the date when the notice of intention to arbitrate referred to in
Rule 6 of the Rules has been received by the Respondent (as defined in the
Rules) such appointment shall, upon written request by either party to the AAA,
be
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made in accordance with Rule 14 of the Rules. The two arbitrators thus
appointed shall attempt to agree upon the third arbitrator to act as
chairperson of the arbitration tribunal. If said two arbitrators fail to
appoint the chairperson within thirty days from the date of appointment of the
second arbitrator, upon written request of either party to the AAA, such
appointment shall be made in accordance with Rule 15 of the Rules. The
arbitrators shall have no power to waive, alter, amend, revoke or suspend any
of the provisions of this Agreement, provided, however, that the arbitrators
shall have the power to decide all questions with respect to the interpretation
and validity of this SECTION 8.13. The arbitration shall be conducted, and the
award shall be rendered, in the English language. An arbitrator may not act as
an advocate for the party nominating him, and all three arbitrators shall be
impartial and unbiased. A majority vote by the three arbitrators shall be
required on any decision made by them. The arbitrators shall permit such
discovery as they shall determine is appropriate in the circumstances, taking
into account the needs of the parties and the desirability of making discovery
expeditious and cost-effective. Any such discovery shall be limited to
information directly relevant to the controversy or claim in arbitration and
shall be concluded within thirty days after the appointment of the arbitration
panel. This agreement to arbitrate shall be binding upon the heirs, successors
and assigns and any trustee, receiver or executor of any party hereto. Except
to the extent required by law or court or administrative order, no party,
arbitrator, representative, counsel or witness shall disclose or confirm to any
Person not present at the arbitration hearings any information about the
arbitration proceeding or hearings, including the names of the parties and
arbitrators, the nature and amount of the claims, the financial condition of
any party, the expected date of hearing or the award made.
[signature page follows]
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IN WITNESS WHEREOF, the parties have executed this Agreement
by their duly authorized officers as of the date first above written.
CEM CORPORATION, a North Carolina
corporation
By: /s/ Ronald A. Norelli
------------------------------------
Ronald A. Norelli
Chairman of the Board of Directors
MJC ACQUISITION CORPORATION, a North
Carolina corporation
By: /s/ Michael J. Collins
------------------------------------
Michael J. Collins
President
/s/ Michael J. Collins
-----------------------------------------
Michael J. Collins
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Appendix B
Opinion of Brookwood Associates, Inc.
December 29, 1999
Special Committee of the Board of Directors
Board of Directors
CEM Corporation
3100 Smith Farm Road
Matthews, NC 28106
Gentlemen:
We understand that CEM Corporation (the "Company"), MJC Acquisition
Corporation ("Acquirer") and Mr. Michael J. Collins ("Mr. Collins") have entered
into an Agreement and Plan of Merger dated as of December 29, 1999 (the
"Agreement") which provides for the merger (the "Merger") of Acquirer with and
into the Company. Under the terms set forth in the Agreement, at the effective
time of the Merger (the "Effective Time"), each share of common stock, $.05 par
value, of the Company ("Company Stock") issued and outstanding immediately prior
to the Effective Time, other than any shares of Company Stock held in the
treasury of the Company and shares of Company Stock owned by Acquiror, if any,
which will be canceled pursuant to the Agreement, will be converted into the
right to receive an amount equal to $11.15 in cash, without interest (the
"Merger Consideration"). The terms and conditions of the Merger are set out more
fully in the Agreement.
You have asked us whether, in our opinion as of December 29, 1999, the Merger
Consideration is fair from a financial point of view to the holders of Company
Stock other than Acquiror, Mr. Collins and their respective affiliates (the
"Unaffiliated Shareholders").
For purposes of this opinion we have, among other things:
(i) reviewed certain publicly available financial statements and
other business and financial information of the Company;
(ii) reviewed certain internal financial statements, financial
forecasts and other data concerning the Company prepared by
the Company's management;
(iii) met with certain members of Company management to discuss the
Company's business, historical and projected financial
results, financial condition and future prospects;
(iv) reviewed the historical stock price and trading volume for
Company Stock;
(v) compared the financial performance of the Company and the
price and trading volume of Company Stock with that of certain
other publicly traded companies;
(vi) compared the financial terms of the Merger with the financial
terms of certain other transactions that we deemed comparable
in whole or in part;
(vii) prepared a discounted cash flow analysis and a leveraged
acquisition analysis of the Company;
(viii) reviewed the financial terms and conditions set forth in the
Agreement; and
(ix) made such other studies and inquiries, and took into account
such other matters, as we deemed relevant, including our
assessment of general economic and market conditions.
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<PAGE> 112
Special Committee of the Board of Directors
Board of Directors
CEM Corporation
December 29, 1999
Page 2
We have not independently verified any of the information described above and
for purposes of this opinion have assumed the accuracy and completeness thereof.
With respect to the information relating to the prospects of the Company, we
have relied upon management's assurances that such information reflects the best
currently available judgments and estimates of the management of the Company as
to the likely future financial performance of the Company. With respect to all
legal matters, we have relied upon the advice of counsel to the Special
Committee of the Board of Directors of the Company (the "Special Committee"). We
have not made an independent inspection, evaluation or appraisal of the assets
or liabilities of the Company, nor have we been furnished with any such
evaluations or appraisals. Our opinion is based on market, economic, and other
conditions as they exist and can be evaluated as of the date of this letter.
Brookwood Associates, Inc. is engaged in the valuation of businesses and their
securities in connection with mergers, acquisitions and private placements of
securities. We have acted as financial advisor to the Special Committee in
connection with the Merger and will receive a fee for our services, a
significant portion of which is contingent upon the consummation of the Merger.
In addition, the Company has agreed to indemnify us for certain liabilities that
may arise out of such services, including the rendering of this opinion.
In connection with our engagement, we were authorized to solicit interest from
third parties with respect to an acquisition of the Company and we participated
in discussions with such third parties and Mr. Collins. Our advisory services
were, and the opinion expressed herein is, provided for the use of the Board of
Directors and do not constitute a recommendation to any of the shareholders of
the Company as to how such shareholders should vote their shares or take any
other action regarding the Merger.
Based upon and subject to the foregoing considerations, it is our opinion that,
as of December 29, 1999, the Merger Consideration is fair to the Unaffiliated
Shareholders from a financial point of view.
Sincerely,
Brookwood Associates, Inc.
By: /s/ Thomas L. Temple
Managing Director
B-2
<PAGE> 113
APPENDIX C
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-15383
CEM CORPORATION
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
North Carolina 56-1019741
------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
3100 Smith Farm Road, Matthews, NC 28104
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Post Office Box 200, Matthews, North Carolina 28106
- --------------------------------------------------------------------------------
(Mailing address of principal executive offices)
Registrant's telephone number, including area code: (704) 821-7015
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
$.05 par value Common Stock
---------------------------
(Title of Class)
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. [ ]
The aggregate market value of shares of the Registrant's $.05 par value Common
Stock, its only outstanding class of voting stock, held by non-affiliates as of
September 8, 1999, was $17,179,844 assuming, for purposes of this filing, that
all executive officers and directors of the Registrant are affiliates. The
number of issued and outstanding shares of the Registrant's $.05 par value
Common Stock, its only outstanding class of Common Stock, as of September 8,
1999, was 3,043,443 shares.
Portions of the CEM Corporation Annual Report to Shareholders for the fiscal
year ended June 30, 1999 are incorporated by reference into Parts I and II.
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be
held November 4, 1999 are incorporated by reference into Part III.
C-1
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PART I
ITEM 1 - BUSINESS
General
CEM Corporation (the "Company") engages in one line of business, the
development, manufacture, sale and service of microwave-based instrumentation
for testing, analysis and process control in analytical laboratory and
industrial markets. These sample preparation products provide advantages of
speed and simplicity compared to traditional methods of testing and analysis.
The Company's products are used in the general analytical laboratory market and
in many manufacturing and processing industries, including chemical and food
processing. A significant amount of the Company's sales consists of consumable
supplies, parts and service for its instrumentation. The Company was organized
as a North Carolina corporation in 1971.
Products
Microwave Accelerated Reaction System("MARS") and Microwave Digestion
System("MDS"). MARS and MDS and related accessories accounted for approximately
36%, 33%, and 29% of the Company's consolidated sales in fiscal 1999, 1998 and
1997, respectively. This product is a microwave heating system designed
especially for use in the digestion of samples for laboratory analysis. It
performs a rapid dissolution of samples in acid in a closed vessel system and is
sold to the analytical laboratory market. MARS, which was introduced in the
first quarter of fiscal 1998 and is the next generation of MDS, permits higher
pressures to be used safely and provides greater measurement data for control of
the instrument.
Moisture/Solids Analyzer. The Moisture/Solids Analyzer and related
accessories accounted for approximately 20%, 17% and 19% of the Company's
consolidated sales in fiscal 1999, 1998 and 1997, respectively. This product
performs percent moisture or percent solids measurement in process control
monitoring, quality control and product development in a variety of industries,
including chemical processing, pharmaceuticals, food and dairy products,
tobacco, textiles, paint and coatings, pulp and paper, water and wastewater
treatment.
Microwave Ashing System. The Microwave Ashing System uses microwave energy
to rapidly oxidize a sample to determine the ash (metal oxide) content. This
product is primarily sold to the analytical laboratory market and petrochemical
industry.
STAR System. The STAR system, which incorporates temperature control and
reagent (acid) addition, is an open cavity microwave heating system designed
initially for use in the digestion of samples for laboratory analysis. It
performs a rapid dissolution of samples and is sold to the food, polymer,
petroleum, chemical and semi-conductor industries.
Fat Analyzer System. The Company manufactures an automatic extraction unit
which is used in conjunction with the Moisture/Solids Analyzer to form the Fat
Analyzer System. This product measures the fat content of a variety of samples
and is sold primarily to meat processing and other food industries.
ProFat II System. The ProFat II System, which was introduced in the first
quarter of fiscal 1998, is a microwave-based instrument that provides rapid
moisture, fat and protein results on most meat products, without solvents. The
product is sold primarily to companies processing beef, poultry and pork
products that require a rapid result for process control purposes and companies
which utilize non solvent-based instruments for product analysis.
Microwave Extraction System. The Microwave Extraction System uses microwave
energy to rapidly heat solvents to high temperatures. These elevated
temperatures reduce the time necessary to extract organic compounds from solid
matrices. This product uses a unique temperature control system and multiple
safety devices to ensure both rapid and safe sample preparation. This product is
a cost effective alternative to traditional solvent extraction due to its high
recoveries and significantly reduced solvent usage. The Microwave Extraction
System is marketed under the trade name, MARS-X. Sales of the MARS-X to
environmental laboratories will be limited in the United States until the U.S.
Environmental Protection Agency approves the use of microwave-based instruments
as an alternative method for extraction.
C-2
<PAGE> 115
Marketing and Sales
The Company's marketing and sales strategy is based on identifying
applications for its products and providing its customers with prompt and
effective technical and applications support.
The Company's marketing strategy utilizes telemarketing, direct mail, trade
show demonstrations, articles, studies, trade journal advertising, product
releases, seminars and makes extensive use of the Company's applications
laboratory to develop specific testing applications for potential and existing
customers.
Sales in the U.S. are generated by full-time sales personnel through sales
and service locations throughout the country. Sales are conducted through direct
selling efforts including on-site demonstrations. Sales and service
representatives provide installation and training of production and laboratory
personnel. Sales representatives are paid a base salary, commissions and/or
other incentive compensation.
The Company's applications laboratories provide technical assistance to
customers and potential customers in developing new and improved applications
and related procedures. The applications laboratories perform tests in its
facilities in North Carolina and Germany and provides the results to customers.
The Company's foreign sales are conducted through independent dealers
throughout the world and the Company's subsidiaries in England, Germany and
Italy. Foreign sales are primarily to customers in Europe, Asia and Latin
America. Foreign sales accounted for 43%, 45% and 46% of net sales in fiscal
1999, 1998 and 1997, respectively.
Research and Development
The Company invests heavily in the research and development of potential
new products, product improvements and enhancements, and applications research
for existing products. For fiscal 1999, 1998 and 1997, research and development
expense was $3,162,000, $2,943,000 and $2,742,000 respectively.
