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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
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<CAPTION>
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
<S> <C>
Preliminary Proxy Statement
Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
X Definitive Proxy Statement
Definitive Additional Materials
Soliciting Material Pursuant to Section 14a-11(c) or Section 14a-12
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LOWRANCE ELECTRONICS, INC.
--------------------------
(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
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<CAPTION>
____________________________________________________________________________________________________________________________________
[_] No fee required.
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[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11:
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(1) Title of each class of securities to which transaction applies:
Common Stock, par value $0.10 per share, of Lowrance Electronics, Inc. ("Lowrance Common Stock")
-------------------------------------------------------------------------------------------------------------------------
(2) Aggregate number of securities to which the transaction applies:
An aggregate of 3,768,796 shares of Lowrance Common Stock
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(3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it was determined):
The per unit price consists of 3,768,796 shares of Lowrance Common Stock at $7.30 per share for a total transaction
value of $27,512,210. One-fiftieth of one percent of such underlying value, the amount of the filing fee, is $5502.44
-------------------------------------------------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$27,512,210
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(5) Total fee paid:
$ 5502.44
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X (6) Fee paid previously with preliminary materials
Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid: $5502.44
(2) Form, Schedule or Registration Statement no.: Schedule 14A
(3) Filing Party: Lowrance Electronics, Inc.
(4) Date Filed: June 30, 1999, and as amended September 1, 1999
<PAGE>
LOWRANCE ELECTRONICS, INC.
PROXY STATEMENT FOR THE SPECIAL MEETING OF STOCKHOLDERS OF
LOWRANCE ELECTRONICS, INC.
At the Lowrance special meeting, you will be asked to (1) approve and adopt
the merger agreement among Lowrance Electronics, Inc., Orbital Sciences
Corporation and Orbital Merger Sub, Inc., a wholly owned subsidiary of Orbital
and (2) approve and ratify the December 9, 1997 issuance of 341,338 shares of
restricted Lowrance common stock issued in a private placement to the Lowrance
directors.
The Lowrance board is providing you with this document, including the
attached appendices, and soliciting your proxy to approve and adopt the merger
agreement that will result in:
. Orbital Merger Sub, Inc., a wholly-owned subsidiary of Orbital, merging
with and into Lowrance, with Lowrance as the surviving corporation; and
. each outstanding share of Lowrance common stock held immediately prior
to the effective time of the merger being converted into the right to
receive $7.30 in cash payable to the holders thereof, without interest,
other than shares held by stockholders who are entitled to and who have
perfected their appraisal rights, shares held in Lowrance's treasury or
by any of Lowrance's subsidiaries or shares held by Orbital or any
subsidiary of Orbital.
The board of directors of Lowrance unanimously recommends that
stockholders vote "FOR" approval and adoption of the merger agreement and "FOR"
approval and ratification of the December 9, 1997 issuance in a private
placement of the restricted Lowrance common stock to the Lowrance directors.
YOUR VOTE IS VERY IMPORTANT
The date, time and place of the meeting is as follows:
October 12, 1999
10:00 a.m., local time
Directors Room, Adam's Mark Hotel
100 East Second Street
Tulsa, Oklahoma 74103
/s/ Darrell J. Lowrance
Darrell J. Lowrance,
Chairman, President and
Chief Executive Officer
All stockholders of Lowrance are cordially invited to attend the Lowrance
special meeting in person. However, to ensure your representation at the
Lowrance special meeting, you are urged to complete, sign and return the
enclosed proxy card as promptly as possible in the enclosed postage-prepaid
envelope.
This document provides you with detailed information about the merger
agreement and the proposed merger. We encourage you to read this entire
document carefully.
Proxy statement dated September 11, 1999 and
first mailed to stockholders on September 11, 1999.
<PAGE>
LOWRANCE ELECTRONICS, INC.
12000 East Skelly Drive
Tulsa, Oklahoma 74128
- --------------------------------------------------------------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON October 12, 1999
____________
To the stockholders of Lowrance Electronics, Inc.:
A special meeting of stockholders of Lowrance Electronics, Inc., a Delaware
corporation, will be held on October 12, 1999, at 10:00 a.m., local time, in the
Directors Room, Adam's Mark Hotel, 100 East Second Street, Tulsa, Oklahoma
74103, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the agreement and
plan of merger, effective as of March 11, 1999, by and among Orbital
Sciences Corporation, Orbital Merger Sub, Inc., a wholly owned subsidiary
of Orbital, and Lowrance, that will result in:
. Orbital Merger Sub, Inc., a wholly owned subsidiary of Orbital, merging
with and into Lowrance, with Lowrance being the surviving corporation;
and
. each outstanding share of Lowrance common stock being converted into the
right to receive $7.30 in cash payable to the holders thereof, without
interest, other than shares held by stockholders who are entitled to and
who have perfected their appraisal rights, shares held in Lowrance's
treasury or by any of Lowrance's subsidiaries or shares held by Orbital
or any subsidiary of Orbital.
2. To consider and vote upon a proposal to approve and ratify the December 9,
1997 issuance of 341,338 shares of restricted Lowrance common stock, for a
cash purchase price of $3.84 per share, in a private placement to the
Lowrance directors.
3. To transact such other business as may properly come before the Lowrance
special meeting or any adjournment or postponement of the Lowrance special
meeting, including without limitation, potential adjournments or
postponements of the Lowrance special meeting for the purpose of soliciting
additional proxies in order to approve and adopt the merger agreement.
We have described the proposals in more detail in the accompanying proxy
statement, which you should read in its entirety before voting. A copy of the
merger agreement is attached as Appendix A to the accompanying proxy statement.
The Lowrance board has fixed the close of business on August 19, 1999 as
the record date for determining the stockholders entitled to notice of, and to
vote at, the Lowrance special meeting or any adjournment or postponement of the
special meeting. Only holders of record of Lowrance common stock at the close
of business on the record date may vote at the Lowrance special meeting.
The affirmative vote of at least 63 1/3% of the outstanding shares of
Lowrance common stock is required to approve and adopt the merger agreement.
The affirmative vote of a majority of the shares present in person or by proxy
at the special meeting and entitled to vote other than shares held by the
Lowrance directors which shall not be counted in the vote is required to approve
and ratify the December 9, 1997 issuance of the restricted Lowrance common stock
to the Lowrance directors.
<PAGE>
You may revoke your proxy in the manner described in the accompanying proxy
statement at any time before it is voted at the Lowrance special meeting.
Executed proxies with no instructions indicated thereon will be voted "FOR"
approval and adoption of the merger agreement and "FOR" approval and
ratification of the December 9, 1997 issuance of restricted Lowrance common
stock to the Lowrance directors. If you fail to return a properly executed
proxy card or vote in person at the Lowrance special meeting, the effect will be
a vote against the merger agreement.
By Order of the Board of Directors,
/s/ Robert F. Biolchini
Tulsa, Oklahoma Robert F. Biolchini
September 11, 1999 Secretary
Your vote is important. Whether or not you plan to attend the Lowrance special
meeting, please complete, sign and date the enclosed proxy card as promptly as
possible in the enclosed postage paid envelope.
Do not send your Lowrance common stock certificates to Lowrance with your proxy
cards. After the merger is consummated you will receive a letter containing
instructions for the surrender of your Lowrance common stock certificates in
exchange for $7.30 in cash per share.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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FREQUENTLY ASKED QUESTIONS AND ANSWERS ABOUT THE MERGER........................................ 1
SUMMARY......................................................................................... 4
FORWARD-LOOKING STATEMENTS...................................................................... 12
WHERE YOU CAN FIND MORE INFORMATION............................................................. 12
THE LOWRANCE SPECIAL MEETING.................................................................... 13
Time, Place and Date....................................................................... 13
Purpose of the Special Meeting............................................................. 13
Record Date, Outstanding Shares and Voting................................................. 13
Quorum..................................................................................... 13
Vote Required.............................................................................. 13
Voting of Proxies.......................................................................... 14
Revocation of Proxies...................................................................... 14
Solicitation of Proxies.................................................................... 14
THE MERGER...................................................................................... 15
Background of the Merger................................................................... 15
Lowrance's Reasons for the Merger.......................................................... 16
Recommendation of the Board of Directors of Lowrance....................................... 17
Opinion of Lowrance's Financial Advisor.................................................... 17
Merger Consideration....................................................................... 18
Interests of Directors and Executive Officers in the Merger................................ 21
Treatment of Lowrance Series "A" Preferred Stock in the Merger Agreement................... 22
Anticipated Accounting Treatment of the Merger............................................. 22
Regulatory Approvals....................................................................... 22
Material United States Federal Income Tax Considerations................................... 23
Delisting and Deregistration of Lowrance Common Stock...................................... 24
THE MERGER AGREEMENT............................................................................ 25
The Merger................................................................................. 25
Treatment of Lowrance Securities........................................................... 25
Procedures for Exchange of Stock Certificates.............................................. 25
Appraisal Rights........................................................................... 26
Representations and Warranties............................................................. 26
Covenants Pending the Merger............................................................... 27
Conditions to the Merger................................................................... 29
Termination................................................................................ 30
Stockholder Support Agreement.............................................................. 31
Appraisal Rights........................................................................... 32
LOWRANCE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.. 34
Overview................................................................................... 34
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i
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<TABLE>
<S> <C>
Results of Operations...................................................................... 36
Liquidity and Capital Resources............................................................ 39
Effects of Inflation....................................................................... 41
Recently-Issued Accounting Principles...................................................... 41
Year 2000 Compliance....................................................................... 42
Quantitative and Qualitative Disclosure About Market Risk.................................. 42
Outlook.................................................................................... 42
INFORMATION CONCERNING LOWRANCE................................................................. 44
General.................................................................................... 44
Products................................................................................... 44
Distribution............................................................................... 46
Inventories and Backlog.................................................................... 46
Advertising and Promotion.................................................................. 47
Competition................................................................................ 47
Product Research and Development........................................................... 49
Employees.................................................................................. 50
Manufacturing and Suppliers................................................................ 50
Seasonality................................................................................ 51
Product Warranty and Support Services...................................................... 51
Patents and Trademarks..................................................................... 51
Properties................................................................................. 52
Legal Proceedings.......................................................................... 52
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT OF LOWRANCE......................... 53
INFORMATION CONCERNING ORBITAL.................................................................. 54
DECEMBER 9, 1997 ISSUANCE OF LOWRANCE COMMON STOCK
TO THE LOWRANCE DIRECTORS....................................................................... 55
Background................................................................................. 55
Recommendation of the Board of Directors of Lowrance....................................... 56
STOCKHOLDER PROPOSALS........................................................................... 57
INDEPENDENT PUBLIC ACCOUNTANTS.................................................................. 57
APPENDICES
A. AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
B. OPINION OF AMERICAN APPRAISAL ASSOCIATES
C. APPRAISAL RIGHTS STATUTE
D. LETTER OF CONSENT OF ARTHUR ANDERSEN LLP
</TABLE>
ii
<PAGE>
FREQUENTLY ASKED QUESTIONS AND ANSWERS
ABOUT THE MERGER
<TABLE>
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Q: Why is Lowrance proposing the merger? A: The Lowrance board believes the merger of Orbital
Merger Sub, Inc., a wholly owned subsidiary of Orbital,
with and into Lowrance, with Lowrance as the surviving
corporation, is in the best interests of Lowrance and
its stockholders and that the merger consideration is
fair from a financial point of view to Lowrance
stockholders. See page 16.