The Company's product development efforts continue to progress with respect
to certain proprietary technology licensed in 1996. The Company expects to
deliver prototype instruments incorporating this technology to prospective
customers in fiscal 2000.
Product Protection
The Company relies upon its proprietary technology, continuing research and
development and customer service support to maintain and enhance its competitive
position. Important features of certain of the Company's products are protected
by issued patents or pending patent applications.
Manufacturing
The Company's manufacturing operations are carried out at its headquarters
in Matthews, North Carolina and consist mostly of the assembly and testing of
mechanical and electronic components purchased from others.
Certain components are currently purchased from single source suppliers. An
interruption of one of these sources could result in delays in the Company's
production while the Company developed an alternative supplier and could result
in a loss of sales and income. There are other single source components for
which the Company has determined that other sources are readily available.
The Company has experienced no significant production delays because of a
supplier's inability to ship an acceptable component. The Company stocks what it
believes is an adequate supply of all components and materials based upon
delivery lead times and orders currently in hand.
Environmental Regulations
Compliance with federal, state and local provisions relating to protection
of the environment has not had, and is not expected to have, any material
adverse effects upon the production, capital expenditures, earnings or
competitive position of the Company and its subsidiaries.
C-3
<PAGE> 116
Employees
At June 30, 1999, the Company employed 179 persons. None of the Company's
employees are covered by a collective bargaining agreement.
Backlog
The Company does not have a significant backlog of orders, as it normally
ships its products within a short time after it receives orders.
Competition
The Company experiences direct competition in both foreign and U.S. markets
from companies using microwave technology, traditional methods of heating and
drying and other technologies.
There are a number of methods for performing acid digestions, the most
common of which is the traditional "open vessel on a hot plate" method. There
are three other primary manufacturers of closed vessel microwave digestion
systems similar in nature to the Company's products. Also competing with MARS
and MDS are other advanced methods utilizing higher pressure and temperature
including steel jacketed digestion vessels for use in conventional ovens and
high pressure wet ashers.
There are a number of other methods for testing the moisture or solids
content of various liquids and solids. In most instances, the equipment and
instruments, which consist typically of simple heating and drying units and
measurement techniques, are less expensive than the Moisture/Solids Analyzer
produced by the Company. In addition, infrared moisture analyzers, radio
frequency energy absorption techniques and the Karl Fischer titration method, a
wet chemical procedure, have been developed. These systems compete directly with
the Company's instrumentation in certain markets. There is one manufacturer of a
microwave moisture system similar in nature to the Company's Moisture/Solids
Analyzer.
The traditional method of ashing is with a resistance heat furnace. There
are a number of manufacturers of laboratory furnaces used for ashing. Although
these products are typically less expensive than the Microwave Ashing System
sold by the Company, the Company's product offers advantages in both speed and
process control.
The Company's microwave open vessel digestion system (the STAR System) is
designed to digest large samples or samples that are very reactive and can not
be safely digested in a closed vessel digestion system. There is currently one
competitor in this market, which also utilizes microwave based technology and
automatic reagent additions, but the Company believes its product offers
advantages in price and performance.
The Company's Fat Analyzer System is the only direct moisture, fat and
protein system available that is approved by the Association of Analytical
Chemists. However, there is a competing technology using an indirect measurement
method of analysis, which results in a quicker result time but is not considered
as accurate. In addition, this competing system is sold at a significantly
higher price than the Company's system.
There are a number of methods for performing extractions, the most common
of which are the traditional Soxhlet and sonication methods. Also competing with
the Company's Microwave Extraction System are other advanced methods such as
Supercritical Fluid Extraction and Accelerated Solvent Extraction.
Typically the Company's selling prices are higher than those of most of its
competitors. The Company competes primarily upon the speed, ease of use,
applications support and long-term cost savings to the users.
International Operations and Sales
Information about the Company's international operations and sales is
incorporated by reference to footnotes 1 and 8 of the financial statements
contained in the Company's 1999 Annual Report to Shareholders (Exhibit 13
hereto).
C-4
<PAGE> 117
ITEM 2 - PROPERTIES
The Company's headquarters, research and manufacturing operations are
located in an 82,000 square foot building on an eight and three-fourths acre
tract of land owned by the Company in Matthews, North Carolina. The Company also
owns a 5,000 square foot office and warehouse facility in England, owns a 5,200
square foot office and warehouse in Germany and leases a 4,000 square foot
office in Italy. The facility in Germany is subject to a mortgage which had a
balance of $68,000 at June 30, 1999. Management believes these facilities are
adequate to serve existing markets for the next several years.
ITEM 3 - LEGAL PROCEEDINGS
Nothing is required to be disclosed pursuant to this item.
ITEM 4 is inapplicable and has been omitted.
PART II
ITEM 5 is incorporated by reference to Footnote 12 on page 19 "Quarterly
Information (Unaudited)" and on the inside back cover "Corporate Information" of
the Registrant's 1999 Annual Report to Shareholders (Exhibit 13 hereto).
ITEM 6 is incorporated by reference to page 20 of items captioned "Selected
Financial Data" of the Registrant's 1999 Annual Report to Shareholders (Exhibit
13 hereto).
ITEM 7 is incorporated by reference to page 6 captioned "Management's Discussion
and Analysis" of the Registrant's 1999 Annual Report to Shareholders (Exhibit 13
hereto).
ITEM 7A is incorporated by reference to Footnote 2 on page 14 "Financial
Instruments" of the Registrant's 1999 Annual Report to Shareholders (Exhibit 13
hereto).
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, notes to the financial statements and quarterly
supplemental financial data of the Company appearing on pages 9 - 20 of the
Company's 1999 Annual Report to Shareholders are hereby incorporated by
reference.
ITEM 9 is inapplicable and has been omitted.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information as to the directors and chief executive officer of the Company
is incorporated herein by reference to the section captioned "Election of
Directors" of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held November 4, 1999. The following information is provided
as to the executive officers of the Company who are not directors:
Name Age Background
- --------------------- ------ --------------------------------------------
Richard N. Decker 50 Vice President - Finance, Chief Financial
Officer, Secretary and Treasurer since 1995;
Secretary, Treasurer and Chief Financial
Officer 1993-1995; Vice President-Finance of
the Water and Gas Meter Division of
Schlumberger Limited Corporation 1982-1993.
All of the Company's executive officers were appointed to their current
positions at the Annual Meeting of the Board of Directors held on November 5,
1998. All of the Company's executive officers' terms of office extend until the
next Annual Meeting of the Board of Directors and until their successors are
elected and qualified.
ITEM 11 is incorporated by reference to the sections captioned "Executive
Compensation" and "Director Compensation" in the Registrant's Proxy Statement
for Annual Meeting of Shareholders to be held November 4, 1999.
C-5
<PAGE> 118
ITEM 12 is incorporated by reference to the sections captioned "Principal
Shareholders and Holdings of Management" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Registrant's Proxy Statement for Annual Meeting of
Shareholders to be held November 4, 1999.
ITEM 13 is inapplicable and has been omitted.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements. See accompanying Index to Financial Statements.
(2) Financial Statement Schedules. See accompanying Index to Financial
Statements.
(3) Exhibits.
3.1 Restated Charter of the Company, as amended.(1)
3.2 Bylaws of the Company.(1)
10.1 * CEM Corporation 1986 Nonqualified Stock Option Plan,
as amended, incorporated herein by reference to the
Company's Registration Statement on Form S-8 (File
No. 33-53694).
10.2 * CEM Corporation Employee Stock Purchase Plan, as
amended, incorporated herein by reference to the
Company's Registration Statement on Form S-8 (File
No. 33-80136).
10.3 * CEM Corporation 1987 Stock Option Plan, as
amended.(1)
10.4 * CEM Corporation 1993 Management Equity Plan,
incorporated herein by reference to the Company's
Registration Statement on Form S-8 (File No.
33-75368).
10.5 * CEM Corporation Management Incentive Compensation
Plan(2).
10.6 CEM Corporation 1993 Nonqualified Stock Option Plan
for Non-Employee Directors, incorporated herein by
reference to the Company's Registration Statement on
Form S-8 (File No. 33-75366).
13. The Company's 1999 Annual Report to Shareholders.
This Annual Report to Shareholders is furnished for
the information of the Commission only and, except
for the parts thereof incorporated in this report, is
not deemed to be "filed" as part of this filing.
21. List of the Company's Subsidiaries.(1)
23. Consent of Independent Accountants.
27. Financial Data Schedules (filed in electronic format
only). This schedule shall not be deemed "filed" for
purposes of Section 11 of the Securities Act of 1933
or Section 18 of the Securities Exchange Act of 1934
or otherwise be subject to the liabilities of such
sections, nor shall it be deemed a part of any
registration statement to which it relates.
99. Revised Item 21 of Part II to the Company's
registration statements on Form S-8 (Registration
Numbers 33-11952 and 33-25739).(1)
--------------------
* This exhibit is one of the Company's management
contracts and compensatory plans and arrangements.
(1) Incorporated herein by reference to the Company's
Form 10-K for the year ended June 30, 1994.
(2) Incorporated herein by reference to the Company's
Form 10-K for the year ended June 30, 1997.
(b) Reports on Form 8-K. No reports on Form 8-K have been filed during the last
quarter of the period covered by this report.
(c) Exhibits. See Item 14(a)(3) above.
C-6
<PAGE> 119
<TABLE>
<CAPTION>
Reference (Page)
-----------------------------------
Annual
Form 10-K Report to
Item 14. (d) Index to Financial Statements and Schedules Annual Report Shareholders
- -------------------------------------------------------------------------- ------------- ------------
<S> <C> <C>
Data incorporated by reference from the attached
1999 Annual Report to Shareholders:
Report of Independent Accountants 20
Consolidated Balance Sheets as of June 30, 1999 and 1998 9
Consolidated Statements of Income for the years ended 10
June 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years 11
ended June 30, 1999, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity for the 12
years ended June 30, 1999, 1998 and 1997
Notes to Consolidated Financial Statements 13 - 20
Data submitted herewith:
Report of Independent Accountants 8
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 10
</TABLE>
The 1999 Annual Report to Shareholders of CEM Corporation is not to be deemed
"filed" as part of this report except for those parts thereof specifically
incorporated herein by reference.
C-7
<PAGE> 120
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of CEM Corporation:
Our audits of the consolidated financial statements referred to in our report
dated July 21, 1999 appearing on page 20 of the 1999 Annual Report to
Shareholders of CEM Corporation (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedule listed in Item
14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
July 21, 1999
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<PAGE> 121
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CEM CORPORATION
By: /s/ Michael J. Collins
----------------------
Michael J. Collins
President and Chief Executive Officer
By: /s/ Richard N. Decker
---------------------
Dated: September 24, 1999 Richard N. Decker
Chief Financial Officer, Secretary
and Treasurer
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------------------------------- ----------------------------------------------- ------------------
<S> <C> <C>
/s/ Ronald A. Norelli Chairman of the Board of Directors September 24, 1999
- ---------------------------------
Ronald A. Norelli
/s/ Michael J. Collins President, Chief Executive Officer and Director September 24, 1999
- --------------------------------- (Principal Executive Officer)
Michael J. Collins
/s/ John L. Chanon Director September 24, 1999
- ---------------------------------
John L. Chanon
/s/ George F. Krall Director September 24, 1999
- ---------------------------------
George F. Krall
</TABLE>
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<PAGE> 122
CEM CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Balance at
beginning of Charged to costs Balance at
Description period and expenses Deductions End of period
--------------------------- ----------- ---------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Year ended Accounts receivable, $ 1,019,000 $ 360,000 $ (151,000) $ 1,228,000
June 30, 1999 inventory and warranty
reserves
Year ended Accounts receivable, 1,040,000 404,000 (425,000) 1,019,000
June 30, 1998 inventory and warranty
reserves
Year ended Accounts receivable, $ 720,000 $ 607,000 $ (287,000) $ 1,040,000
June 30, 1997 inventory and warranty
reserves
</TABLE>
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<PAGE> 123
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
ITEM 14(a)(3)
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended Commission File Number
- ------------------------- ----------------------
June 30, 1999 0-15383
CEM CORPORATION
EXHIBIT INDEX
Exhibit No. Exhibit Description
- ----------- -------------------
3.1 Restated Charter of the Company, as amended.(1)
3.2 Bylaws of the Company.(1)
10.1 CEM Corporation 1986 Nonqualified Stock Option Plan,
as amended, incorporated herein by reference to
the Company's Registration Statement on Form S-8
(File No. 33-53694).
10.2 CEM Corporation Employee Stock Purchase Plan, as
amended, incorporated herein by reference to the
Company's Registration Statement on Form S-8 (File
No. 33-80136).
10.3 CEM Corporation 1987 Stock Option Plan, as
amended.(1)
10.4 CEM Corporation 1993 Management Equity Plan,
incorporated herein by reference to the Company's
Registration Statement on Form S-8 (File No.
33-75368).
10.5 CEM Corporation Management Incentive Compensation
Plan.(2)
10.6 CEM Corporation 1993 Nonqualified Stock Option Plan
for Non-Employee Directors, incorporated herein by
reference to the Company's Registration Statement
on Form S-8 (File No. 33-75366).
13. The Company's 1999 Annual Report to Shareholders.
This Annual Report to shareholders is furnished
for the information of the Commission only and,
except for the parts thereof incorporated in this
report, is not deemed to be "filed" as part of
this filing (page __ of the sequentially numbered
pages).
21. List of the Company's Subsidiaries.(1)
23. Consent of Independent Accountants (page __ of the
sequentially numbered pages).
27. Financial Data Schedules (filed in electronic format
only). This schedule shall not be deemed "filed"
for purposes of Section 11 of the Securities Act
of 1933 or Section 18 of the Securities Exchange
Act of 1934 or otherwise be subject to the
liabilities of such sections, nor shall it be
deemed a part of any registration statement to
which it relates.
99. Revised Item 21 of Part II to the Company's
registration statements on Form S-8 (Registration
Numbers 33-11952 and 33-25739).(1)
----------------------
(1) Incorporated herein by reference to the Company's Form
10-K for the year ended June 30, 1994.
(2) Incorporated herein by reference to the Company's Form
10-K for the year ended June 30, 1997.
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<PAGE> 124
MANAGEMENT'S DISCUSSION & ANALYSIS
The following table sets forth the percentage relationship of net sales,
expenses and income for the periods indicated:
<TABLE>
<CAPTION>
For the years ended June 30
------------------------------------------------------------
Percent Change
Percentage of Sales Over Prior Period
1999 1998 1997 1999 1998
----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% (.9)% 7.6%
Cost of goods sold 47.1 46.4 44.8 .5 11.5
----- ----- ----- ----- ----
Gross profit 52.9 53.6 55.2 (2.1) 4.4
Selling, general and administrative expenses 34.8 35.1 38.2 (1.6) (1.2)
Research and development expenses 9.9 9.1 9.1 7.4 7.3
----- ----- ----- ----- ----
Income from operations 8.2 9.4 7.9 (13.2) 28.2
Investment income 1.3 1.7 1.5 (22.1) 20.5
Other expense, net .3 .2 .4 nm nm
----- ----- ----- ----- ----
Income before income taxes 9.2 10.9 9.0 (15.8) 30.8
Provision for income taxes 2.9 3.4 2.9 (15.5) 28.3
----- ----- ----- ----- ----
Net income 6.3% 7.5% 6.1% (16.0)% 32.0%
===== ===== ===== ====== ====
</TABLE>
RESULTS OF OPERATIONS
Fiscal Year 1999 Compared to Fiscal Year 1998
Net sales for fiscal 1999 decreased .9% to $32.1 million. Foreign sales were
down 5% primarily due to weakness in Europe and Latin America. The shortfall in
foreign sales was somewhat offset by an increase in U.S. sales, primarily
resulting from the Company's Microwave Accelerated Reaction System (MARS). The
MARS accounted for approximately 26% of net sales for fiscal 1999 compared to
18% for fiscal 1998. Foreign sales as a percentage of total sales decreased from
45% to 43%.
Gross profit margins decreased from 53.6% to 52.9% primarily due to competitive
pricing pressures in Europe and a shift in product mix from the MDS to the MARS
platform. The Company expects margins to improve in fiscal 2000 on the MARS
platform. The Company began realizing the benefit of these reductions in the
second half of fiscal 1999.
Selling, general and administrative expenses decreased 1.6% compared to the
prior year primarily due to reduced legal costs as a result of the settlement of
litigation the Company initiated to establish the validity of a patent for
microwave digestion vessels and a decline in incentive compensation and
distributor commissions resulting from decreased sales. The 7.4% increase in
research and development expenses was consistent with management's expectations
and reflects the Company's continued commitment to new product development and
enhancements. Management expects research and development expenses to remain
between 8% and 10% of net sales for the foreseeable future.
Investment income decreased due to a reduction in average cash and investment
balances during fiscal 1999. These balances declined as a result of purchases of
the Company's stock pursuant to the Company's stock repurchase program.
The Company's effective tax rate remained relatively consistent with the prior
year.
Fiscal Year 1998 Compared to Fiscal Year 1997
Net sales for fiscal 1998 increased to a record of $32.4 million or 7.6% above
prior year. The primary driver for the increase in net sales was the Company's
Microwave Accelerated Reaction System (MARS), the new closed vessel digestion
system, which was introduced in the first quarter of fiscal 1998 and accounted
for 18% of sales in that year. The increase in net sales was accomplished
against the backdrop of a sharp slowdown in sales to Asia, which declined 31%.
Sales in the U.S., Europe and other international areas contributed substantial
gains for the year and offset the Asian downturn. Foreign sales as a percentage
of total sales decreased from 46% to 45%.
As expected, gross profit margins declined from 55.2% to 53.6% primarily due to
high MARS costs and changes in product mix.
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<PAGE> 125
Cost containment measures continued to show positive results during fiscal 1998
as selling, general and administrative expenses decreased slightly from prior
year. Research and development expenses increased by 7.3%.
Investment income increased due to effective cash management strategies and an
increase in average cash and investment balances during the year.
The Company's effective tax rate decreased from 32.0% to 31.4% as a result of
lower state income taxes and various other factors.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for fiscal 1999 totaled $2.9 million and
decreased $900K from the prior year primarily due to lower net income and
increased prepayments for health and welfare costs.
The Company maintains unsecured bank lines of credit providing for short term
borrowings of up to $3.6 million at market rates. At June 30, 1999, the Company
had no outstanding balance. At June 30, 1998, the Company had $83,000
outstanding under these bank lines of credit. Should the need arise, management
believes the lines of credit could be increased.
In 1995, the Company converted an intercompany note receivable to a third party
bank loan of $1.5 million, denominated in German marks. The loan proceeds and an
additional $0.5 million of available cash were used to acquire a long-term
investment which was pledged to collateralize the loan. While the loan and the
corresponding investment are now reflected on the balance sheet, this
transaction eliminated the Company's exposure to future currency fluctuations on
the intercompany note receivable.
In 1991, the Company began a stock repurchase program which has been extended by
the Board of Directors on several occasions. Repurchases totaled $1.4, $5.0, and
$0.8 million in 1999, 1998, and 1997, respectively. As of June 30, 1999, an
additional $1.7 million remained authorized to repurchase the Company's common
stock. From time to time, repurchases may be made in the open market at
prevailing market prices. The shares repurchased will reduce any dilution of
earnings to existing shareholders resulting from the Company's stock option and
compensation plans. The stock repurchase program had the effect of increasing
earnings per diluted share by $.07, $.02 and $.01 in 1999, 1998, and 1997,
respectively.
Effective January 1, 1999, eleven of the fifteen member countries of the
European Union established fixed conversion rates between their existing
currencies and one common currency (the "euro"). The euro trades on currency
exchanges and is being used in certain business transactions. Beginning in
January, 2002, bills and coins denominated in the euro will be issued and
existing currencies will be withdrawn from circulation. The Company's foreign
subsidiaries do not expect to transact a material portion of their business in
the euro until fiscal 2001.
The Company's foreign subsidiaries are not yet required to prepare reports to
local regulatory agencies using the euro. IT systems used by the company's
foreign subsidiaries should be updated or replaced in a timely manner to
facilitate business transactions and reporting to local government agencies.
Costs to update and/or replace IT systems are not expected to exceed $50,000.
The Company primarily assembles components manufactured by others and
significant expenditures for property and equipment are not expected. Existing
facilities, which were expanded in 1991 and 1992, are expected to be sufficient
to serve existing markets for the next several years. Management believes that
working capital, capital expenditures, debt servicing and stock repurchases can
be funded currently from cash on hand and cash generated from operations.
The Company has never paid cash dividends and has no plans to do so in the
foreseeable future.
YEAR 2000 ISSUE
The Company continued implementing its plan for addressing the Year 2000 Issue
(also known as Y2K) during fiscal 1999. The Year 2000 Issue results from
computers and other systems that process or use date sensitive information and
may incorrectly respond to dates on or after January 1, 2000. Plans for
addressing information technology (IT) systems are nearly complete and involve
primarily software upgrades and/or hardware upgrades. To date, the Company has
spent less than $100,000 to address the Year 2000 Issue and does not believe its
future expenditures to address this issue will be more than $25,000. For non-IT
systems, the Company has not identified and does not expect to identify any
areas where Year 2000 problems would have a material impact on the Company that
are not capable of being repaired or replaced at a fairly low cost.
C-13
<PAGE> 126
The Company has initiated formal communications with all of its third party
vendors, suppliers and customers with whom the Company has a significant
relationship to evaluate whether these third parties have significant Year 2000
problems that could have a material adverse effect on the Company; no such
problems have been identified. However, there can be no guarantee that the
systems of other companies on which the Company's systems rely will be timely
converted, or that a failure to convert by another company, or conversion that
is incompatible with the Company's systems, would not have a material effect on
the Company. The Company, in turn, has responded to all inquiries from customers
as to the Year 2000 readiness of the Company. CEM instrument operations will be
unaffected by the year 2000 issue. CEM instruments do not use the date for
operation; rather, they use the date as a stamp for printouts only.
The plans to address the Year 2000 Issue for the Company's foreign subsidiaries
should be complete by September 30, 1999. If the Company's plans to address
these issues are not successful, the Company would attempt to identify and
purchase replacement systems that do not have problems associated with the Year
2000 Issue. The cost of such replacement systems would be immaterial to the
Company.
The discussion is this section contains Year 2000 readiness disclosures within
the meaning of the Year 2000 Information and Readiness Disclosure Act of 1998.
OUTLOOK
The following cautionary statement identifies important factors that could cause
the Company's actual results to differ materially from those projected in
forward-looking statements made by or on behalf of the Company. Except for the
historical information contained herein, the matters discussed in "Management's
Discussion and Analysis of Results of Operations and Financial Condition" may be
deemed forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are statements that
include projections, predictions, expectations or beliefs about future events or
results or otherwise are not statements of historical fact. Such statements are
often characterized by the use of qualifying words (and their derivatives) such
as "expect," "believe," "plan," "project," or other statements concerning
opinions or judgment of the Company and its management about future events.
These cautionary statements are made pursuant to Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both enacted
pursuant to the Private Securities Litigation Reform Act of 1995.
The industry in which the Company competes, as well as the markets that it
serves, are characterized by cyclical market patterns as a consequence of, among
other things, business cycles, foreign exchange fluctuations, regulatory
changes, government spending levels and general economic conditions. These
factors affect the timing of orders from the Company's customers and cause
substantial variations in sales and profitability from quarter to quarter.
Likewise, supplier-related delays and the timing of the release of the Company's
customer orders may affect quarter-to-quarter sales and profitability. The
Company's sales may also be adversely affected by direct and indirect
competition from third parties including, but not limited to, legal challenges
to existing patents or pending patent applications.
Demand for the Company's instrumentation is substantially affected by the
enactment, timing, extent and severity of state, federal and foreign laws
governing environmental testing standards as well as product labeling
requirements including foods and pharmaceuticals. The Company has experienced
and may continue to experience fluctuations in sales of such products as well as
in demand for particular product enhancements as a result of actual or perceived
changes in regulatory requirements. Legislation or regulations resulting in the
development or expansion of acceptance standards for specific testing methods
has and may result in periodic delays in sales, especially in the United States.
Conversely, increases in international sales have resulted, and may result in
the future, from less stringent or nonexistent acceptance standards in a given
country.