Q: What will I receive in the merger? A: Each share of Lowrance common stock you own will be
converted into the right to receive $7.30 in cash
payable to the holders thereof, without interest, other
than shares held by stockholders who are entitled to and
who have perfected their appraisal rights, shares held
in Lowrance's treasury or by any of Lowrance's
subsidiaries or shares held by Orbital or any subsidiary
of Orbital.
Q: When do you expect the merger to be completed? A: We are working toward completing the merger as
quickly as possible. We expect to complete the merger
by October 31, 1999. See page 25.
Q: What are the tax consequences of the merger? A: The receipt of the merger consideration ($7.30 in
cash per share) by holders of common stock pursuant to
the merger will be a taxable transaction for federal
income tax purposes.
Tax considerations to you resulting from your own
individual circumstances and the merger may be complex.
You should carefully read the discussion of the material
U.S. federal income tax consequences of the merger on
page 23 of this document and consult with your own
advisors as to the federal, state and local tax
consequences.
Q: What is the Lowrance board of directors' A: The Lowrance board unanimously approved the merger
recommendation on the merger? and unanimously recommends that you vote "FOR" the
proposal to approve the merger agreement. See page 17.
Q: What do I need to do now? A: This document contains important information
regarding the proposed merger, as well as information
about Orbital and Lowrance. It also contains important
information about what the management and the board of
Lowrance considered in evaluating the proposed merger.
We urge you to read this document carefully, including
the appendices, and to consider how the merger affects
you as a stockholder. You also may want to review the
documents referenced under "Where You Can Find More
Information" on page 12. For information about where to
call to get answers to
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
your questions, see "Who Can Help Answer Your
Questions?" on page 3.
Q: How do I vote? A: If you are a stockholder of Lowrance, you should
simply indicate on your proxy card how you want to vote,
then sign and mail your proxy card in the enclosed
return envelope as soon as possible so that your shares
may be represented at the Lowrance special meeting. If
you sign and send in your proxy but do not indicate how
you want to vote, your proxy will be counted as a vote
for the merger. You may withdraw your proxy at any time
prior to its use at the Lowrance special meeting by
following the directions on page 14.
Q: If my shares are held in "street name" by my A: No. Your broker will not vote your shares for you
broker, will my broker vote my shares for me? unless you provide instructions on how to vote. It is
important therefore that you follow the directions
provided by your broker regarding how to instruct your
broker to vote your shares.
Q: May I change my vote after I have mailed my signed A: Yes. You may change your vote at any time before
proxy card? your proxy is voted at the Lowrance special meeting.
You may do this in one of three ways.
. You may send the Lowrance Secretary a written notice
stating that you would like to revoke your proxy;
. You may complete and submit a new proxy card;
. You may attend the Lowrance special meeting and vote
in person if you tell the Lowrance Secretary that you
want to cancel your proxy and vote in person. Simply
attending the Lowrance special meeting, however, will
not revoke your proxy.
If you choose either of the first two options above, you
must submit your notice of revocation or your new proxy
card to Lowrance at the address on page 14.
If you have instructed a broker to vote your shares, you
must follow directions received from your broker to
change your vote or to vote in person at the Lowrance
special meeting.
Q: Should I send in my stock certificates now? A: No. After the merger is complete, BankBoston, N.A.,
the payment agent appointed by Orbital, will send you
written instructions for exchanging your stock
certificates. See page 25.
Q: What other matters will be voted on at the A: In addition to the merger agreement, Lowrance
Lowrance special meeting? stockholders will be asked to approve and ratify the
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2
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December 9, 1997 issuance of 341,338 shares of
restricted Lowrance common stock, for a cash purchase
price of $3.84 per share, in a private placement to the
Lowrance directors.
Q: What is the Lowrance board's recommendation on the A: The Lowrance board unanimously recommends that you
December 9, 1997 issuance of restricted Lowrance vote "FOR" the proposal to approve and ratify the
common stock? December 9, 1997 issuance of restricted Lowrance common
stock to the Lowrance directors in a private placement.
See page 56.
Q: Who can help answer my questions? A: If you have more questions about the proposals, you
should contact:
Lowrance Electronics, Inc.
12000 East Skelly Drive
Tulsa, Oklahoma 74128
Attention: Mark Wilmoth
Telephone Number: (918) 437-6881
</TABLE>
3
<PAGE>
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
proposals for the special meeting fully and for a more complete description of
the legal terms of the merger you should read carefully this entire document and
the documents to which we have referred you. See "Where You Can Find More
Information" on page 12. We have included page references parenthetically to
direct you to a more complete description of the topics in this summary.
The Companies
Orbital Sciences Corporation (page 54)
21700 Atlantic Boulevard
Dulles, Virginia 20166
(703) 406-5000
Orbital, together with its subsidiaries, is a leading space and information
systems company that designs, manufactures, operates and markets a broad range
of space-related products and services. Orbital's products and services are
grouped into three general business sectors: space and ground infrastructure
systems, satellite access products and satellite services. Space and ground
infrastructure systems include launch vehicles, satellites and related space
systems, electronics and sensor systems, transportation management systems and
satellite ground systems and software. Satellite access products include
satellite-based navigation, positioning and communications products. Satellite
services include satellite-based two-way mobile data communications services,
satellite-based remote imaging services, and new initiatives relating to
satellite-based automotive information products and satellite-based voice
communications services.
Lowrance Electronics, Inc. (page 44)
12000 East Skelly Drive
Tulsa, Oklahoma 74128
(918) 437-6881
Lowrance designs, manufactures and markets sonar, global positioning system
and aviation instruments. Lowrance markets the products under three of
Lowrance's trade names, "Lowrance," "Eagle" and "Sea." Lowrance sells its
products throughout the U.S. and in 65 countries worldwide, through wholesalers,
original equipment manufacturers and a wide variety of retail outlets including
boat dealers, marine electronics dealers, aviation electronics dealers, mass
merchandisers, mail-order catalogs and sporting goods stores.
Additional Information Regarding the Lowrance Special Meeting
(page 13)
Time, Date, Place and Purpose
Lowrance will hold a special meeting of stockholders on October 12, 1999 at
10:00 a.m. local time in the Directors Room of the Adam's Mark Hotel, 100 East
Second Street, Tulsa, Oklahoma, 74103.
At the Lowrance special meeting, the holders of shares of Lowrance common
stock will vote on:
. the approval and adoption of the merger agreement;
. the approval and ratification of the December 9, 1997 issuance of
341,338 shares of restricted Lowrance common stock to the Lowrance
directors; and
. the transaction of such other business as may properly come before the
Lowrance special meeting.
4
<PAGE>
Record Date and Voting Power
You are entitled to vote at the Lowrance special meeting if you owned
shares of Lowrance common stock as of the close of business on the record date
of August 19, 1999. On the record date, there were 3,768,796 shares of Lowrance
common stock outstanding held by approximately 103 record holders.
You are entitled to one vote for each share of Lowrance common stock you
own on the record date. The holders of a majority of the shares entitled to vote
at the Lowrance special meeting must be present in person or by proxy in order
to constitute a quorum for all matters to come before the special meeting.
Vote Required
The affirmative vote of Lowrance stockholders required to approve and adopt
the merger agreement and to consummate the merger is 63 1/3% of the outstanding
shares of Lowrance common stock. The affirmative vote of a majority of the
shares present in person or by proxy at the special meeting and entitled to
vote, other than the shares of the Lowrance directors which will not be counted
in the vote, is required to approve and ratify the December 9, 1997 issuance of
the restricted Lowrance common stock to the Lowrance directors.
Darrell J. Lowrance, Chairman, President and Chief Executive Officer of
Lowrance, who beneficially owns approximately 50.6% of the outstanding Lowrance
common stock as of the record date, has already agreed in a stockholder support
agreement to vote his shares in favor of the proposal to approve and adopt the
merger agreement. For a description of this stockholder support agreement, see
page 31.
Share Ownership of Management
As of the record date, the directors and executive officers of Lowrance and
their affiliates have the right to vote an aggregate of 2,169,095 shares of
Lowrance common stock at the special meeting, representing approximately 57.6%
of the shares of Lowrance common stock outstanding on the record date. All such
directors, executive officers and affiliates have indicated that they intend to
vote all shares held by them in favor of the approval and adoption of the merger
agreement.
Some directors and executive officers of Lowrance have interests in the
merger that are different from, or in addition to, your interests as a
stockholder. These interests may relate to or arise from, among other things,
potential change in control payments and employment agreements which are
discussed in more detail in "The Merger--Interests of Directors and Executive
Officers in the Merger" on page 21.
Proxies
Lowrance will bear its own cost of solicitation of proxies. Lowrance will
reimburse brokerage houses, fiduciaries, nominees and others for their out-of-
pocket expenses in forwarding proxy materials to beneficial owners of Lowrance
common stock held in their names.
Additional Information Regarding the Merger Agreement
(page 25)
The merger agreement is attached as Appendix A to this document. We
encourage you to read the merger agreement as it is the legal document that
governs the merger.
What Holders of Lowrance Common Stock Will Receive
Each share of your Lowrance common stock held immediately prior to the
effective time of the merger will be exchanged for the right to receive $7.30 in
cash payable to the holders thereof, without interest, other than shares held by
stockholders who are entitled to and who have perfected their appraisal rights,
shares held in Lowrance's treasury or by any of Lowrance's subsidiaries or
shares held by Orbital or any subsidiary of Orbital.
5
<PAGE>
Lowrance stockholders should not send in their stock certificates until
instructed to do so after the merger is completed.
Effective Time of the Merger
The merger will become effective when a certificate of merger is filed with
the Delaware Secretary of State or at such later time as is specified in the
certificate of merger.
Conditions to the Merger Agreement
The completion of the merger depends upon the companies meeting a number of
conditions, including the following:
. the approval of the Lowrance stockholders;
. the receipt of all authorizations, consents, orders and approvals of any
required governmental authority;
. the absence of legal restraints or prohibitions preventing the
consummation of the merger; and
. the material correctness of the representations and warranties of the
other parties contained in the merger agreement.
Each condition to the merger may be waived by the company entitled to
assert the condition.
No Solicitation by Lowrance
Lowrance has agreed that it will not solicit or engage in any discussion
regarding a business combination of Lowrance with any other party.