Moreover, the Company's success is dependent on its ability to continue to
develop and engineer high-quality, high-performance products that are
commercially acceptable. Risks associated with new product development include
market acceptance, competition from other products and the Company's ability to
manufacture and market products on an efficient and timely basis at a reasonable
cost and in sufficient volume.
INFLATION
Inflation has not had a material impact on the Company's operations. In the past
several years, prices of some components purchased by the Company have
increased, while prices of other components have declined due, in part, to
changes in volume. Management believes that increases in costs have not exceeded
the inflation rate of the national economy as a whole.
C-14
<PAGE> 127
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 June 30
In thousands, except share data 1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,865 $ 2,963
Short-term investments 6,262 3,200
Trade receivables, net 6,634 6,616
Inventories 5,335 5,675
Deferred taxes 351 231
Other current assets 613 257
-------- --------
Total current assets 22,060 18,942
-------- --------
Long-term Investments 113 3,117
Investment in Affiliate 363 325
Property, Plant and Equipment, Net 4,984 4,925
Other Assets 1,036 989
-------- --------
$ 28,556 $ 28,298
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable and current maturities of long-term debt $ 1,066 $ 92
Accounts payable 1,318 1,491
Accrued payroll and benefits 951 1,115
Deferred income 1,402 1,280
Income taxes payable 819 538
Warranty reserve 261 213
Other current liabilities 344 577
-------- --------
Total current liabilities 6,161 5,306
-------- --------
Long-term Debt, Net of Current Maturities 173 1,177
-------- --------
Deferred Taxes 127 96
-------- --------
Shareholders' Equity:
Preferred stock, $5 par value, 1,000,000 shares authorized; none issued -
Common stock, $.05 par value; 10,000,000 shares authorized; 3,046,000 and
3,180,000 shares issued and outstanding as of June 30, 1999 and 1998, respectively 152 159
Additional paid-in capital -- --
Retained earnings 22,422 21,800
Accumulated other comprehensive loss (479) (240)
-------- --------
Total shareholders' equity 22,095 21,719
-------- --------
$ 28,556 $ 28,298
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
C-15
<PAGE> 128
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the years ended June 30
In thousands, except per share data 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net sales $32,077 $32,362 $30,075
Cost of goods sold 15,110 15,030 13,481
------- ------- -------
Gross profit 16,967 17,332 16,594
Selling, general and administrative expenses 11,158 11,340 11,474
Research and development expenses 3,162 2,943 2,742
------- ------- -------
Income from operations 2,647 3,049 2,378
Investment income 426 547 454
Other expense, net 99 62 130
------- ------- -------
Income before income taxes 2,974 3,534 2,702
Provision for income taxes 938 1,110 865
------- ------- -------
Net income $ 2,036 $ 2,424 $ 1,837
======= ======= =======
Earnings per share
Basic $ .66 $ .71 $ .52
Diluted $ .66 $ .70 $ .52
Average shares outstanding
Basic 3,093 3,435 3,530
Diluted 3,102 3,469 3,550
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
C-16
<PAGE> 129
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended June 30
In thousands 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,036 $ 2,424 $ 1,837
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,299 1,261 1,116
Deferred income taxes (89) 112 (64)
Loss on disposal of fixed assets, net 2 21 32
Changes in operating assets and liabilities:
Trade receivables (35) (673) 942
Inventories 266 (580) 389
Accounts payable and accrued expenses (429) 885 508
Income taxes payable 287 163 101
Other changes, net (487) 131 22
------- ------- -------
Net cash provided by operating activities 2,850 3,744 4,883
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of short-term investments -- 3,100 1,500
Purchase of short-term investment -- (3,200) (500)
Purchase of long-term investment -- (1,152) --
Purchase of investment in affiliate (38) (75) (250)
Proceeds from sale of fixed assets 52 29 56
Capital expenditures and acquisition of intangibles (1,447) (1,119) (1,165)
------- ------- -------
Net cash used in investing activities (1,433) (2,417) (359)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable -- 84 59
Repayment of long-term debt (88) (65) (8)
Repurchase of common stock (1,445) (4,999) (767)
Proceeds from issuance of common stock 21 784 147
------- ------- -------
Net cash used in financing activities (1,512) (4,196) (569)
------- ------- -------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH (3) (1) 46
------- ------- -------
Net (decrease) increase in cash and cash equivalents (98) (2,870) 4,001
Cash and cash equivalents at beginning of year 2,963 5,833 1,832
------- ------- -------
Cash and cash equivalents at end of year $ 2,865 $ 2,963 $ 5,833
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
C-17
<PAGE> 130
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Comprehensive Additional Other
Income Paid-in Retained Comprehensive
In thousands (Loss) Shares Amount Capital Earnings Loss Total
------------- ------ ------ ---------- -------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
JUNE 30, 1996 3,551 $ 178 $ -- $ 22,223 $ (50) $ 22,351
Issuance of shares under stock benefit plans 16 1 146 -- -- 147
Repurchase of common stock (80) (5) (165) (597) -- (767)
Income tax benefit from employees' stock options -- -- 19 -- -- 19
Net income $ 1,837 -- -- -- 1,837 -- 1,837
Translation adjustment (107) -- -- -- -- (107) (107)
------- ----- ----- ----- -------- ----- ---------
Comprehensive income $ 1,730
=======
JUNE 30, 1997 3,487 174 -- 23,463 (157) 23,480
Issuance of shares under stock benefit plans 95 5 779 -- -- 784
Repurchase of common stock (402) (20) (892) (4,087) -- (4,999)
Income tax benefit from employees' stock options -- -- 113 -- -- 113
Net income 2,424 -- -- -- 2,424 -- 2,424
Translation adjustment (83) -- -- -- -- (83) (83)
------- ----- ----- ----- -------- ----- ---------
Comprehensive income $ 2,341
=======
JUNE 30, 1998 3,180 159 -- 21,800 (240) 21,719
Issuance of shares under stock benefit plans 3 -- 21 -- -- 21
Repurchase of common stock (137) (7) (24) (1,414) -- (1,445)
Income tax benefit from employees' stock options -- -- 3 -- -- 3
Net income 2,036 -- -- -- 2,036 -- 2,036
Translation adjustment (239) -- -- -- -- (239) (239)
------- ----- ----- ----- -------- ----- ---------
Comprehensive income $ 1,797
=======
JUNE 30, 1999 3,046 $ 152 $ -- $ 22,422 $(479) $ 22,095
===== ===== ===== ======== ===== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
C-18
<PAGE> 131
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Consolidation - The financial statements include the accounts of the Company and
its wholly-owned domestic and foreign subsidiaries after the elimination of
inter-company accounts and transactions.
Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Comprehensive Income - Effective July 1, 1998 the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
Accordingly, the Consolidated Statements of Changes in Shareholders' Equity and
the shareholders' equity section of the Consolidated Balance Sheets have been
reclassified to comply with the new requirements.
Translation of Foreign Currencies - The Company's export sales, other than those
to its foreign subsidiaries, are denominated in U.S. dollars. For the Company's
foreign subsidiaries, assets and liabilities are translated at exchange rates
prevailing on the balance sheet date; revenues and expenses are translated at
average exchange rates prevailing during the period. Any resulting translation
adjustments are reported separately in shareholders' equity. Net exchange gains
(losses) from foreign currency transactions included in income were ($19,000) in
1999, $51,000 in 1998, and ($26,000) in 1997.
Statement of Cash Flows - For purposes of reporting cash flows, cash equivalents
include short-term interest bearing investments, generally maturing within sixty
days. Cash flows from operations include income taxes paid totaling $642,000,
$817,000 and $788,000 in 1999, 1998 and 1997, respectively. Interest paid
totaled $128,000, $127,000 and $135,000 in 1999, 1998 and 1997, respectively.
The Company had non-cash activity related to the income tax benefit from
employees' stock options of $3,000, $113,000 and $19,000 in 1999, 1998 and 1997,
respectively.
Investments - The Company records investments in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." This
Statement requires the use of fair value accounting for those securities the
Company identifies as trading and available-for-sale. The Company uses the
amortized cost method for investments in debt securities that the Company has
the positive intent and ability to hold to maturity. Unrealized holding gains
and losses are included in earnings for trading securities and are shown as a
separate component of shareholders' equity for available-for-sale securities net
of the effects of income taxes. Realized gains or losses continue to be
determined on the specific identification method and are reflected in income.
Investment in Affiliate - The Company has an exclusive, worldwide licensing
agreement with an Israel-based company, Sirotech, Ltd., related to the
development and marketing of instruments used in rapid testing for bacteria. The
Company has a 13% ownership in Sirotech, Ltd. The investment is accounted for
under the cost method.
Trade Receivables, Net - Trade receivables are stated net of allowances for
doubtful accounts of $291,000 and $306,000 at June 30, 1999 and 1998,
respectively.
Inventories - Inventories are stated at the lower of cost or market. The
first-in, first-out (FIFO) basis is used to determine the cost of inventories.
Advertising Costs - The Company is actively engaged in marketing both new and
existing products. All advertising and promotional costs are charged to
operations as incurred and totaled $522,000, $480,000 and $383,000 in 1999, 1998
and 1997, respectively.
Property, Plant and Equipment, Net - Property, plant and equipment is stated at
cost less depreciation. Depreciation is computed generally using straight-line
methods over the estimated useful lives as follows: 20-40 years for buildings,
3-10 years for machinery and equipment, and 3-5 years for vehicles. When
property, plant and equipment is disposed of, the cost and related depreciation
are removed from the accounts and resulting gains and losses are included in
income. Major improvements are capitalized. Repair and maintenance costs are
charged to expense as incurred.
Research and Development Costs - The Company is actively engaged in basic
technology and applied research and development programs which are designed to
develop new and improved products, and product applications. The costs of these
programs as well as ongoing product and process improvement, engineering and
support costs are charged to expense as incurred.
Deferred Income - Revenue from service contracts is recognized in earnings
ratably over the period of the service agreement.
Deferred Income Taxes - Deferred tax assets or liabilities are established for
temporary differences between financial and tax reporting bases and are
subsequently adjusted to reflect changes in tax rates expected to be in effect
when the temporary differences reverse.
Stock Options - The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which establishes financial accounting and
C-19
<PAGE> 132
reporting standards for stock-based compensation, including employee stock
purchase plans and stock option plans. As allowed by SFAS No. 123, the Company
continues to measure compensation expense under the provisions of APB No. 25,
"Accounting for Stock Issued to Employees."
2. FINANCIAL INSTRUMENTS
Foreign Currency Risk - The Company has a term note denominated in German marks
for $1,058,000 maturing in fiscal 2000. To mitigate the effect of foreign
currency movements, the Company has investments denominated in German marks also
maturing in fiscal 2000 which management intends to utilize to extinguish this
debt.
Interest Rate Swap - The Company has entered into an interest rate swap whereby
a variable rate, based on IBOR (Interstate Bank Offered Rate) plus 1.65% on the
Company's term note denominated in German marks, was swapped for a fixed
interest rate.
Concentration of Credit Risk - Financial instruments, which potentially subject
the Company to concentrations of credit risk, consist principally of temporary
cash investments and trade receivables. The Company places overnight cash
investments with major financial institutions. On June 30, 1999 and 1998, the
Company purchased $1,515,000 and $997,000, respectively, of Eurodollar
investments under agreements to resell on July 1, 1999 and 1998, respectively.
Due to the short term nature of the agreements, the Company did not take
possession of the securities which were, instead, held by a custodian.
The Company sells instruments on open account terms. Sales are not concentrated
geographically and no single customer accounts for more than ten percent of
sales. Management considers the risk of significant loss related to trade
receivables at June 30, 1999 and 1998 to be minimal.
3. INVESTMENTS
The following table summarizes the amortized cost, fair market value and
carrying value of the Company's investments at June 30, 1999 and 1998. Proceeds
from sales of available-for-sale securities were $0 and $3,100,000 in 1999 and
1998, respectively. There were no realized gains or losses in 1999 or 1998 in
any security classification.
<TABLE>
<CAPTION>
In thousands
1999 Amortized Cost Market Value Carrying Value
-------------- ------------ --------------
<S> <C> <C> <C>
Short-term available-for-sale $3,200 $3,200 $3,200
Short-term held-to-maturity 3,062 3,086 3,062
Long-term held-to-maturity 113 113 113
------ ------ ------
$6,375 $6,399 $6,375
====== ====== ======
1998 Amortized Cost Market Value Carrying Value
-------------- ------------ --------------
Short-term held-to-maturity $3,200 $3,200 $3,200
Long-term held-to-maturity (see Note 6) 3,117 3,165 3,117
------ ------ ------
$6,317 $6,365 $6,317
====== ====== ======
</TABLE>
4. INVENTORIES
Inventories at current cost are as follows at June 30:
<TABLE>
<CAPTION>
In thousands 1999 1998
------ ------
<S> <C> <C>
Parts and raw materials $3,233 $3,302
Work-in-process and finished goods 2,102 2,373
------ ------
$5,335 $5,675
====== ======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consisted of the following at June 30:
<TABLE>
<CAPTION>
In thousands 1999 1998
------- -------
<S> <C> <C>
Land $ 671 $ 691
Buildings 4,465 4,432
Machinery and equipment 5,841 4,928
Vehicles 463 690
------- -------
11,440 10,741
Less: accumulated depreciation 6,456 5,816
------- -------
$ 4,984 $ 4,925
======= =======
</TABLE>
C-20
<PAGE> 133
6. FINANCING ARRANGEMENTS
The Company maintains unsecured bank lines of credit providing for short term
borrowings of up to $3.6 million at market rates. The Company did not have any
amounts outstanding at June 30, 1999 under these bank lines of credit. The
Company had $83,000 outstanding at June 30, 1998 under these bank lines of
credit. The Company is not subject to commitment fees related to the unused
portion of the lines of credit.
At June 30, 1999, the Company had a foreign denominated mortgage note payable
totaling $68,000 bearing interest at an average rate of 7.4%. Principal payments
are due in equal installments until 2006 with the current portion totaling
approximately $10,000 per year.
At June 30, 1999, the Company had a term note maturing in fiscal 2000 and
denominated in German marks for $1,058,000 carrying a 9.25% fixed interest rate
and requiring a balloon principal payment upon maturity. The note is
collateralized by a long-term held-to-maturity investment.
The carrying amount of this term note approximates its fair value.
7. INCOME TAXES
Pre-tax income and the provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
------- ------ -------
<S> <C> <C> <C>
Pre-tax income (loss):
Domestic $ 2,579 $3,266 $ 2,705
Foreign 395 268 (3)
------- ------ -------
2,974 3,534 2,702
======= ====== =======
Current taxes:
Federal and state 934 845 929
Foreign 93 153 --
------- ------ -------
1,027 998 929
Deferred taxes, federal and state (89) 112 (64)
------- ------ -------
Total taxes $ 938 $1,110 $ 865
======= ====== =======
</TABLE>
The provision includes deferred taxes resulting from temporary differences in
the recognition of income and expense for tax and financial reporting purposes.
The sources of these differences and the tax effect of each are as follows:
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Depreciation $ 17 $ 14 $ 40
Inventories and reserves (108) 185 (139)
Other items, net 2 (87) 35
----- ----- -----
$ (89) $ 112 $ (64)
===== ===== =====
</TABLE>
A reconciliation of the effective income tax rate to the amount computed by
applying the statutory federal income tax rate to income before income taxes
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefit 2.4 2.8 3.0
Foreign income .4 1.7 --
Tax-exempt foreign sales income (2.5) (3.0) (3.0)
Tax-exempt interest and dividends received exclusion (1.8) (2.4) (2.4)
Research and development credits (2.2) (1.6) (1.6)
Other items, net 1.2 (0.1) 2.0
---- ---- ----
Effective income tax rate 31.5% 31.4% 32.0%
==== ==== ====
</TABLE>
C-21
<PAGE> 134
Components of net deferred tax assets and liabilities at June 30 are as follows:
<TABLE>
<CAPTION>
In thousands 1999 1998
----- -----
<S> <C> <C>
Current asset (liability):
Inventories and reserves $ 311 $ 203
Employee compensation and benefits 15 (3)
Other 25 31
----- -----
$ 351 $ 231
===== =====
Noncurrent liability (asset):
Depreciation and difference in asset basis $ (39) $ (19)
Amortization of patents 167 128
Foreign exchange on inter-company notes (1) (10)
Deferred gain on sale/leaseback transaction -- (3)
----- -----
$ 127 $ 96
===== =====
</TABLE>
8. SEGMENT REPORTING
The Company engages in one line of business defined as the development,
manufacture, sale and service of microwave-based instrumentation for testing,
analysis and process control in analytical laboratory and industrial markets.
The Company considers this to be one industry segment for financial reporting
purposes. The Company operates three subsidiaries in Europe primarily for the
distribution of microwave-based instrumentation produced by the parent.
Financial data by geographic area is presented below:
<TABLE>
<CAPTION>
In thousands
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
NET SALES:
U.S. operations:
Unaffiliated customers:
U.S. $ 18,189 $ 17,793 $ 16,165
Europe 2,807 3,311 2,221
Asia 2,591 2,678 3,855
Other 2,908 3,064 2,561
Inter-area transfers 1,844 2,724 2,308
-------- -------- --------
$ 28,339 $ 29,570 $ 27,110
======== ======== ========
European operations:
Unaffiliated customers 5,582 5,516 5,273
Eliminations (1,844) (2,724) (2,308)
-------- -------- --------
Consolidated $ 32,077 $ 32,362 $ 30,075
======== ======== ========
NET INCOME (LOSS):
U.S. operations $ 1,541 $ 2,446 $ 1,776
European operations 286 35 (3)
Eliminations 209 (57) 64
-------- -------- --------
Consolidated $ 2,036 $ 2,424 $ 1,837
======== ======== ========
IDENTIFIABLE ASSETS:
U.S. operations $ 24,634 $ 24,659 $ 25,506
European operations 4,365 4,652 4,967
Eliminations (443) (1,013) (1,259)
-------- -------- --------
Consolidated $ 28,556 $ 28,298 $ 29,214
======== ======== ========
</TABLE>
C-22
<PAGE> 135
9. EMPLOYEE BENEFIT PLANS
The Company has a noncontributory profit-sharing and a 401(k) tax deferred
savings plan covering all employees meeting age and service requirements.
Participants can make pre-tax contributions with the Company matching certain
percentages of employee contributions. In addition to Company matching
contributions under the 401(k) plan, contributions may be made as determined by
the Board of Directors. The Company's policy is to fund amounts accrued. Expense
related to this plan amounted to $497,000, $573,000 and $569,000 for the years
ended June 30, 1999, 1998 and 1997, respectively.
10. NET INCOME PER COMMON SHARE
Basic Earnings Per Share Computation:
The computation of basic earnings per share is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding during the period. Shares issued during the period and shares
repurchased by the Company during the period are weighted for the portion of the
period they were outstanding. Income and share information for the years ended
June 30, 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
In thousands, except per share data 1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net income $2,036 $2,424 $1,837
Less: preferred stock dividends -- -- --
------ ------ ------
Income available to common shareholders $2,036 $2,424 $1,837
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Fraction Fraction Fraction
DATES OUTSTANDING Shares of Period Shares Shares of Period Shares Shares of Period Shares
------ --------- ------ ------ --------- ------ ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shares outstanding, beginning 3,180 3,487 3,551
Shares repurchased during the period (137) 237/365 (89) (402) 77/365 (85) (80) 160/365 (35)
Stock options exercised during the period 3 240/365 2 95 127/365 33 16 320/365 14
----- ------- ------ ---- ------- ----- --- ------- -----
Weighted average shares 3,093 3,435 3,530
----- ------- ------ ---- ------- ----- --- ------- -----
Basic earnings per common share $ .66 $ .71 $ .52
----- ------- ------ ---- ------- ------ --- ------- ------
</TABLE>
Diluted Earnings Per Share Computation:
The computation of diluted earnings per common share is similar to the
computation of basic earnings per common share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the dilutive potential common shares had been issued. Potential
common shares consist of dilutive stock options using the treasury stock method.
Income and share information for the year ended June 30, 1999, 1998 and 1997
follows:
<TABLE>
<CAPTION>
In thousands, except per share data 1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net Income $2,036 $2,424 $1,837
Less: preferred stock dividends -- -- --
------ ------ ------
Income available to common stockholders $2,036 $2,424 $1,837
====== ====== ======
Weighted average shares 3,093 3,435 3,530
Dilutive potential common shares (stock options) 9 34 20
------ ------ ------
Adjusted weighted average shares 3,102 3,469 3,550
====== ====== ======
Diluted earnings per share $ .66 $ .70 $ .52
====== ====== ======
</TABLE>
Options to purchase 272,000, 160,000 and 308,000 shares of common stock at a
weighted average price of $9.54, $10.45 and $9.52 per share were outstanding
during the twelve months ended June 30, 1999, 1998 and 1997 respectively, which
were not included in the computation of diluted earnings per share because the
option exercise prices were greater than the average market price of the common
shares during the periods.
C-23
<PAGE> 136
11. MANAGEMENT INCENTIVE AND STOCK OPTION PLANS
In fiscal 1994, the Company adopted the 1993 Management Equity Plan under which
officers and other key employees may receive stock and cash performance-based
incentive awards. Up to 375,000 shares are authorized under this plan. At June
30, 1999, 96,000 shares were reserved for future grants. No compensation expense
was accrued under the plan in 1999, 1998, and 1997.
Also in fiscal 1994, the Company adopted the 1993 Nonqualified Stock Option Plan
for Non-Employee Directors under which options may be granted to outside
directors. Up to 25,000 shares are authorized under this plan. At June 30, 1999,
3,000 shares were reserved for future grants.
Additional information with respect to the 1993 Management Equity Plan and 1993
Nonqualified Stock Option Plan is as follows:
<TABLE>
<CAPTION>
In thousands Shares
------
<S> <C>
STOCK AWARDS:
1996 awards at $13.00 per share 7
1997 awards --
1998 & 1999 awards --
---
Total stock awards at $13.00 per share 7
OPTIONS TO PURCHASE SHARES:
Outstanding at June 30, 1996
at $11.00 - $13.75 per share 105
---
Granted at $8.25 - $10.69 per share 65
Canceled at $10.69 - $13.00 per share (20)
---
Outstanding at June 30, 1997
at $8.25 - $13.75 per share 150
---
Granted at $9.06 - $11.25 per share 65
Exercised at $10.69 - $11.00 per share (2)
Canceled at $9.06 - $13.00 per share (21)
---
Outstanding at June 30, 1998
at $8.25 - $13.75 192
Granted at $7.50 - $11.38 per share 117
Exercised at $10.69 - $11.00 per share --
Canceled at $9.06 - $13.00 per share (13)
---
Outstanding at June 30, 1999
at $7.50 - $13.75 296
===
Options exercisable at June 30, 1999
at $8.25 - $13.75 110
===
</TABLE>
Effective with the approval of the above plans, the Company's 1986 and 1987
stock option plans, under which options were granted to officers, employees, and
outside directors, were terminated. At June 30, 1999, no shares were reserved
for future grants.
Additional information with respect to the 1986 and 1987 stock option plans is
as follows:
<TABLE>
<CAPTION>
In thousands Shares
------
OPTIONS TO PURCHASE SHARES:
<S> <C>
Outstanding at June 30, 1996
at $6.56 - $13.63 per share 363
---
Exercised at $7.69 - $10.50 per share (16)
Canceled at $8.50 - $10.50 per share (47)
---
Outstanding at June 30, 1997
at $6.56 - $13.63 per share 300
---
Exercised at $6.56 - $10.50 per share (93)
Canceled at $7.75 - $11.25 per share (24)
---
Outstanding at June 30, 1998 at $7.75 - $13.63 per share 183
---
Exercised at $7.75 - $7.88 per share (3)
Canceled at $8.50 - $13.62 per share (44)
---
Outstanding at June 30, 1999
at $8.00 - $10.50 per share 136
===
Options exercisable at June 30, 1999
at $8.00 - $10.50 136
===
</TABLE>
Options granted under all stock option plans are exercisable at the market value
of the shares at the date of grant. The options are exercisable over a period
not to exceed ten years. Tax benefits arising from disqualifying dispositions
are recognized at the time of disposition, are credited to additional paid-in
capital and recorded as noncash activity on the statement of cash flows.