Termination of the Merger Agreement
The companies may, by mutual written consent, agree to terminate the merger
agreement without completing the merger, and any of the companies may terminate
the merger agreement if any of the following occurs:
1. the merger is not completed by December 23, 1999;
2. a court or other governmental authority permanently prohibits the
merger;
3. the approval of the stockholders of Lowrance is not obtained; or
4. the other party breaches or materially fails to comply with any of
its representations or warranties or obligations under the merger
agreement.
Orbital can terminate the merger agreement if any of the following occurs:
1. the Lowrance board:
. withdraws or modifies materially and adversely its
recommendation to the Lowrance stockholders to approve the
merger agreement; or
. recommends another proposal to the Lowrance stockholders;
2. a tender offer or exchange offer that would result in a party
obtaining 50% or more of the Lowrance common stock is commenced
and the Lowrance board recommends that the Lowrance stockholders
tender their shares in such a tender or exchange offer; or
6
<PAGE>
3. Lowrance fails for any reason to call and hold the Lowrance
special meeting by December 23, 1999.
Lowrance can terminate the merger agreement if any of the following occurs:
1. Lowrance receives a superior proposal for the acquisition of
Lowrance and the Lowrance board determines in good faith to accept
the superior proposal in order to act in a manner consistent with
its fiduciary duties to the Lowrance stockholders; or
2. the Orbital board withdraws or materially and adversely modifies
its approval of the merger agreement.
Termination Fees
If Orbital terminates the merger agreement under its option 1 or 2 above or
Lowrance terminates the merger agreement under its option 1 above, the merger
agreement requires that Lowrance pay Orbital $2,600,000 if and only if Lowrance
has entered into an acquisition agreement with respect to a proposal with a
third party or the Lowrance board has withdrawn, modified or changed its
approval or recommendation of the merger agreement in a manner adverse to
Orbital.
If the Orbital board withdraws or materially and adversely modifies its
approval of the merger agreement, the merger agreement requires that Orbital pay
Lowrance $2,600,000.
Opinion of Financial Advisor
In deciding to approve the merger, the Lowrance board received an opinion
from Lowrance's financial advisor, American Appraisal Associates, as to the
fairness of the $7.30 in cash per share of Lowrance common stock to the Lowrance
stockholders from a financial point of view. The full text of the opinion is
attached as Appendix B to this document and should be read carefully in its
entirety. The opinion of American Appraisal is directed to the Lowrance board
and does not constitute a recommendation to any stockholder with respect to
matters relating to the merger.
Financing for the Merger
Orbital intends to fund the merger consideration through a combination of
cash generated from operations, bank credit facilities, and, possibly,
alternative financing sources. The merger will require the consent of Orbital's
lenders and may require the restructuring of certain of its primary credit
facilities.
Accounting Treatment
The merger will be treated as a "purchase" in accordance with generally
accepted accounting principles.
Regulatory Matters
We are prohibited by U.S. antitrust laws from completing the merger until
after we have furnished information and materials to the Antitrust Division of
the Department of Justice and the Federal Trade Commission and a required
waiting period has ended or early termination of the waiting period has been
granted. Lowrance and Orbital filed the required forms on April 22, 1999, and
the waiting period expired on May 22, 1999. However, the Department of Justice
and the FTC have the authority to challenge the transaction on antitrust grounds
before or after the merger is completed.
Appraisal Rights
Any stockholder who does not wish to accept the merger consideration has
the right under the Delaware General Corporation Law to receive the "fair value"
of his or her shares of common stock as determined by a Delaware court. This
"appraisal right" is subject to a number of restrictions and technical
requirements. Generally, in order to perfect appraisal rights (a) a dissenting
stockholder must not vote in favor of adopting and approving the
7
<PAGE>
merger agreement and (b) a dissenting stockholder must make a written demand for
appraisal before the vote on the merger agreement. Merely voting against the
merger agreement will not protect the right of appraisal. Appendix C to this
proxy statement contains the applicable provisions of the Delaware General
Corporation Law relating to appraisal rights. See "Appraisal Rights" on page 32.
Additional Information Regarding the December 9, 1997 Issuance
of the Lowrance Common Stock to the Lowrance Directors
(page 55)
In November 1997 because of Lowrance's extreme cash liquidity strain,
Lowrance officers and directors determined that an additional cash infusion of
$2,500.000 was essential to Lowrance's short and long term financial viability.
At that time, Lowrance's lender, Fleet Capital, agreed that if Lowrance's
officers and directors first invested an aggregate of $1,500,000 in a new
equity, Fleet would agree to increase Lowrance's loan with Fleet by an
additional $1,000,00. Because Lowrance officers had exercised options in
November 1997, resulting in a cash infusion of $189,305, Fleet agreed to
increase Lowrance's loan by an additional $1,000,000 if the Lowrance directors
agreed to purchase additional Lowrance common stock for approximately $1,310,000
in cash.
As a result, Lowrance's six directors agreed to purchase 341,338 shares of
restricted and unregistered Lowrance common stock for an aggregate cash purchase
price of $1,311,000 in an attempt to help insure Lowrances's financial
viability. On December 9, 1997, Lowrance issued 341,338 shares of its
unregistered common stock in a private placement at a discounted price of 65% of
the then current Lowrance share price (pursuant to a fairness opinion from a
disinterested investment banking firm) simultaneously with Lowrance executing a
new $1,000,000 term loan with Fleet. The new cash infusion was used to assist in
partially alleviating cash flow problems and to enable Lowrance to receive
timely delivery of essential parts required to meet its budget demand for its
product during the period from January through April 1998.
Due to the need for immediate action to inject new cash into Lowrance to
secure the new term loan with Fleet and to help partially alleviate cash flow
problems, Lowrance issued the authorized but unregistered common shares to its
six directors without obtaining the consent of its stockholders, which consent
was not required under the Delaware General Corporation Law. In late 1998,
Nasdaq informed Lowrance that Nasdaq believed that Lowrance was not in
compliance with Nasdaq's stockholder approval requirements in connection with
the December 9, 1997 issuance because Lowrance had not obtained stockholder
consent or obtained a waiver of the applicable Nasdaq rules prior to the
December 9, 1997 issuance. After a hearing and review, the Nasdaq Listing and
Hearing Review Council in a decision issued on August 9, 1999, decided that
because Lowrance did not comply with Nasdaq's stockholder approval rules,
Lowrance common stock would be delisted from Nasdaq unless Lowrance complied
with certain requirements. One requirement is that Lowrance must obtain approval
of the December 9, 1997 private placement to the Lowrance directors by a
majority of the common shares held by disinterested Lowrance stockholders
(stockholders other than the six directors who purchased stock in the private
placement). A second requirement is that each of the six directors enter into a
lock-up agreement with Lowrance whereby each director would agree that the
shares issued on December 9, 1997 would not be sold or otherwise transferred
until sixty days after the Lowrance stockholders approved the December 9, 1997
issuance.
Lowrance is now seeking the Nasdaq required stockholder approval and
ratification of the December 9, 1997 issuance to the Lowrance directors in order
to continue to be listed on the Nasdaq National Market. If the proposal is not
approved and ratified by a majority vote of Lowrance stockholders other than the
six directors who purchased the unregistered stock in December 1997, Lowrance
will not be in compliance with the Nasdaq council's decision. As a result,
Lowrance will face delisting.
Additionally, Lowrance is working with Nasdaq to agree upon mutually
acceptable terms of a lock up agreement with the Lowrance directors. None of the
restricted Lowrance common stock issued on December 9, 1997 has been sold or
transferred by any director, and each of the six directors had previously
entered into a lock-up agreement with Lowrance at the request of Nasdaq in which
the shares issued on December 9, 1997 will not be transferred until after a
stockholder vote approves the issuance. Subsequent to the Nasdaq council's
decision dated August 9, 1999, Lowrance entered into an amended merger agreement
in which each and every share of
8
<PAGE>
Lowrance common stock would be converted into the right to receive $7.30 in
cash, without interest. The proposed merger is fully described in this proxy
statement and is also the subject of a stockholder vote at the special meeting.
Lowrance is therefore trying to work with Nasdaq to revise the terms of the
required lock up agreement so that the current executed lock up agreements,
which do not require a sixty day holding period, will be acceptable to the
Nasdaq council. If Lowrance does not resolve the issue of an acceptable director
lock up agreement with Nasdaq, the
Lowrance common stock could be delisted. Lowrance previously advised Nasdaq
that prior to the December 9, 1997 issuance, the officers and directors of
Lowrance held in excess of 50% of the Lowrance common stock and at that time
represented the vote necessary for approval and ratification of the December 9,
1997 issuance. However, Lowrance faces the delisting of its common stock unless
it obtains the approval and ratification of the private placement by a majority
vote of the disinterested Lowrance stockholders. If Lowrance is successful in
obtaining both an amended agreement with Nasdaq regarding directors' lock up
agreements and approval of the private placement by a majority vote of
disinterested Lowrance stockholders, Lowrance believes Nasdaq will continue
listing Lowrance common stock.
9
<PAGE>
Comparative Market Price Information
Lowrance common stock is quoted on Nasdaq under the symbol "LEIX." The
following tables set forth the high and low bid prices of the Lowrance common
stock as reported on The Nasdaq National Market System for the fiscal quarters
indicated. Lowrance's fiscal year end is July 31. The information below
represents inter-dealer prices, without adjustments for retail markups,
markdowns or commissions and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Lowrance Common Stock
-----------------------
High Low
-------- -------
<S> <C> <C>
Fiscal 1997:
First Quarter $ 8.25 $5.00
Second Quarter 11.00 6.50
Third Quarter 10.00 7.50
Fourth Quarter 8.63 5.00
Fiscal 1998:
First Quarter 6.50 4.22
Second Quarter 7.25 5.00
Third Quarter 8.50 5.50
Fourth Quarter 7.13 3.44
Fiscal 1999:
First Quarter 4.00 2.50
Second Quarter 7.44 2.50
Third Quarter 6.25 4.00
Fourth Quarter 6.50 5.56
Fiscal 2000:
First Quarter 7.00 6.00
(through August 31, 1999)
</TABLE>
Lowrance has not declared any dividends on its common stock for the periods
indicated above and under agreements with its lenders can only do so under
certain circumstances. Set forth below are the high, low and closing sale
prices of Lowrance common stock on March 10, 1999, August 27, 1999 and September
2, 1999. March 10, 1999 was the last full trading day prior to the public
announcement of the old stock for stock merger, August 27, 1999 was the last
full trading day prior to the public announcement of the current cash for stock
merger, and September 2, 1999 was the last practicable trading day for which
information was available prior to the date of the first mailing of this
document. See "The Merger - Background of the Merger" regarding change from
stock for stock merger to a cash for stock merger.
<TABLE>
<CAPTION>
Lowrance Common Stock
--------------------------
High Low Close
------ ----- -------
<S> <C> <C> <C>
March 10, 1999 $5.25 $4.50 $5.25
August 27, 1999 $6.25 $6.38 $6.38
September 2, 1999 $6.88 $6.81 $6.81
</TABLE>
We urge you to obtain current market quotations of Lowrance common stock.