C-24
<PAGE> 137
Pro Forma Information - The Company continues to apply APB No. 25 in accounting
for its stock-based compensation plans. Accordingly, no compensation cost has
been recognized in the accompanying consolidated statements of operations for
its stock option plans. Had compensation cost for the Company's stock-based
compensation plans been determined in accordance with the fair value method
prescribed in SFAS No. 123, the Company's net income and earnings per share
would have changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net income as reported $ 2,036 $ 2,424 $ 1,837
Net income pro forma 1,843 2,291 1,751
Earnings per share
Basic as reported $ .66 $ .71 $ .52
Basic pro forma .60 .67 .50
Diluted as reported $ .66 $ .70 $ .52
Diluted pro forma .59 .66 .49
</TABLE>
The above pro forma amounts include compensation expense for options granted
since July 1, 1996, and may not be representative of that to be expected in
future years. The pro forma amounts assume that the fair value assigned to the
options were amortized using the straight-line method over the vesting period of
the options, which is one to four years.
The fair value of each option granted under the stock option plans is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions used for grants in 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 5.1% 5.8% 6.5%
Expected life 6 years 6 years 6 years
Expected volatility 41% 40% 30%
</TABLE>
A dividend yield of zero was used for each year. These assumptions resulted in
weighted-average values as of the grant dates of $4.71, $5.26 and $4.52 per
share for stock options granted in 1999, 1998 and 1997 respectively.
12. QUARTERLY INFORMATION (UNAUDITED)
Selected quarterly results of operations and quarterly stock prices for fiscal
1999 and 1998 are summarized in the table below. The stock prices represent the
high and low sales prices for CEM common shares as reported on the Nasdaq Stock
Market.
No cash dividends were declared during the two fiscal years ended June 30, 1999.
<TABLE>
<CAPTION>
In thousands, except per share data Q-1 Q-2 Q-3 Q-4 Year
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
1999
Net sales $ 7,152 $ 8,492 $ 7,537 $ 8,896 $ 32,077
Gross profit 3,643 4,429 4,011 4,884 16,967
Net income 283 702 327 724 2,036
Net income per share
Basic .09 .23 .11 .24 .66
Diluted .09 .23 .11 .24 .66
Stock Price:
High $ 13.00 $ 11.50 $ 10.13 $ 9.13 $ 13.00
Low 10.00 9.00 7.88 6.88 6.88
1998
Net sales $ 6,603 $ 8,705 $ 8,012 $ 9,042 $ 32,362
Gross profit 3,542 4,654 4,234 4,902 17,332
Net income 241 725 582 876 2,424
Net income per share
Basic .07 .21 .17 .26 .71
Diluted .07 .21 .17 .26 .70
Stock Price:
High $ 10.75 $ 11.25 $ 11.63 $ 13.75 $ 13.75
Low 7.50 9.00 9.25 8.75 7.50
</TABLE>
C-25
<PAGE> 138
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of CEM Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
CEM Corporation and its subsidiaries at June 30, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1999, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Charlotte, North Carolina
July 21, 1999
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the years ended June 30
In thousands, except per share data 1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Income Statement and Cash Flows
Net sales $32,077 $32,362 $30,075 $31,477 $31,611
Income from operations 2,647 3,049 2,378 4,136 4,479
Net income 2,036 2,424 1,837 2,908 3,179
Net income per share
Basic $ .66 $ .71 $ .52 $ .80 $ .88
Diluted .66 .70 .52 .78 .85
Average shares outstanding
Basic 3,093 3,435 3,530 3,626 3,630
Diluted 3,102 3,469 3,550 3,748 3,735
Net cash provided by operating activities $ 2,850 $ 3,744 $ 4,883 $ 2,020 $ 3,134
<CAPTION>
As of June 30
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance Sheet
Working capital $15,899 $13,636 $16,409 $15,549 $14,047
Total assets 28,556 28,298 29,214 27,584 26,653
Long-term debt 173 1,177 1,229 1,417 1,578
Shareholders' equity $22,095 $21,719 $23,480 $22,351 $20,592
</TABLE>
C-26
<PAGE> 139
CORPORATE INFORMATION
OFFICERS & DIRECTORS
Dr. Michael J. Collins
Director, President and
Chief Executive Officer
John L. Chanon
Director, Area Partner
Tatum CFO Partners LP (CFO Services)
Richard N. Decker
Vice President-Finance
Chief Financial Officer
Secretary and Treasurer
George F. Krall
Director, President and
Chief Executive Officer
Mebane Packaging Group
(Packaging Products)
Ronald A. Norelli
Chairman of the Board
President and Chief Executive Officer
Norelli & Company
(Management Consulting)
CORPORATE ADDRESS
CEM Corporation
3100 Smith Farm Road
P.O. Box 200
Matthews, North Carolina 28106-0200
(704) 821-7015
email: [email protected]
www.cem.com
TRANSFER AGENT
American Stock Transfer & Trust
New York, New York
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Charlotte, North Carolina
GENERAL COUNSEL
Robinson, Bradshaw & Hinson, P.A.
Charlotte, North Carolina
SUBSIDIARIES
CEM (Microwave Technology) Ltd.
Unit 2 Middle Slade
Buckingham Industrial Park
Buckingham MK18 1 WA
United Kingdom
Tel: (44) 1280-822873
Fax: (44) 1280-822342
email: [email protected]
CEM GmbH
Carl-Friedrich-Gauss-Str. 9
47475 Kamp-Linfort
Germany
Tel: (49) 2842-9644-0
Fax: (49) 2842-9644-11
email: [email protected]
www.cem.com.de
CEM S.r.l.
Via Dell'Artigianato, 6/8
24055 Cologno al Serio (Bg)
Italy
Tel: (39) 035-896224
Fax: (39) 035-891661
email: [email protected]
FORM 10-K/INVESTOR CONTACT
The Company's Annual Report on Form 10-K for the year ended June 30, 1999 filed
with the Securities and Exchange Commission is available without charge to
shareholders upon written request. These requests and other investor contacts
should be directed to Richard N. Decker, Secretary, at the corporate address.
ANNUAL MEETING
The annual meeting of shareholders of CEM Corporation will be held at 11:00 am
local time on November 4, 1999 at the corporate offices, 3100 Smith Farm Road,
Matthews, North Carolina. Shareholders of record as of September 8, 1999 will
be entitled to vote at this meeting.
TRADEMARKS
CEM(R), MAC(TM), MAS 7000(TM), Airwave 7000(TM), LabWave 9000(TM), CEM STAR
System 6(R), MARS 5(R), ProFat 2(TM), CustomerCare Plus(R), PrepLink(TM), Clean
STAR(TM), MARS X(TM), and SMART System5(TM) are CEM Corporation trademarks. For
ease of reading, designations of trademarks have sometimes been omitted from
the text of this report.
NASDAQ SYMBOL
The Company's common shares are traded on the Nasdaq Stock Market (National
Market System) under the symbol CEMX.
SHAREHOLDERS OF RECORD
As of September 8, 1999, The Company had approximately 1,550 shareholders of
record and an estimate of the number of individual participants represented by
security position listings.
C-27
<PAGE> 140
APPENDIX D
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
----------- ----------
Commission File Number: 0-15383
CEM CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-1019741
-------------- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
3100 SMITH FARM ROAD, MATTHEWS, NC 28104
(Address of principal executive offices) (Zip Code)
POST OFFICE BOX 200, MATTHEWS, NORTH CAROLINA 28106
----------------------------------------------------
(Mailing address of principal executive offices)
(704) 821-7015
----------------------------------------------------
(Registrant's telephone number, including area code)
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 [ ]
3,043,443 shares of the issuer's $.05 par value common stock, its only class of
common stock, were outstanding as of January 29, 2000.
D-1
<PAGE> 141
PART I. FINANCIAL INFORMATION
ITEM 1. Financial statements
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended December 31, 1999
CEM Corporation
Matthews, North Carolina
The condensed financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1999.
D-2
<PAGE> 142
CEM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31 AND JUNE 30, 1999
<TABLE>
<CAPTION>
(in thousands)
(unaudited)
December 31 June 30
----------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................................... $ 4,561 $ 2,865
Short-term investments ...................................................................... 6,131 6,262
Trade receivables ........................................................................... 6,516 6,634
Inventories ................................................................................. 5,228 5,335
Deferred taxes and other .................................................................... 834 964
-------- --------
Total current assets ..................................................................... 23,270 22,060
LONG-TERM INVESTMENTS .......................................................................... 546 476
PROPERTY, PLANT AND EQUIPMENT, NET ............................................................. 4,722 4,984
OTHER ASSETS ................................................................................... 1,261 1,036
-------- --------
$ 29,799 $ 28,556
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt ...................................... $ 1,038 $ 1,066
Accounts payable and accrued expenses ....................................................... 3,113 2,874
Deferred income ............................................................................. 1,481 1,402
Income taxes payable ........................................................................ 766 819
-------- --------
Total current liabilities ................................................................ 6,398 6,161
LONG-TERM DEBT, NET OF CURRENT MATURITIES ...................................................... 320 173
DEFERRED TAXES ................................................................................. 127 127
SHAREHOLDERS' EQUITY:
Common Stock ................................................................................ 152 152
Retained Earnings ........................................................................... 23,346 22,422
Translation Adjustments ..................................................................... (544) (479)
-------- --------
Total Shareholders' Equity ................................................................ 22,954 22,095
-------- --------
$ 29,799 $ 28,556
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
D-3
<PAGE> 143
CEM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
(in thousands, except per share data)
1999 1998
------- -------
Net sales .................................. $ 9,051 $ 8,492
Cost of goods sold ......................... 4,438 4,063
------- -------
Gross profit ........................... 4,613 4,429
Selling, general and administrative expenses 2,909 2,718
Research and development expenses .......... 805 776
------- -------
Income from operations ................. 899 935
Investment income .......................... 139 107
Other expenses, net ........................ (208) (31)
------- -------
Income before income taxes ............. 830 1,011
Provision for income taxes ................. 261 309
------- -------
Net income ............................. 569 702
Foreign Currency Translation ............... (280) (35)
------- -------
Comprehensive Income ................... $ 289 $ 667
======= =======
Net Income Per Share:
Basic .................................. $ .19 $ .23
======= =======
Diluted ................................ $ .19 $ .23
======= =======
Average Shares Outstanding:
Basic ................................. 3,043 3,089
======= =======
Diluted 3,044 3,104
======= =======
See accompanying notes to condensed consolidated financial statements.
D-4
<PAGE> 144
CEM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
(in thousands, except per share data)
1999 1998
-------- --------
Net sales .................................. $ 16,441 $ 15,643
Cost of goods sold ......................... 7,963 7,572
-------- --------
Gross profit ........................... 8,478 8,071
Selling, general and administrative expenses 5,555 5,311
Research and development expenses .......... 1,546 1,506
-------- --------
Income from operations ................. 1,377 1,254
Investment income .......................... 236 212
Other expenses, net ........................ (237) (41)
-------- --------
Income before income taxes ............. 1,376 1,425
Provision for income taxes ................. 433 441
-------- --------
Net income ............................. 943 984
Foreign Currency Translation ............... (65) 166
-------- --------
Comprehensive Income ................... $ 878 $ 1,150
======== ========
Net Income Per Share:
Basic .................................. $ .31 $ .31
======== ========
Diluted ................................ $ .31 $ .31
======== ========
Average Shares Outstanding:
Basic ................................. 3,044 3,126
======== ========
Diluted ............................... 3,044 3,155
======== ========
See accompanying notes to condensed consolidated financial statements.
D-5
<PAGE> 145
CEM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES ......... $ 2,356 $ 1,186
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of available-for-sale investments ........ 100 --
Purchase of available-for-sale investments .... -- --
Purchase of long-term investment .............. (38) --
Acquisition of intangibles .................... (317) (63)
Capital expenditures, net ..................... (331) (580)
------- -------
Net cash used in investing activities .. (586) (643)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of notes payable ...................... (73) (99)
Proceeds from issuance of common stock ........ -- 21
------- -------
Repurchase of common stock .................... (19) (1,175)
------- -------
Net cash used in financing activities .. (92) (1,253)
------- -------
EFFECTS OF EXCHANGE RATES ON CASH ................. 18 (3)
------- -------
Net increase(decrease) in cash and cash equivalents 1,696 (713)
Cash and cash equivalents at beginning of period .. 2,865 2,963
------- -------
Cash and cash equivalents at end of period ........ $ 4,561 $ 2,250
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
D-6
<PAGE> 146
CEM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of results for the interim periods. The result of operations for
the period ended December 31, 1999 are not necessarily indicative of the results
that may be expected for the year ended June 30, 2000.
The Company engages in one line of business defined as the development,
manufacture, sale and service of microwave-based instrumentation for testing,
analysis and process control in analytical laboratory and industrial markets.
The Company considers this to be one industry segment for financial reporting
purposes.
2. INVENTORIES
The components of inventories at current cost at December 31 and June 30, 1999
are as follows:
(in thousands)
<TABLE>
<CAPTION>
December 31 June 30
------------- ------------
<S> <C> <C>
Parts and raw materials............................ $ 2,900 $ 3,233
Work-in-process and finished goods................. 2,328 2,102
------------- ------------
$ 5,228 $ 5,335
============= ============
</TABLE>
3. NET INCOME PER COMMON SHARE
BASIC EARNINGS PER SHARE COMPUTATION:
The computation of basic earnings per share is computed by dividing income
available to shareholders by the weighted average number of shares outstanding
during the period. Shares issued during the period and shares repurchased by the
Company during the period are weighted for the portion of the period that they
were outstanding. Income and share information for the three months ended
December 31, 1999 follows:
(in thousands, except per share data)
Net income............................................. $ 569
Less: preferred stock dividends........................ --
-------------
Income available to shareholders....................... $ 569
=============
<TABLE>
<CAPTION>
Dates Shares Fraction Weighted
Outstanding Outstanding of Period Average Shares
----------- ----------- --------- --------------
<S> <C> <C> <C>
October 1, 1999................................................... 3,043
Shares repurchased during the period.............................. -- -- --
Stock options exercised during the period......................... -- -- --
--------------
Weighted average shares........................................... 3,043
==============
Basic earnings per share.......................................... $ .19
==============
</TABLE>
D-7
<PAGE> 147
3. NET INCOME PER COMMON SHARE (CONTINUED)
Income and share information for the three months ended December 31, 1998
follows:
(in thousands, except per share data)
Net income.................................................. $ 702
Less: preferred stock dividends............................. --
------------
Income available to shareholders............................ $ 702
============
<TABLE>
<CAPTION>
Dates Shares Fraction Weighted
Outstanding Outstanding of Period Average Shares
----------- ----------- --------- --------------
<S> <C> <C> <C>
October 1, 1998............................................. 3,100
Shares repurchased during the period........................ (14) 74/92 (11)
Stock options exercised during the period................... -- -- --
-----------------
Weighted average shares..................................... 3,089
=================
Basic earnings per share.................................... $ .23
=================
</TABLE>
Income and share information for the six months ended December 31, 1999 follows:
(in thousands, except per share data)
Net income.................................................. $ 943
Less: preferred stock dividends............................. --
----------------
Income available to shareholders............................ $ 943
================
<TABLE>
<CAPTION>
Dates Shares Fraction Weighted
Outstanding Outstanding of Period Average Shares
----------- ----------- --------- --------------
<S> <C> <C> <C>
July 1, 1999................................................. 3,046
Shares repurchased during the period......................... (3) 154/184 (2)
Stock options exercised during the period.................... -- -- --
---------------
Weighted average shares...................................... 3,044
===============
Basic earnings per share..................................... $ .31
===============
</TABLE>
D-8
<PAGE> 148
3. NET INCOME PER COMMON SHARE (CONTINUED)
Income and share information for the six months ended December 31, 1998 follows:
(in thousands, except per share data)
Net income..................................................... $ 984
Less: preferred stock dividends................................ --
-------------
Income available to shareholders............................... $ 984
=============
<TABLE>
<CAPTION>
Dates Shares Fraction Weighted
Outstanding Outstanding of Period Average Shares
----------- ----------- --------- --------------
<S> <C>
July 1, 1998.................................................. 3,180
Shares repurchased during the period.......................... (105) 98/184 (56)
Stock options exercised during the period..................... 3 140/184 2
-----------------
Weighted average shares....................................... 3,126
=================
Basic earnings per share...................................... $ .31
=================
</TABLE>
DILUTED EARNINGS PER SHARE COMPUTATION:
The computation of diluted earnings per share is similar to the computation of
basic earnings per share except that the denominator is increased to include the
number of additional shares that would have been outstanding if the dilutive
potential shares had been issued. Potential shares consist of dilutive stock
options using the treasury stock method.
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
December 31, 1999 December 31, 1999
----------------- ------------------
<S> <C> <C>
Income available to shareholders..................... $ 569 $ 943
Plus: Preferred stock dividends...................... -- --
============== ------------
Income available to shareholders.................... $ 569 $ 943
============== ============
Weighted average shares............................. 3,043 3,044
Dilutive potential shares (stock options)........... 1 --
-------------- ------------
Adjusted weighted average shares.................... 3,044 3,044
============== ============
Diluted earnings per share.......................... $ .19 $ .31
============== ============
</TABLE>
Options to purchase an additional 432,179 and 432,179 shares of common stock at
a weighted average price of $7.85 and $7.37 per share were outstanding during
the three and six months ended December 31, 1999, respectively, which were not
included in the computation of diluted earnings per share because the option
exercise prices were greater than the average market price of the common shares
during the periods.
D-9
<PAGE> 149
3. NET INCOME PER COMMON SHARE (CONTINUED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
December 31, 1998 December 31, 1998
--------------------------- ------------------------
<S> <C> <C>
Income available to shareholders.................... $ 702 $ 984
Plus: Preferred stock dividends..................... -- --
-------------------- ------------------------
Income available to shareholders.................... $ 702 $ 984
==================== ========================
Weighted average shares............................. 3,089 3,126
Dilutive potential shares (stock options)........... 15 29
-------------------- ------------------------
Adjusted weighted average shares.................... 3,104 3,155
==================== ========================
Diluted earnings per share.......................... $ .23 $ .31
==================== ========================
</TABLE>
Options to purchase an additional 282,000 and 145,000 shares of common stock at
a weighted average price of $10.12 and $10.77 per share were outstanding during
the three and six months ended December 31, 1998, respectively, which were not
included in the computation of diluted earnings per share because the option
exercise prices were greater than the average market price of the common shares
during the periods.
4. NEW PRONOUNCEMENTS
There have been no new pronouncements issued which have not already been
implemented by the Company which management believes would have a material
impact on the financial statements.
D-10
<PAGE> 150
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following table sets forth, for the three-month periods indicated, the
percentages which certain components of the condensed consolidated statements of
income bear to net sales and the percentage of change of such components from
the same period of the prior year.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------
12/31/99 12/31/98 % Change
----------------- ----------------- ---------------
<S> <C> <C> <C>
Net sales................................................................... 100.0% 100.0% 6.6%
Cost of goods sold.......................................................... 49.0 47.8 9.2
-------- --------
GROSS PROFIT......................................................... 51.0 52.2 4.2
Selling, general and administrative expenses................................ 32.2 32.0 7.0
Research and development expenses........................................... 8.9 9.2 3.7
-------- --------
INCOME FROM OPERATIONS............................................... 9.9 11.0 (3.9)
Investment income........................................................... 1.5 1.3 29.9
Other expenses, net......................................................... (2.2) (0.4) 571.0
-------- --------
INCOME BEFORE INCOME TAXES........................................... 9.2 11.9 (17.9)
Provision for income taxes.................................................. 2.9 3.6 (15.5)
-------- --------
NET INCOME........................................................... 6.3% 8.3% (18.9)
======== ========
</TABLE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 1999
Net sales for the second quarter of fiscal 2000 increased by 7%, compared with
the second quarter of fiscal 1999, primarily due to increased demand in the
Asian and, to a lesser extent, the U.S. markets. These gains were partially
offset by lagging sales and margins in Europe as a result of a stronger dollar.
Management expects continued softness in the European sales. Foreign sales as a
percent of total sales increased from 47% in the second quarter of fiscal 1999
to 48% in the current year period.
Gross profit margins declined from 52.2% in the second quarter of fiscal 1999 to
51.0% in the second quarter of fiscal 2000, primarily due to product warranty
issues related to new product launches, as well as reduced profit from the
foreign subsidiaries caused by the strengthening of the dollar. Management
expects the margin pressure to continue for the next quarter after which time
warranty expenses should decline to historical levels.
Selling, general and administrative expenses increased 7% compared to the second
quarter of fiscal 1999, primarily due to increases in incentive compensation and
distributor commissions resulting from increased sales. The 3.7% increase in
research and development expense reflects the Company's continued commitment to
new product development. Management expects research and development expenses to
remain between 8% and 10% of net sales for the foreseeable future.
Investment income increased 30.8% for the second quarter of fiscal 2000 as
compared with the prior year period as average cash and investment balances
increased due to a suspension of the stock repurchase program while a Special
Committee of the Board of Directors assessed an offer to acquire the Company and
other strategic alternatives. The expenses associated with this assessment
process caused the other expenses for the quarter to rise from $41,000 to
$237,000 as compared with the second quarter of fiscal 2000.
The Company's effective tax rate was 31.4% for the second quarter of fiscal 2000
which approximates the fiscal 1999 tax rate.
D-11
<PAGE> 151
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
The following table sets forth, for the six-month periods indicated, the
percentages which certain components of the condensed consolidated statements of
income bear to net sales and the percentage of change of such components from
the same period of the prior year.
<TABLE>
<CAPTION>
Six Months Ended
----------------------------------------------------
12/31/99 12/31/98 % Change
----------------- ----------------- ---------------
<S> <C> <C> <C>
Net sales................................................................... 100.0% 100.0% 5.1%
Cost of goods sold.......................................................... 48.4 48.4 5.2
--------- --------
GROSS PROFIT......................................................... 51.6 51.6 5.0
Selling, general and administrative expenses................................ 33.8 34.0 4.6
Research and development expenses........................................... 9.4 9.6 2.7
--------- --------
INCOME FROM OPERATIONS............................................... 8.4 8.0 9.8
Investment income........................................................... 1.4 1.4 11.3
Other expenses, net......................................................... (1.5) (0.3) 478.0
--------- --------
INCOME BEFORE INCOME TAXES........................................... 8.3 9.1 (3.4)
Provision for income taxes.................................................. 2.6 2.8 (1.8)
--------- --------
NET INCOME........................................................... 5.7% 6.3% (4.2)
========= ========
</TABLE>
RESULTS OF OPERATIONS - SIX MONTHS ENDED DECEMBER 31, 1999
The increase in total sales for the first six months of fiscal 2000 compared
with the prior year period was primarily due to increased sales in the U.S. The
percentage increase in U.S. sales was partially offset by slower growth in the
foreign sales as improvements noted in Asia have been softened by declines in
Europe and Latin America. Foreign sales as a percent of total sales decreased to
43% in the first six months of fiscal 2000 from 45% in the same period of the
prior year.
Gross profit margins were flat at 51.6% for the two six month period as gains
obtained in the first quarter of fiscal 2000 were offset by factors described
above for the quarter ended December 31, 1999.
Selling, general and administrative expenses were 4.6% above the six months
ended December 31,1999 compared to the prior year period because of the
favorable impact from a settlement of litigation initiated to establish the
validity of a patent for our microwave digestion system that occurred in the
year earlier period. In addition, the increase in revenue created a
corresponding increase in incentive compensation and distributor commissions,
which was partially offset by improved operating efficiencies. Research and
development expense was consistent with the prior year period.
Investment income and other expense changes as compared with the prior year
period are due to the factors described for the quarter ended December 31, 1999.
The Company's effective tax was 31.5% for the first six months of fiscal 2000
which approximates the fiscal 1999 tax rate.
D-12
<PAGE> 152
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
FINANCIAL CONDITION
In the first half of fiscal 2000, the Company generated cash from operations of
approximately $2.2 million, including $0.9 million in net income. Some
improvements have been made in accounts receivable collections and management of
inventory balances. Management believes that working capital, planned capital
expenditures, and debt servicing can be funded on a current basis with cash on
hand and cash generated from operations.