10
<PAGE>
Selected Financial and Operating Data of Lowrance
The following selected consolidated financial data for the five years ended
July 31, 1998 are derived from the audited consolidated financial statements of
Lowrance. The selected consolidated financial data for the nine months ended
April 30, 1998 and 1999 are derived from the unaudited consolidated financial
statements of Lowrance which, in the opinion of management, reflect all
adjustments, consisting only of normal recurring adjustments, that Lowrance
considers necessary for a fair presentation of the financial position and
results of operations for these periods. The information should be read in
conjunction with "Lowrance Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
of Lowrance and the related notes thereto included elsewhere in this document.
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended July 31, April 30,
------------------------------------------------------------ ----------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(in thousands, except share and per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Net sales......................... $ 81,250 $ 91,116 $ 94,579 $104,659 $ 91,706 $ 68,717 $ 66,730
Gross profit...................... $ 25,330 $ 31,069 $ 31,988 $ 26,881 $ 25,645 $ 19,416 $ 22,302
Income (loss) before income
taxes and extraordinary credit.... $ (1,663) $ 2,061 $ 2,199 $ (7,877) $ (3,166) $ (856) $ 1,130
Net income (loss)................. $ (672) $ 1,422 $ 1,743 $ (5,190) $ (3,995) $ (556) $ 1,130
<CAPTION>
As of July 31, As of April 30,
------------------------------------------------------------ ----------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Share Data:
Weighted average number of
shares outstanding
Basic........................... 3,350 3,352 3,352 3,352 3,608 3,582 3,768
Diluted......................... 3,350 3,396 3,387 3,352 3,608 3,582 3,768
Net income (loss)
Basic........................... $ (.20) $ .42 $ .52 $ (1.55) $ (1.11) $ (.16) $ .30
Diluted......................... $ (.20) $ .42 $ .51 $ (1.55) $ (1.11) $ (.16) $ .30
Balance Sheet Data:
Working capital................... $ 12,872 $ 14,777 $ 18,509 $ 17,798 $ 19,633 $ 20,148 $ 23,174
Total assets...................... $ 35,028 $ 40,228 $ 47,108 $ 61,366 $ 52,247 $ 61,360 $ 47,336
Long term debt, less current
maturities........................ $ 9,379 $ 9,975 $ 13,705 $ 21,176 $ 23,038 $ 21,815 $ 23,528
Stockholders' equity.............. $ 11,991 $ 13,452 $ 15,196 $ 9,952 $ 7,172 $ 10,820 $ 8,581
</TABLE>
11
<PAGE>
FORWARD-LOOKING STATEMENTS
We believe that some of the information in this document constitutes
forward-looking statements within the definition of the Private Securities
Litigation Reform Act of 1995. You can identify these statements by forward-
looking words such as "may," "will," "expect," "anticipate," "believe,"
"estimate" and "continue" or similar words. You should read statements that
contain these words carefully because they discuss future expectations, contain
projections of future results of operations or financial condition or state
other "forward-looking" information.
We believe that it is important to communicate our expectations to the
Lowrance stockholders. However, there may be events in the future that Lowrance
is not able to accurately predict or over which it has no control. The factors
listed below and cautionary language in this document provide examples of risks,
uncertainties and events that may cause actual results to differ materially from
the expectations described in this document in its forward-looking statements.
Specifically, actual results relating to, among other things, product
performance, the introduction of products and services by competitors, general
economic and business conditions and the inability to accurately predict market
trends could differ materially from those currently anticipated in such
statements. Factors affecting forward-looking statements include:
. technological changes and innovations;
. changes in availability of, unavailability of or delay in receiving
components and raw materials;
. changes in economic conditions; and
. changes in seasonal demand for products.
Lowrance and Orbital do not undertake to update forward-looking information
contained herein or elsewhere to reflect actual results, changes in
assumptions, or changes in other factors affecting such forward-looking
statements.
WHERE YOU CAN FIND MORE INFORMATION
As required by law, Lowrance files annual, quarterly and special reports,
proxy statements and other information with the SEC. These reports, proxy
statements and other information contain additional information about Lowrance.
You may read and copy any reports, statements or other information we file at
the SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available
to the public from commercial document retrieval services and at the web site
maintained by the SEC at "http://www.sec.gov."
You should rely only on the information contained in this document to vote
on the proposals at the special meeting. We have not authorized anyone to
provide you with information that is different from what is contained in this
document. This document is dated September 11, 1999. You should not assume
that the information contained in this document is accurate as of any date other
than September 11, 1999, and the mailing of the document to you shall not create
any implication to the contrary.
12
<PAGE>
THE LOWRANCE SPECIAL MEETING
Time, Place and Date
This document is being furnished to Lowrance stockholders as part of the
solicitation of proxies by the Lowrance board for use at a special meeting of
stockholders of Lowrance to be held on October 12, 1999, at 10:00 a.m., local
time, in the Directors Room of the Adam's Mark Hotel, 100 East Second Street,
Tulsa, Oklahoma 74103 and at any adjournment or postponement thereof. This
document and the enclosed form of proxy are first being mailed to stockholders
of Lowrance on or about September 11, 1999.
Purpose of the Special Meeting
At the Lowrance special meeting, the holders of shares of Lowrance common
stock will vote on:
. the approval and adoption of the merger agreement;
. the approval and ratification of the December 9, 1997 issuance of
341,338 shares of restricted Lowrance common stock to the Lowrance
directors; and
. the transaction of such other business as may properly come before the
Lowrance special meeting.
The Lowrance board, after careful consideration, has unanimously approved
the merger agreement and recommends a vote "FOR" approval and adoption of the
merger agreement and "FOR" approval and ratification of the December 9, 1997
issuance of 341,338 shares of the restricted Lowrance common stock to the
Lowrance directors.
Record Date, Outstanding Shares and Voting
Holders of record of Lowrance common stock at the close of business on the
record date of August 19, 1999, are entitled to notice of and to vote at the
Lowrance special meeting. On the record date, there were 3,768,796 shares of
Lowrance common stock outstanding held by approximately 103 record holders. Each
share of Lowrance common stock as of the record date entitles its owner to one
vote.
Quorum
The representation, in person or by properly executed proxy, of the holders
of a majority of all of the shares of stock entitled to vote at the Lowrance
special meeting is necessary to constitute a quorum at the Lowrance special
meeting.
Vote Required
The holders of 63 1/3% of the voting power represented by the shares of
Lowrance common stock outstanding on the record date must vote affirmatively to
approve and adopt the merger agreement. The affirmative vote of a majority of
the shares present in person or by proxy at the special meeting and entitled to
vote other than those held by the 6 Lowrance directors is required to approve
and ratify the December 9, 1997 issuance of the Lowrance common stock to the
Lowrance directors.
Shares of Lowrance common stock represented in person or by proxy will be
counted for the purposes of determining whether a quorum is present at the
Lowrance special meeting. Shares which abstain from voting will be treated as
shares that are present and entitled to vote at the Lowrance special meeting for
purposes of determining whether a quorum exists, but abstentions will have the
same effect as votes against approval of the merger agreement and the December
9, 1997 issuance of the Lowrance common stock to the Lowrance directors. Broker
non-votes, which are shares held by brokers or nominees for which no
instructions are given by the beneficial owners
13
<PAGE>
of such shares, will have the same effect as shares voted against approval of
the merger agreement. However, with respect to the December 9, 1997 issuance of
Lowrance common stock to the Lowrance directors, broker non-votes will not be
counted as votes for or against the proposal to approve and ratify the December
9, 1997 issuance, and will not be included in counting the number of votes
necessary for the approval of the December 9, 1997 issuance.
As of the record date, directors and executive officers of Lowrance and
their affiliates may be deemed to be beneficial owners of approximately 57.6% of
the outstanding shares of Lowrance common stock and have expressed their intent
to vote their shares in favor of the approval and adoption of the merger
agreement. Directors of Lowrance who purchased shares in the December 9, 1997
private placement are not entitled to vote their shares for or against the
proposal to approve and ratify the December 9, 1997 issuance of the Lowrance
common stock to the Lowrance directors.
Voting of Proxies
All shares of Lowrance common stock which are entitled to vote and are
represented at the Lowrance special meeting by properly executed proxies
received prior to or at such meeting, and not revoked, will be voted at the
Lowrance special meeting in accordance with the instructions indicated on such
proxies. If no instructions are indicated, such proxies, other than broker non-
votes, will be voted for approval and adoption of the merger agreement and for
the approval and ratification of the December 9, 1997 issuance of the Lowrance
common stock to the Lowrance directors.
The Lowrance board does not know of any matters other than those described
in the notice of the Lowrance special meeting that are to come before the
Lowrance special meeting. If any other matters are properly presented at the
Lowrance special meeting for consideration, including consideration of a motion
to adjourn or postpone such meeting to another time and/or place for the
purposes of soliciting additional proxies or allowing additional time for the
satisfaction of conditions to the merger, the persons named in the enclosed form
of proxy and acting under such proxy generally will have discretion to vote on
such matters in accordance with their best judgment.
Revocation of Proxies
Any proxy given in accordance with this solicitation may be revoked by the
person giving it at any time before it is voted. Proxies may be revoked by:
. giving the Secretary of Lowrance, at or before the taking of the vote at
the Lowrance special meeting, a written notice of revocation bearing a
later date than the proxy;
. duly executing a later dated proxy relating to the same shares and
delivering it to the Secretary of Lowrance before the taking of the vote
at the Lowrance special meeting; or
. attending the Lowrance special meeting and voting in person, although
attendance at the Lowrance special meeting will not in and of itself
constitute a revocation of a proxy.
Any written notice of revocation or subsequent proxy should be sent to
Lowrance Electronics, Inc., 12000 East Skelly Drive, Tulsa, Oklahoma 74128,
Attention: Secretary, or hand delivered to the Secretary of Lowrance at or
before the taking of the vote at the Lowrance special meeting. Stockholders
that have instructed a broker to vote their shares must follow directions
received from such broker in order to change their vote or to vote at the
Lowrance special meeting.
Solicitation of Proxies
Lowrance will bear its own cost of solicitation of proxies. Lowrance will
reimburse brokerage houses, fiduciaries, nominees and others for their out-of-
pocket expenses in forwarding proxy materials to beneficial owners of Lowrance
common stock held in their names.
14
<PAGE>
THE MERGER
Background of the Merger
In August 1998, Lowrance engaged Chase Securities Inc. as its financial
advisor to assist in exploring potential strategic alternatives, particularly
the sale or merger of Lowrance. In a September 14, 1998 press release, Lowrance
announced that it had retained Chase to assist Lowrance in exploring strategic
alternatives.
In September 1998, Chase began contacting potential strategic and financial
partners to ascertain their interest in pursuing an acquisition of, a merger
with or an investment in Lowrance. Over the course of the next several weeks,
Lowrance, after execution of confidentiality agreements, shared selected non-
public information with several of these parties. In October 1998, Lowrance and
Chase requested and received from several of these parties, including Orbital,
non-binding indication of interest letters that stipulated the basic terms upon
which these parties would be interested in exploring a potential acquisition of,
merger with or investment in Lowrance.
During October and November 1998, Lowrance's management team met with
several of these parties including Orbital and presented additional non-public
information regarding Lowrance and its future prospects. During November and
December 1998, Lowrance and Chase received additional information from these
parties about their interest in a potential transaction with Lowrance. On
November 23, 1998, Orbital sent a letter to Chase which expressed Orbital's
interest in a potential merger with Lowrance and requested additional time for
due diligence. Members of the Lowrance management team met with Orbital during
the first part of December and provided Orbital with additional due diligence
material. On December 21, 1998, Orbital informed Chase of its continued interest
in a possible merger of Lowrance into Orbital in an all-stock transaction. After
consultation with the Lowrance board, Chase informed Orbital that Lowrance was
interested in the possible merger, pending negotiation of a definitive
agreement.
After several weeks of negotiations, Orbital informed Chase on January 7,
1999 that it would be willing to make certain improvements to its merger
proposal, which included an implied value of $7.30 for each share of Lowrance
common stock, based upon Orbital's then current per share price. During the week
of January 11, 1999 Lowrance indicated to Orbital its continuing interest in the
merger proposal, and the parties continued their negotiation of a merger
agreement. On January 13, 1999, as a consequence of unusually heavy trading
volume in Lowrance common stock and a significant upward movement in the market
price of Lowrance common stock, Lowrance issued a press release disclosing that
it was continuing to have discussions with a strategic partner. Lowrance also
stated that if it reached an agreement with a strategic partner, it would
immediately make a public announcement. On January 14, 1999, the Lowrance board
engaged American Appraisal Associates to render a fairness opinion in connection
with the proposed merger.
On January 28, 1999, the Lowrance board met to consider the Orbital
proposal, and American Appraisal delivered an oral opinion to Lowrance's board
that, as of such date and based upon and subject to the assumptions made,
matters considered, and the limitations on the review undertaken by American
Appraisal, the exchange ratio and other terms and conditions of the merger, at
such time, were fair, from a financial point of view, to the unaffiliated common
stockholders of Lowrance. However, the Lowrance board did not vote on the merger
proposal, deciding to delay a decision on the Orbital proposal pending Orbital's
earnings announcement in mid-February. After Orbital's earnings release,
Lowrance and Orbital continued negotiations, most of which focused upon
adjustment mechanisms for fluctuations in the value of Orbital's share price;
these negotiations did not change the proposed $7.30 in implied value for each
share of Lowrance common stock, based upon Orbital's then current per share
price.
On March 8, 1999, the Orbital board met and the Orbital directors were
apprised of the resolution of the outstanding material issues pertaining to the
stock for stock merger agreement. The Orbital board voted unanimously to approve
the stock for stock merger agreement and authorized the execution of the merger
agreement, subject to negotiation of remaining issues within the ranges
authorized by the Orbital board.
On March 11, 1999, the Lowrance board met to consider the proposed stock
for stock merger agreement with Orbital. During the course of the meeting, the
board consulted with Chase, American Appraisal and Stuart,
15
<PAGE>
Biolchini, Turner & Givray, Lowrance's outside legal counsel, and American
Appraisal delivered its oral opinion (which it subsequently confirmed by
delivery of a written opinion dated March 11, 1999) that, based upon and subject
to the assumptions made, matters considered and the limitations on the review
undertaken by American Appraisal, the terms and conditions of the merger were
fair, from a financial point of view, to the unaffiliated common stockholders of
Lowrance. After a review of relevant legal considerations and other discussions
among the Lowrance board, the Lowrance directors voted unanimously to approve
the stock for stock merger agreement and authorized the execution of the merger
agreement, subject to negotiation of remaining issues within the ranges
authorized by the Lowrance board and recommended that Lowrance stockholders
approve and adopt the merger agreement.
On the afternoon of March 11, 1999, the stock for stock merger agreement
and the other transaction documents were executed.
On August 18, 1999, Orbital management proposed changing the terms of the
merger agreement from a stock for stock merger to a cash for stock merger valued
at $7.30 per share of Lowrance common stock which is the same as the $7.30 in
implied value in the stock for stock merger. Orbital's board of directors met on
August 26, 1999 and unanimously approved the terms of the merger agreement as
amended subject to negotiation of remaining issues within the ranges authorized
by the Orbital board. On August 26, 1999 the Lowrance board met in a special
meeting to consider the amended merger agreement. During the course of this
meeting, the Lowrance board further consulted with Chase, American Appraisal,
and Stuart, Biolchini, Turner & Givray. American Appraisal delivered its oral
opinion regarding the terms of the cash offer that, based upon and subject to
the assumptions made, matters considered, and the limitations on the review
undertaken by American Appraisal regarding the terms of the amended merger, the
terms and conditions were fair, from a financial point of view, to the
unaffiliated common stockholders of Lowrance. After further review by the
Lowrance board, the Lowrance board voted unanimously to approve the amended
merger agreement and recommended that Lowrance stockholders approve and adopt
the amended merger agreement.
On August 26, 1999, the parties executed the amended merger agreement and
other transaction documents.
Lowrance's Reasons for the Merger
In reaching its determination to approve the transaction, and to recommend
that Lowrance stockholders vote to adopt the merger agreement, the Lowrance
board considered a number of factors, including the following:
. The Lowrance board considered the information and presentations by
Lowrance management and its legal and financial advisors concerning the
terms of the merger and the business, technology, products, operations,
financial condition, organizational structure and industry position of
the companies, on both a historical and prospective basis;
. The value to be received per share of Lowrance common stock in the
merger represented a 57.5% premium over the average closing sale price
of Lowrance common stock for the period from February 10, 1999 through
and including March 10, 1999, and a 15.6% premium over the closing sale
price of Lowrance common stock on August 26, 1999;
. American Appraisal gave the opinion that, based upon and subject to the
assumptions made, matters considered, and the limitations on the review
undertaken by American Appraisal, the $7.30 in cash per share of
Lowrance common stock and other terms and conditions of the merger, at
such time, were fair, from a financial point of view, to the
unaffiliated common stockholders of Lowrance. A copy of the American
Appraisal written opinion is attached as Appendix B to this document;
. The present and anticipated environment of Lowrance's business,
including the potential for further consolidation within the industry
and the need for substantial capital in order for Lowrance to compete
effectively, which led to the belief that it would become harder for
Lowrance to compete in its markets and that continued growth would
require significant additional capital and that stockholder value may be
maximized by selling Lowrance to a larger, better capitalized company;
16
<PAGE>
. The financial condition, results of operations, business and prospects
of Lowrance, including the increasingly competitive nature of the
markets in which Lowrance operates, which helped the directors evaluate
the future prospects of Lowrance and determine whether the merger
consideration is fair and whether it is an appropriate time to engage in
the proposed merger; and
. The results of an extensive search authorized by Lowrance and conducted
by Chase Securities, Inc. for a strategic partner (in addition to
Orbital).
The Lowrance board also took into account negative factors associated with
the merger that as a result of the merger, Lowrance stockholders would no longer
participate in any future growth and prospects of Lowrance. However, the
Lowrance board believed that a sale of Lowrance under the terms of the merger
would achieve greater value at this time for the Lowrance stockholders as
compared with remaining a public company. The Lowrance board concluded that the
potential benefits of the merger outweighed the potential risks.
The Lowrance board did not quantify or otherwise assign relative weights to
these factors or determine that any factor was of particular importance. Rather,
the Lowrance board made its recommendation based on the totality of the
information presented to and considered by it.
Recommendation of the Board of Directors of Lowrance
The Lowrance board has unanimously determined that the merger agreement is
in the best interests of Lowrance and its stockholders. Accordingly, the
Lowrance board has unanimously approved the merger agreement and recommends that
Lowrance stockholders vote in favor of approval and adoption of the merger
agreement at the Lowrance special meeting.
Opinion of Lowrance's Financial Advisor
Lowrance's board retained American Appraisal to render a fairness opinion in
connection with the merger. On August 26, 1999, American Appraisal delivered an
oral opinion to Lowrance's board that, as of such date and based upon and
subject to the assumptions made and matters considered in, and the limitations
on, the review undertaken by American Appraisal, the merger consideration and
other terms and conditions of the merger were fair, from a financial point of
view, to the unaffiliated common stockholders of Lowrance. Such opinion was
subsequently confirmed in writing. No limitations were imposed by Lowrance's
board upon American Appraisal with respect to the investigations made or
procedures followed by American Appraisal in rendering its opinion.
The full text of American Appraisal's fairness opinion, which sets forth the
assumptions made, procedures followed and matters considered by American
Appraisal, is attached as Appendix B to this document. You are urged to read
carefully the opinion in its entirety. The summary of the opinion is qualified
in its entirety by reference to its full text. American Appraisal has consented
to the inclusion of its opinion and the summary of its opinion in this document.
As set forth in the opinion, American Appraisal relied, without independent
verification, upon and assumed the accuracy and completeness of all financial
and other information and data publicly available or furnished to or otherwise
reviewed by American Appraisal. With respect to Lowrance's projected financial
operating results for fiscal years 2000 - 2003, American Appraisal assumed that
such near term projections were reasonably prepared on bases reflecting the best
currently available estimates and judgments of Lowrance management as to the
expected near term performance of Lowrance. American Appraisal did not perform
any independent verification of the information or projections provided to it
and relied upon the representations of Lowrance management that they were
unaware of any facts that would make the information or projections provided to
American Appraisal incomplete or misleading. American Appraisal's opinion is
necessarily based on economic, market and other conditions, and the information
made available to it, as of the date of the opinion.
American Appraisal's opinion is directed to the Lowrance board and relates to
the fairness of the merger consideration and other financial terms and
conditions of the merger from a financial point of view. The opinion does not
constitute a recommendation to any Lowrance stockholder as to how such
stockholder should vote with respect to the merger. The financial terms of the
merger were determined through negotiations between Orbital and
17
<PAGE>
Lowrance and their respective advisors and although American Appraisal provided
advice to Lowrance's board during the course of such negotiations, it did not
make a recommendation with respect to any of the financial terms, including the
merger consideration.
In rendering its opinion, American Appraisal, among other things:
(i) reviewed the merger agreement, executed August 26, 1999;
(ii) reviewed Lowrance's Annual Reports on Form 10-K and Proxy Statements
for the fiscal years ended July 31, 1996 through 1998 and its
Quarterly Report on Form 10-Q for the quarterly period ended April
30, 1999 and other publicly available financial and operating
information relating to Lowrance;
(iii) reviewed and analyzed the internal unaudited operating results
reported by Lowrance for the twelve months ended July 31, 1999 and
financial projections for Lowrance for fiscal years 2000 - 2003
provided to American Appraisal by Lowrance management;
(iv) considered (a) Lowrance's operating history, financial condition and
prospects prior to, and after, the merger, (b) Lowrance's ability
absent the merger to independently raise capital needed to fund
working capital, and (c) the strategic alternatives available to
Lowrance other than the merger;
(v) reviewed written presentations presented to the Lowrance board by
Chase related to the process Chase employed in soliciting bids for
Lowrance, dated December 30, 1998, January 28, 1999, March 10, 1999
and August 26, 1999;
(vi) analyzed available information concerning other companies that (a)
have sufficient similarities to Lowrance for purposes of comparing
their market capitalizations to Lowrance and (b) have sufficient
similarities to Lowrance and have been recently acquired by, or
merged into, other companies;
(vii) reviewed the public stock market price and trading volume history of
Lowrance's common stock on Nasdaq; and
(viii) conducted other financial analyses and studies as American Appraisal
deemed appropriate for purposes of delivering its opinion as to the
fairness, from a financial point of view, of the merger consideration
and other terms and conditions of the merger.
The following is a brief summary of certain of American Appraisal's reviews
and financial analyses in connection with providing its fairness opinion.
Merger Consideration
Based on terms of the merger agreement, a holder of one share of Lowrance
common stock will receive $7.30 in cash, an amount that was concluded by
American Appraisal to be fair, from a financial point of view, based on its
reviews and analyses summarized in the following paragraphs:
Merger's Implied Enterprise Valuation
The $7.30 per share common stock valuation of Lowrance's equity as
indicated by the terms of the merger agreement, represented, as of August 26,
1999, (a) an estimated total business enterprise value for Lowrance of
approximately $54.5 million, or $14.45 per share and (b) business enterprise
valuation ratios of 0.61 times Lowrance's LTM revenues and 9.0 times Lowrance's
LTM EBITDA where "business enterprise value" is defined as the market value of a
company's total equity capital plus the market value of its long term debt,
"LTM" refers to the latest 12 months operating results for Lowrance ended April
30, 1999, adjusted for nonrecurring expenses and "EBITDA" means operating income
before interest, taxes, depreciation and amortization, adjusted for nonrecurring
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expenses. For purposes of this opinion, Lowrance's long term debt was equivalent
to its average balance of the end-quarter amounts for the four quarters ended
April 30, 1999.
Selected Comparable Company Analysis.
American Appraisal compared selected financial information of Lowrance with
corresponding publicly available information of certain other publicly traded
companies engaged in the manufacturing and sale of products similar to those of
Lowrance or of products of similar technology that served market segments
similar to those of Lowrance. Such comparable companies included Brunswick
Corp. ("Brunswick"), Coleman Co. ("Coleman"), Johnson Worldwide Associates, Inc.
("JWA"), Teleflex, Inc. ("Teleflex"), Trimble Navigation Limited ("Trimble") and
Novatel, Inc ("Novatel"). However, because Trimble and Novatel reported net
EBITDA and net income losses for the LTM period, their market capitalization
multiples were not considered for purposes of this fairness opinion analyses.
Correlation of the market capitalization multiples of the remaining comparable
companies indicated that (i) their LTM revenue multiples ranged between 0.4x
and 1.4x, implying a per share valuation of Lowrance between $2.37 and $26.18
and (ii) their LTM EBITDA multiples ranged from 5.8x to 10.1x, implying a per
share valuation of Lowrance between $2.20 and $9.14.
The financial performance, financial condition and financial resources of
Brunswick, JWA and Teleflex were generally superior to that of Lowrance. No
company utilized in the comparable company analysis was identical to Lowrance.
Accordingly, an analysis of the results of the foregoing is not purely
mathematical. Rather it involves complex considerations and judgments concerning
differences in historical financial and operating characteristics of the
companies included in the selected comparable company analysis.
Comparable Acquisition Analysis
American Appraisal conducted a search for publicly available information
regarding business combinations involving companies with sufficient similarities
to Lowrance to be helpful in determining an appropriate valuation for Lowrance.
The search revealed the following transactions with information sufficient to
measure certain enterprise value ratios for comparison to the merger enterprise
valuation:
Acquired Company Acquirer Enterprise Valuation/
Revenues EBITDA
- ------------------------------------------------------------------------------
Ashtech, Inc. Orbital Sciences 1.0x n/a
Corporation
Magellan Corporation Orbital Sciences 1.2x n/a
Corporation
Nutone, Inc. Nortek, Inc. 1.2x 8.0x
Signature Brands, Inc. Sunbeam Corp. 1.0x 8.4x
Correlation from the comparable acquisition analysis indicated that (i) the
LTM revenue multiples of the comparable companies ranged between 1.0x and 1.2x,
implying a per share valuation of Lowrance between $16.65 and $21.41 and (ii)
the LTM EBITDA multiples of the comparable companies ranged between 8.0 x and
8.4x, implying a per share valuation of Lowrance between $5.75 and a $6.40.
Except for the above, many acquisitions of businesses considered comparable
to Lowrance in recent years involved privately held companies which precluded
comparable company valuation analysis because information for meaningful
analysis was not available.
Discounted Net Cash Flow Analysis
American Appraisal valued Lowrance's common stock based on Lowrance's
projected future operating and net cash flow as of August 26, 1999. Based on
Lowrance's management prepared financial projections for the four year period
ended December 31, 2003, the projected net cash flow of Lowrance was discounted
to present value at a
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rate of return commensurate with its estimated weighted average cost of capital
and the risk associated with the achievement of the financial projections. The
discounted net cash flow analysis included the following analyses:
(i) From the financial projections, Lowrance's unlevered, or debt-
free net cash flow, defined as debt-free net income plus
depreciation and amortization less capital expenditures and less
(plus) increases (decreases) in working capital was estimated;
(ii) Lowrance's projected debt-free net cash flow for the four years
included in the financial projections was discounted to present
value at rates of return ranging from 14% to 16%, such rates of
returns representing American Appraisal's estimate of Lowrance's
weighted average cost of capital that reflected (a) Lowrance's
debt and equity capital structure, (b) estimated market returns
on Lowrance's debt and equity capital and (c) the uncertainty
associated with Lowrance's ability to independently achieve the
financial projections; and
(iii) Lowrance's terminal value as of the end of the fourth year of
the financial projections was estimated by averaging the results
of the capitalization of EBITDA projected in the terminal year
by multiples ranging from 4.0 to 6.0, where the multiples were
obtained from the comparable company analysis and comparable
acquisition analysis as representing current market EBITDA
multiples for profitable moderate growth companies in Lowrance's
industry.
Based on the foregoing discounted net cash flow analysis, the value for
Lowrance's common stock ranged from $5.05 per share to $11.22 per share.
Evaluation of Strategic Alternatives
American Appraisal evaluated strategic alternatives, in addition to the
merger, that were available to Lowrance prior to the merger including (i) a
strategic business combination with parties other than Orbital, (ii) a
recapitalization involving an infusion of equity capital from private equity
capital investors, and (iii) the financial and business viability of remaining
independent. Based on American Appraisal's analysis of these alternatives,
American Appraisal concluded the following:
(i) The results of an extensive and orderly search conducted by Chase
for strategic partners (in addition to Orbital), indicated that
Lowrance had limited marketability (1) as a strategic partner and
(2) at financial terms comparable to those of the merger; and
(ii) Chase's search for financial partners indicated that some private
equity investors considered Lowrance a potential candidate for a
recapitalization transaction involving new equity capital.
However, based on Chase's discussions with such investors
American Appraisal concluded that the terms of any
recapitalization from these investors would likely be less
favorable to the Lowrance stockholders because a recapitalization
of Lowrance would likely result in material dilution and
considerably less liquidity to Lowrance's common stockholders.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying American Appraisal's opinion. In arriving at its opinion, American
Appraisal considered the results of all such analyses which were prepared solely
for purposes of providing its opinion to the Lowrance board as to the fairness
of the merger consideration and other terms of the merger, from a financial
point of view, to the unaffiliated stockholders of Lowrance. American
Appraisal's opinion and presentation to Lowrance's board was one of many factors
taken into consideration by Lowrance's board in making its determination to
approve the merger. The foregoing summary does not purport to be a complete
description of the analyses performed by American Appraisal.
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American Appraisal, as part of its financial advisory services, is regularly
and continually engaged in the valuation of businesses and securities in
connection with restructurings and reorganizations, mergers and acquisitions,
private placements and other corporate purposes. Prior to this engagement,
American Appraisal had not provided financial or valuation advice to Lowrance or
to Orbital.
Pursuant to letter agreements, dated January 14, 1999 and August 27, 1999,
Lowrance will pay American Appraisal $125,000 for the fairness opinion service,
of which $65,000 was paid as of the date of the fairness opinion letter and the
remaining sum to be payable as of the date that this document is sent to
Lowrance's common stockholders. In addition, Lowrance agreed to reimburse
American Appraisal's out-of-pocket expenses, including the reasonable fees and
disbursements of counsel, and to indemnify American Appraisal against certain
liabilities in connection with the engagement of American Appraisal.
Interests of Directors and Executive Officers in the Merger
In considering the recommendation of the Lowrance board, Lowrance
stockholders should be aware that the directors and executive officers of
Lowrance may have interests in the merger that are different from, or in
addition to, the interests of Lowrance stockholders generally, and that may
create potential conflicts of interest. Lowrance directors, officers and
employees have rights with respect to a stockholder agreement, severance
provisions under existing employment contracts, indemnification provisions and
liability insurance in connection with the merger. The Lowrance board was aware
of these interests and considered them, among other factors, in approving the
merger agreement. These interests are summarized below.
Ownership and Voting Stock
As of the record date, directors and executive officers of Lowrance and
their affiliates may be deemed to be beneficial owners of approximately 57.6% of
the outstanding shares of Lowrance common stock. Darrell J. Lowrance has entered
into a stockholder support agreement dated as of August 26, 1999 with Orbital
whereby he has agreed to vote the 1,907,423 shares of Lowrance common stock he
beneficially owns, representing approximately 50.6% of the outstanding shares of
Lowrance common stock, in favor of the merger agreement.
Employment and Severance Arrangements
Lowrance is a party to employment and severance agreements with the
following people who are executive officers of Lowrance: Terry R. Nimmo, Steven
L. Schneider and Mark C. Wilmoth. Under these employment and severance
agreements, all of which are substantially identical, if Lowrance is sold,
merged, reorganized or otherwise acquired at a time when the executive is still
employed with Lowrance, and if employment of any executive is terminated other
than for "cause," as defined in the employment and severance agreement, then
such executive will be entitled to:
. payment of standard severance as set forth in Lowrance's established
written policy; and
. a lump sum payment in the amount of such executive's salary for one year.
The aggregate amount of the cash benefits payable to each executive is:
Mr. Nimmo $197,981.00
Mr. Schneider $222,557.00
Mr. Wilmoth $196,586.00
In addition, Robert F. Biolchini, who is on the Lowrance board and is the
Secretary of Lowrance, is also a partner at the law firm Stuart, Biolchini,
Turner & Givray, which is Lowrance's outside general counsel.
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Indemnification and Insurance
Lowrance presently has no directors' and officers' liability insurance.
However, under the terms of the merger agreement, Orbital procured liability
insurance for the directors and officers of Lowrance, effective as of June 3,
1999.
Under the terms of the merger agreement, Lowrance is obligated to, and from
and after the merger, Orbital and Merger Sub are obligated to, defend, indemnify
and hold harmless each person who is now, or has been at any time prior to the
date of this document, or who becomes prior to the merger, an officer, director
or employee of Lowrance or any of Lowrance's subsidiaries. These individuals
will be indemnified against all costs or expenses, including reasonable
attorneys' fees, in connection with any civil, criminal, administrative or
investigative claim which is based in whole or in part on the fact that such
person is or was an officer, director or employee of Lowrance. The
indemnification will cover claims which pertain to any matter existing or
occurring at or prior to the merger regardless of when it was asserted or
claimed and all claims and liabilities pertaining to the merger agreement.
Treatment of Lowrance Series "A" Preferred Stock in the Merger Agreement
Immediately before the merger, Lowrance shall redeem each share of Lowrance
Series "A" preferred stock issued and outstanding for cash in an amount equal to
$4.625.
At the time of the merger, all shares of Lowrance Series "A" preferred
stock shall no longer be outstanding and shall automatically be canceled and
retired and shall cease to exist.
Financing for the Merger
Orbital intends to fund the merger consideration through a combination of cash
generated from operations, bank credit facilities, and, possibly, alternative
financing sources. The merger will require the consent of Orbital's lenders and
may require the restructuring of certain of its primary credit facilities.
Anticipated Accounting Treatment of the Merger
The merger will be accounted for using the purchase method of accounting
for financial reporting purposes under U.S. generally accepted accounting
principles. Under this method of accounting, the aggregate consideration paid by
Orbital in connection with the merger will be allocated to Lowrance's assets and
liabilities based on their fair market values, with any excess being treated as
goodwill. Goodwill from such an acquisition is generally amortized in equal
annual installments over a period of time and is not deductible for federal
income taxes. The assets and liabilities and results of operations of Lowrance
will be consolidated into the assets and liabilities and results of operations
of Orbital from the date of the merger.
Regulatory Approvals
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
and the regulations promulgated thereunder, Orbital and Lowrance may not merge
unless Notification and Report Forms have been filed with the Antitrust Division
of the United States Department of Justice and the Federal Trade Commission, and
waiting period requirements have expired or are otherwise earlier terminated by
the Antitrust Division and the FTC. On April 22, 1999, Orbital and Lowrance
submitted the required filings to the Antitrust Division and the FTC. The
waiting period under the Hart-Scott-Rodino Act expired on May 22, 1999.
The Antitrust Division and the FTC frequently scrutinize the legality of
transactions such as the merger under the antitrust laws. At any time before or
after the completion of the merger, the Antitrust Division or the FTC could take
such action under the antitrust laws as it deems necessary or desirable in the
public interest, including seeking to enjoin the consummation of the merger or
seeking the divestiture of substantial assets of Orbital or Lowrance. We do not
believe that the merger will violate the antitrust laws. We cannot assure,
however, that the
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Antitrust Division, the FTC or state or private parties will not challenge the
merger on antitrust grounds, or, if such a challenge is made, what the result
will be.
Material United States Federal Income Tax Considerations
Upon consummation of the merger each outstanding share of Lowrance common
stock (except for those shares with respect to which statutory appraisal rights
are exercised, those shares which are held in Lowrance's treasury of by any of
Lowrance's subsidiaries and those shares held by Orbital, Orbital Merger Sub,
Inc., or any other subsidiary of Orbital) will be converted into the right to
receive $7.30 in cash, without interest. The following discussion is a summary
of the principal federal income tax consequences of the merger to the
stockholders of Lowrance whose shares of common stock are surrendered pursuant
to the merger (including any cash amounts received by dissenting stockholders
pursuant to the exercise of appraisal rights). The discussion below does not
purport to deal with all aspects of federal income taxation that may affect
particular stockholders in light of their individual circumstances, and is not
intended for stockholders subject to special treatment under the federal income
tax law, including insurance companies, tax exempt organizations, financial
institutions, broker-dealers, foreign persons, stockholders who hold their stock
as part of a hedge, appreciated financial position, straddle or conversion
transaction, stockholders who do not hold their stock as capital assets and
stockholders who have acquired their stock upon the exercise of employee options
or otherwise as consideration. In addition, the discussion below does not
consider the effect of any applicable state, local or foreign tax laws. The
discussion below is based upon current provisions of the Internal Revenue Code
of 1986, as amended, currently applicable treasury regulations promulgated
thereunder, and judicial and administrative decisions and rulings. Future
legislative changes, judicial administrative changes or interpretations could
alter or modify the statements and conditions set forth herein, and these
changes or interpretations could be retroactive and could affect the tax
consequences to the stockholders of Lowrance.
THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH BELOW ARE INCLUDED FOR
GENERAL INFORMATION PURPOSES ONLY AND ARE BASED UPON PRESENT LAW. BECAUSE
INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH STOCKHOLDER IS URGED TO CONSULT SUCH
STOCKHOLDER'S OWN TAX ADVISOR TO DETERMINE THE APPICABILITY OF THE RULES
DISCUSSED BELOW TO SUCH STOCKHOLDER AND THE PARTICULAR TAX EFFECTS OF THE
MERGER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND OTHER TAX LAWS.
The receipt of cash pursuant to the merger (including any cash amounts
received by dissenting stockholders pursuant to the exercise of appraisal
rights) will be a taxable transaction for federal income tax purposes under the
Internal Revenue Code of 1986, as amended. In general, for federal income tax
purposes, a stockholder will recognize gain or loss equal to the difference
between the cash received by the stockholder pursuant to the merger agreement
and the stockholder's adjusted tax basis in the shares of common stock
surrendered pursuant to the merger agreement. Such gain or loss will be a
capital gain or loss. The rate at which any such gain will be taxed to non-
corporate stockholders (including individuals, estates and trusts) will, as a
general matter, depend upon each stockholder's holding period for the shares of
common stock at the effective time of the merger. If a non-corporate
stockholder's holding period for the shares of common stock is more than one
year, either a 20 percent or a 10 percent capital gains rate generally will
apply to such gain, depending on the amount of taxable income of such
stockholder for such year. If the stockholder's holding period for the shares of
common stock is one year or less, such gain will be taxed at the same rates as
ordinary income. Capital loss generally is deductible only to the extent of
capital gain plus ordinary income of up to $3,000. Net capital loss in excess of
$3,000 may be carried forward to subsequent taxable years.
For corporations, capital losses are allowed only to the extent of capital
gains, and net capital gain is taxed at the same rate as ordinary income.
Corporations generally may carry capital losses back up to three years and
forward up to five years.
Payment in connection with the merger may be subject to "backup
withholding" at a 31% rate. Backup withholding generally applies if the
stockholder fails to furnish such stockholder's social security number or other
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taxpayer identification number ("TIN"), or furnishes an incorrect TIN. Backup
withholding is not an additional tax but merely a creditable advance payment
which may be refunded to the extent it results in an overpayment of tax,
provided that specific required information is furnished to the Internal Revenue
Service. Certain persons generally are exempt from backup withholding, including
corporations and financial institutions. Certain penalties apply for failure to
furnish correct information and for failure to include reportable payments in
income. Stockholders should consult with their own tax advisers as to the
qualifications and procedures for exemption from backup withholding.
Delisting and Deregistration of Lowrance Common Stock
Lowrance common stock currently is listed for quotation on Nasdaq under the
symbol "LEIX." Upon consummation of the merger, Lowrance common stock will be
delisted from Nasdaq and deregistered under the Securities Exchange Act of 1934,
as amended. Following the merger, Lowrance stockholders will be instructed to
exchange their outstanding stock certificates for the merger consideration. See
"The Merger Agreement--Procedures for Exchange of Stock Certificates" on page
25.
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THE MERGER AGREEMENT
The following is a brief summary of the material provisions of the merger
agreement, a copy of which is attached as Appendix A to this document and is
incorporated in this document by reference. The summary is not complete and is
qualified in its entirety by reference to the merger agreement. We urge all
stockholders of Lowrance to read the merger agreement in its entirety for a more
complete description of the terms and conditions of the merger.
The Merger
The merger agreement provides that Orbital Merger Sub, Inc., a wholly owned
subsidiary of Orbital, will be merged with and into Lowrance. At the time of the
merger, the separate corporate existence of Orbital Merger Sub, Inc. will cease
and Lowrance will continue as the surviving corporation. The merger will become
effective at such time as a certificate of merger is filed with the Secretary of
State of the State of Delaware or at such later time as agreed to by the
companies. We presently expect that the merger will be effective within five
business days after all conditions in the merger agreement are met.
Treatment of Lowrance Securities
Treatment of Lowrance Series "A" Preferred Stock. Immediately before the
merger, each issued and outstanding share of Lowrance Series "A" preferred stock
will be redeemed for $4.625 in cash, without interest.
Treatment of Lowrance Common Stock. At the time of the merger, each issued
and outstanding share of Lowrance common stock will be converted into the right
to receive $7.30 in cash payable to the holders thereof, without interest.
Procedures for Exchange of Stock Certificates
Orbital has designated BankBoston, N.A. to serve as payment agent and to
exchange certificates representing Lowrance common stock for the payment of
merger consideration. As soon as reasonably practicable after the merger, the
payment agent will mail to each record holder of certificates representing
shares of Lowrance common stock, a letter of transmittal and instructions for
use in effecting the surrender of the certificates for payment. Holders of
certificates who surrender their certificates to the payment agent together with
a duly completed and validly executed letter of transmittal will receive $7.30
in cash per share payable to the holders thereof, without interest. The
surrendered Lowrance certificates will be canceled.
At the time of the merger, the stock transfer books of Lowrance will be
closed and there will be no further registration of transfers of shares of
Lowrance common stock or the Lowrance Series "A" preferred stock on the records
of Lowrance.
Six months after the merger, Orbital can require the payment agent to
deliver to Orbital all cash and other instruments in its possession relating to
the merger and which have not been distributed. After such six month period,
each holder of a Lowrance certificate must look only to Orbital for payment of
the consideration under the merger agreement.
Orbital is entitled to deduct and withhold from the consideration otherwise
payable to any holder of Lowrance common stock the amounts it is required to
deduct and withhold with respect to the payment of such consideration under the
Internal Revenue Code or any provision of state, local or foreign tax law. Any
amounts withheld will be treated as having been paid to the holder of the shares
of Lowrance common stock.
If any Lowrance certificate is lost, stolen or destroyed, the Lowrance
stockholder must provide an appropriate affidavit of that fact. Orbital may
require the owner of such lost, stolen or destroyed Lowrance certificate to
deliver a bond as indemnity against any claim that may be made against Orbital
or the payment agent with respect to the Lowrance certificate alleged to have
been lost, stolen or destroyed.
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Lowrance common stockholders should not send in their certificates until
they receive a transmittal form from the payment agent.
Appraisal Rights
Notwithstanding any provision of the merger agreement to the contrary, any
shares of common stock held by a holder who has demanded and perfected the right
of appraisal of those shares in accordance with the provisions of Section 262 of
the Delaware General Corporation Law shall not be converted into the right to
receive the merger consideration pursuant to the merger agreement, but the
holder shall only be entitled to such rights as are granted by the Delaware
General Corporation Law. If a holder of shares of common stock who demands
appraisal of such shares under the Delaware General Corporation Law effectively
withdraws or becomes ineligible for (through failure to perfect or otherwise)
the right of appraisal, then, as of the effective time of the merger or the
occurrence of such event, whichever last occurs, those shares shall be converted
into and represent only the right to receive the merger consideration upon
compliance with the provisions, and subject to the limitations, of the merger
agreement. The merger agreement requires that Lowrance shall give Orbital (a)
prompt notice of any written demands for appraisal of any shares of common stock
and (b) the opportunity to participate in all negotiations and proceedings with
respect to demands for appraisal under the Delaware General Corporation Law. The
merger agreement further provides that Lowrance shall not, except with the prior
written consent of Orbital, make any payment with respect to any demands for
appraisal of common stock or offer to settle or settle any such demands.
Representations and Warranties
The merger agreement contains representations and warranties made by
Lowrance, relating to, among other things:
. required consents and approvals;
. compliance with laws;
. Lowrance's filing of all required reports, registrations and statements
required to be filed since January 1, 1996 with the SEC and the accuracy
of the information contained in those filings;
. absence of undisclosed liabilities;
. absence of material changes;
. litigation;
. taxes;
. tax basis;
. employee benefit plans and employment matters;
. intellectual property;
. environmental matters;
. title to properties;
. permits and licenses;
. material contracts;
. insurance;
. product warranties;
. business practices;
. brokers and finders fees;
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. opinion received from financial advisors;
. the votes of stockholders required to approve the merger; and
. its organization, capitalization and ownership and organization of its
subsidiaries.
In addition, the merger agreement contains representations and warranties
made by Orbital relating to, among other things:
. organization;
. required consents and approvals;
. compliance with laws;
. financing;
. litigation; and
. brokers and finders.
Covenants Pending the Merger
Conduct of Lowrance Business. The merger agreement provides for covenants
pending the merger. Lowrance has agreed that until the merger, Lowrance and its
subsidiaries will:
. conduct business in the ordinary course consistent with past practice;
. preserve intact its business organization;
. maintain in effect any franchises, authorizations or similar rights;
. keep available the services of its present officers and key employees;
. preserve its business relationships;
. maintain and keep its properties in good repair and condition;
. maintain insurance coverage; and
. perform its obligations under contracts and agreements.
The merger agreement also restricts the ability of Lowrance and its
subsidiaries to:
. issue, sell, pledge, dispose of or encumber:
(1) any capital stock, except for redemption of the Series "A" preferred
stock; or
(2) any assets, except in the ordinary course of business and consistent
with past practice and not relating to the borrowing of money;
. amend its organizational documents;
. split, combine or reclassify any capital stock, or declare, set aside or
pay any dividend, except for dividends by Lowrance's subsidiaries to
Lowrance;
. redeem, purchase or acquire or offer to acquire any of Lowrance or its
subsidiaries' capital stock except for the redemption of the Lowrance
Series "A" preferred stock;
. incur or guarantee any indebtedness or sell any debt securities or
warrants other than in the ordinary course of business;
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. make loans, advances or capital contributions to or investments in any
other person other than between or with Lowrance and any Lowrance
subsidiaries;
. pay, discharge or satisfy any claims, liabilities or obligations;
. increase employee compensation or grant severance or termination pay, or
stay, bonus or other incentive arrangement, except in the ordinary
course of business and in accordance with past practice;
. make any new capital expenditures other than those made in accordance
with the operating and capital budget approved by Lowrance's board; and
. take any action that could reasonably be expected to result in
Lowrance's representations or warranties becoming untrue in any material
respect.
No Shopping. Lowrance further represents and warrants in the merger
agreement that none of Lowrance or any of its subsidiaries has any agreements or
understandings with any potential acquiror that would be violated or require any
payments by reason of the execution, delivery or consummation of the merger
agreement.
Further Negotiations. Lowrance and its subsidiaries have agreed to cease
any existing discussions or negotiations regarding an acquisition proposal
concerning Lowrance or its assets and to not directly or indirectly solicit,
initiate, continue, facilitate or encourage any inquiries, proposals or offers
or negotiate, explore or communicate in any way with any third party with
respect to an acquisition proposal.
However, Lowrance may, in response to an unsolicited written acquisition
proposal, furnish or disclose non-public information and negotiate or
communicate with a third party, in each case only if:
. the Lowrance board by majority vote determines in good faith, after
consulting with outside counsel, that failing to take such an action
would constitute a breach of the fiduciary duties of the board, such an
acquisition proposal being defined in the merger agreement as a
"superior proposal";
. Lowrance receives from the third party prior to taking such action a
confidentiality agreement on terms no less favorable to Lowrance than
those contained in the confidentiality agreement between Lowrance and
Orbital, but that does not provide for any exclusive right to negotiate
with Lowrance or for any payments by Lowrance; and
. Lowrance advises Orbital of all of the non-public information delivered
to such third party concurrently with the delivery of the information.
When used in this document, the term "acquisition proposal" means, with
respect to Lowrance, any inquiries, proposals or offers from any party other
than Orbital with respect to, or that could reasonably be expected to lead to,
any acquisition or purchase of a material portion of the assets or business or a
25% or more voting equity interest in, including through tender offer, or any
amalgamation, merger, consolidation or business combination with, or any
recapitalization or restructuring or any similar transaction involving Lowrance
or any of its subsidiaries.
The merger agreement provides that Lowrance will not enter into a
definitive agreement with respect to a superior proposal unless:
. Lowrance has given Orbital five business days notice of its intention to
enter into such a definitive agreement;
. if Orbital makes a counter-proposal within such five business day
period, the Lowrance board determines that the third party's proposal is
still a superior proposal;
. Lowrance concurrently terminates the merger agreement in accordance with
its terms and pays a termination fee in the amount of $2,600,000; and
. such definitive agreement allows Lowrance to terminate the merger
agreement if it receives a Superior Proposal, with termination
provisions on terms no less favorable to Lowrance as those contained in
the merger agreement.
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The merger agreement further provides that Lowrance shall within one day of
becoming aware of an acquisition proposal, advise Orbital of the receipt by
Lowrance or any of its agents or representatives of any inquiries or proposals
relating to an acquisition proposal and provide Orbital with a copy of any such
inquiry or proposal. Lowrance will also inform Orbital of the status and content
of and development with respect to any discussions regarding an acquisition
proposal, including:
. the calling of a meeting of the Lowrance board to take action with
respect to such an acquisition proposal;
. the execution of any letters of intent, memoranda of understanding or
similar non-binding agreement with respect to such an acquisition
proposal;
. the waiver of any standstill agreement to which Lowrance is or becomes a
party;
. the determination by the Lowrance board to recommend to the Lowrance
stockholders that they approve or accept a superior proposal or to
withdraw or modify in a manner adverse to Orbital its approval or
recommendation of the merger agreement;
. the determination by Lowrance to disclose publicly the receipt of a
superior proposal; and
. the waiver by Lowrance of any confidentiality agreement with a person
proposing a superior proposal.
Additional Agreements. Orbital and Lowrance have also agreed to, among other
things:
. with respect to Orbital, after the merger, defend, indemnify and hold
harmless each present and former officer, director or employee of
Lowrance and its subsidiaries against all costs or expenses, including
attorneys' fees, judgments, fines, losses, claims, damages, liabilities
or amounts paid in settlement incurred in connection with any claim,
action, suit, proceeding or investigation in connection with the merger;
. with respect to Orbital, use its reasonable efforts to obtain coverage
effective as of date of the merger for Lowrance's officers and directors
with respect to claims arising from facts or events which occurred after
January 1, 1999;
. cooperate with one another to prepare, file and furnish all necessary
information to obtain all approvals and authorizations of third parties
to any material agreements and any governmental authorities in
connection with consummation of the transactions contemplated by the
merger agreement; and
. to make such filings as may be required under the Hart-Scott-Rodino Act
including promptly filing any supplemental information which may be
requested during the initial waiting period and cooperating with each
other and using reasonable efforts to obtain the requisite approval of
the FTC and the Justice Department.
Conditions to the Merger
The respective obligations of each party to effect the merger are subject
to the satisfaction or waiver of the following conditions:
. approval of the merger agreement by the Lowrance stockholders;
. all material required governmental authorizations, consents, orders and
approvals and filings shall have been obtained, declared or filed; and
. no judgment, injunction, order or decree nor any provision of any
applicable legal requirement prohibiting the consummation of the merger
shall exist.
The obligation of Orbital to consummate the merger is also subject to the
satisfaction or waiver of the following conditions:
29
<PAGE>
. the representations and warranties of Lowrance set forth in the merger
agreement that are qualified as to materiality shall be true and correct
and the representations and warranties of Lowrance set forth in the
merger agreement that are not so qualified shall be true and correct in
all material respects as of the closing date, except that those
representations and warranties that address matters only as of a
particular date shall remain true and correct as of such particular
date; and
. receipt of all third-party consents and approvals required to consummate
the transactions contemplated by the merger agreement.
. Holders of not more than 10% of the total outstanding Lowrance common
stock shall have demanded appraisal rights for their shares under the
Delaware General Corporation Law.
The obligation of Lowrance to consummate the merger is also subject to the
satisfaction or waiver by Lowrance of the following condition:
. the representations and warranties of Orbital in the merger agreement
that are qualified as to materiality shall be true and correct and the
representations and warranties of Orbital set forth in the merger
agreement that are not so qualified shall be true and correct in all
material respects as of the closing date, except that those
representations and warranties which address matters only as of a
particular date shall remain true and correct as of such particular
date.
Termination
The merger agreement may be terminated at any time prior to the effective
time of the merger:
1. by mutual written consent of the companies, duly authorized by their
respective boards of directors;
2. by Orbital:
. if Lowrance materially breaches a covenant or agreement;
. if any Lowrance representation or warranty that is qualified as to
materiality shall have become untrue; or
. if any Lowrance representation or warranty not so qualified as to
materiality shall have become untrue in any material respect;
provided that such breach has not been cured within 20 days of
notice to Lowrance;
3. by Lowrance:
. if Orbital materially breaches a covenant or agreement;
. if any