EURO CURRENCY ISSUES
Effective January 1, 1999, eleven of the fifteen member countries of the
European Union established fixed conversion rates between their existing
currencies and one common currency (the "euro"). The euro trades on currency
exchanges and is used in business transactions. Beginning in January, 2002,
bills and coins denominated in the euro will be issued and existing currencies
will be withdrawn from circulation. The Company's foreign subsidiaries do not
expect to transact a material portion of their business in the euro until fiscal
2001. Also, the Company's foreign subsidiaries are not yet required to prepare
reports to local regulatory agencies using the euro. Management expects that IT
systems used by the Company's foreign subsidiaries will be repaired or replaced
in a timely manner to facilitate business transactions and reporting to local
government agencies. Costs to repair and/or replace IT systems are not expected
to exceed $50,000.
CAUTIONARY STATEMENT
The following cautionary statement identifies important factors that could cause
the Company's actual results to differ materially from those projected in
forward-looking statements made by or on behalf of the Company. Except for
factual statements and historical information contained in this report,
statements contained in the foregoing discussion may be deemed forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements are statements that include projections,
predictions, expectations or beliefs about future events or results or otherwise
are not statements of historical fact. Such statements are often characterized
by the use of qualifying words (and their derivatives) such as "expect,"
"believe," "plan," "project," or other statements concerning opinions or
judgment of the Company and its management about future events. These cautionary
statements are made pursuant to Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, both enacted pursuant to the
Private Securities Litigation Reform Act of 1995.
The industry in which the Company competes, as well as the markets that it
serves, is characterized by cyclical market patterns as a consequence of, among
other things, business cycles, foreign exchange fluctuations, regulatory
changes, government spending levels and general economic conditions. These
factors affect the timing of orders from the Company's customers and cause
substantial variations in sales and profitability from quarter to quarter.
Likewise, supplier-related delays and the timing of the release of orders by the
Company's customers may affect quarter-to-quarter sales and profitability. The
Company's sales may also be adversely affected by direct and indirect
competition from third parties including, but not limited to, legal challenges
to existing patents or pending patent applications.
Demand for the Company's instrumentation is substantially affected by the
enactment, timing, extent and severity of state, federal and foreign laws
governing environmental testing standards as well as product labeling
requirements including foods and pharmaceuticals. The Company has and may
experience fluctuations in sales of such products as well as in demand for
particular product enhancements as a result of actual or perceived changes in
regulatory requirements. Legislation or regulations resulting in the development
or expansion of acceptance standards for specific testing methods has and may
result in periodic delays in sales, especially in the United States. Conversely,
increases in international sales have resulted, and may result in the future,
from less stringent or nonexistent acceptance standards in a given country.
Moreover, the Company's success is dependent on its ability to continue to
develop and engineer high-quality, high-performance products that are
commercially acceptable. Risks associated with new product development include
market acceptance, competition from other products and the Company's ability to
manufacture and market products on an efficient and timely basis at a reasonable
cost and in sufficient volume.
D-13
<PAGE> 153
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Information about the Company's exposure to market risk was
disclosed in its 1999 Annual Report on Form 10-K which was filed
with the Securities and Exchange Commission on September 27, 1999.
There have been no material quantitative changes in market risk
exposures since the date of that filing.
PART II. OTHER INFORMATION
ITEMS 1, 2, and 3 are not applicable and are omitted.
ITEM 4. Submission of Matters to a Vote of Security Holders
The Registrant's Annual Meeting of Shareholders scheduled for
November 4, 1999 was postponed indefinitely, pending a Special
Committee review of Michael J. Collins' offer to purchase all of
the Company's outstanding shares as well as other strategic
alternatives to maximize shareholder value. See ITEM 5 below.
ITEM 5. Other Information
On December 29, 1999 the Company announced that it had entered
into a merger agreement (Exhibit 10.7 hereto) with Michael J.
Collins, the Company's Chief Executive Officer and President,
pursuant to which Mr. Collins would acquire all of the Company's
outstanding shares not owned by him at a price of $11.15 per
share in cash.
A Special Committee of the Board of Directors, which was
appointed to consider the transaction and assess other strategic
alternatives, received the opinion of Brookwood Associates,
Inc., its financial advisor, dated as of December 29, 1999,
that, subject to the assumptions and limitations set forth in
its opinion, the $11.15 per share cash consideration to be
received by the shareholders of the Company (other than Mr.
Collins and his affiliate) pursuant to the merger is fair from a
financial point of view to such shareholders.
The transaction is subject to approval by the Company's
shareholders and to certain other customary conditions. The
Company currently believes that the shareholder vote and the
closing of the transaction (if approved by the shareholders)
could occur early in the Company's fourth fiscal quarter (the
second calendar quarter).
The transaction is not subject to any financing contingency. Mr.
Collins has accepted a commitment from Bank of America
Commercial Finance Corporation to provide the necessary
financing.
The affirmative vote of holders of 66 2/3% of the Company's
outstanding common stock is needed to approve the transaction.
Mr. Collins beneficially owns in excess of 15% of the
outstanding common stock of the Company.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
<S> <C> <C>
3.1 Restated Charter of the Company, as amended.(1)
3.2 Bylaws of the Company.(1)
10.1 * CEM Corporation 1986 Nonqualified Stock Option Plan, as amended, incorporated herein by
reference to the Company's Registration Statement on Form S-8 (File No. 33-53694).
10.2 * CEM Corporation Employee Stock Purchase Plan, as amended, incorporated herein by reference to
the Company's Registration Statement on Form S-8 (File No. 33-80136).
</TABLE>
D-14
<PAGE> 154
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
<S> <C> <C>
10.3 * CEM Corporation 1987 Stock Option Plan, as amended.(1)
10.4 * CEM Corporation 1993 Management Equity Plan, incorporated herein by reference to the
Company's Registration Statement on Form S-8 (File No. 33-75368).
10.5 * CEM Corporation Management Incentive Compensation Plan(2).
10.6 CEM Corporation 1993 Nonqualified Stock Option Plan for Non-Employee Directors,
incorporated herein by reference to the Company's Registration Statement on Form
S-8 (File No. 33-75366).
10.7 Agreement and Plan of Merger dated December 29, 1999 among Michael J. Collins, MJC Acquisition
Corporation and CEM Corporation, incorporated by reference to the Schedule 13D/A
(Amendment No. 2) filed by Michael J. Collins on January 4, 2000, and Exhibit 1 thereto.
27 Financial Data Schedule (filed in electronic format only). This schedule
shall not be deemed "filed" for purposes of Section 11 of the Securities Act
of 1933 or Section 18 of the Securities Exchange Act of 1934 or otherwise be
subject to the liabilities of such sections, nor shall it be deemed a part of
any registration statement to which it relates.
* This exhibit is one of the Company's management contracts and compensatory plans and
arrangements.
(1) Incorporated herein by reference to the Company's Form 10-K for the year ended June 30, 1994.
(2) Incorporated herein by reference to the Company's Form 10-K for the year ended June 30, 1997.
</TABLE>
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed during the quarter ended
December 31, 1999.
D-15
<PAGE> 155
CEM CORPORATION
SIGNATURE
Pursuant to the requirements 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.
Date: February 10, 2000 CEM CORPORATION
BY: \s\ Richard N. Decker
------------------------------
Richard N. Decker
Secretary, Treasurer and
Chief Financial Officer
D-16
<PAGE> 156
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
EXHIBITS
ITEM 6(a)
Quarterly Report on Form 10-Q
For the quarter ended December 31, 1999 Commission File Number: 0-15383
CEM CORPORATION
EXHIBIT INDEX
Exhibit Number: Exhibit Description
- --------------- -------------------
27 Financial Data Schedule (filed in electronic format only)
D-17
<PAGE> 157
[CEM CORPORATION LOGO]
SPECIAL MEETING OF SHAREHOLDERS
_________ __, 2000
TABLE OF CONTENTS
Page Page
<PAGE> 158
<TABLE>
<S> <C>
LETTER TO SHAREHOLDERS The Merger
NOTICE OF SPECIAL MEETING Combination of Corporations
PROXY STATEMENT Conversion of Securities
Summary Term Sheet Cash-out of CEM Stock Options
Available Information Transfer of Shares
Forward-looking Information Conditions
Who Can Help Answer Your Questions Representations and Warranties
The Special Meeting Covenants
Time, Place and Date; Proxy Solicitation Nonsolicitation Covenant
Record Date and Quorum Requirement Indemnification and Insurance
Required Vote; Voting Procedures Expenses
Voting and Revocation of Proxies Termination; Amendment and Waiver
Effective Time Termination Fee
Payment of Merger Consideration and Regulatory Approvals/Third Party Consents
Surrender of Stock Certificates Accounting Treatment
Rights of Objecting Shareholders Fees and Expenses
Other Matters to be Considered at the Federal Income Tax Consequences
Special Meeting Information Regarding CEM
Special Factors Incorporation of Documents by Reference
Background of the Merger Selected Consolidated Financial Data
Recommendation of the Special Committee Directors and Executive Officers
and the Board of Directors Stock Ownership
Opinion of CEM's Financial Advisor Recent Stock Purchases
Projections Market Prices of Common Stock and
Valuation Analysis of Mr. Collins's Dividends
Financial Advisor Information Regarding MJC Acquisition and Mr.
Conflicts of Interest Collins
Purpose and Reasons of Mr. Collins for the Independent Auditors
Merger Shareholder Proposals
Position of Mr. Collins as to the Fairness Other Matters
of the Merger APPENDIX A -- Agreement and Plan of Merger
Conduct of CEM's Business After the Merger APPENDIX B -- Opinion of Brookwood
Effects of the Merger Associates, Inc.
Financing of the Merger APPENDIX C - Annual Report on Form 10-K for
Cash Financing of the Merger the fiscal year ended June 30, 1999*
Financing Conditions APPENDIX D - Quarterly Report on Form 10-Q
Security for the Financing for the period ended December 31, 1999*
Representations, Warranties and Covenants * Incorporated by reference. In
Terms of Revolver addition we have incorporated by reference our
Term Loan A Quarterly Report on Form 10-Q for the period
Term Loan B ended September 30, 1999
Indemnity
Payment
</TABLE>
<PAGE> 159
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR
THE SPECIAL MEETING TO BE HELD ______________ __, 2000
The undersigned hereby appoints Ronald A. Norelli, John L. Chanon and
Richard N. Decker, and each or either of them, proxies, with full power of
substitution, with the powers the undersigned would possess if personally
present, to vote, as designated on the reverse side, all shares of the $.05 par
value Common Stock of the undersigned in CEM Corporation ("CEM") at the Special
Meeting of Shareholders to beheld on ________ __, 2000, and at any adjournment
thereof. THIS PROXY WILL BE VOTED AS SPECIFIED HEREIN AND, UNLESS OTHERWISE
DIRECTED, WILL BE VOTED "FOR" THE MERGER DESCRIBED BELOW. THE BOARD OF DIRECTORS
RECOMMENDS VOTING "FOR" THE MERGER.
1. PROPOSAL TO ADOPT AND APPROVE PLAN OF MERGER included in an
Agreement and Plan of Merger, dated as of December 29, 1999, under which MJC
Acquisition Corporation will merge with and into CEM and under which each CEM
shareholder (other than MJC Acquisition Corporation) will become entitled to
receive $11.15 in cash for each outstanding share of CEM common stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In their discretion, the proxies are authorized to vote upon
such other business as may properly come before the meeting, except that if this
proxy is marked AGAINST Proposal 1 this proxy will be voted AGAINST any proposal
to adjourn the Special Meeting of Shareholders to permit CEM more time to
solicit proxies.
Receipt of Notice of Special Meeting of Shareholders and accompanying
Proxy Statement is hereby acknowledged.
PLEASE DATE AND SIGN EXACTLY AS PRINTED BELOW AND RETURN PROMPTLY IN
THE ENCLOSED POSTAGE PAID ENVELOPE.
A.
B. Dated: _____________________, 2000.
----------------------------
----------------------------
----------------------------
(When signing as attorney,
executor, administrator,
trustee, guardian, etc.,
give title as such. If joint
account, each joint owner
should sign.)
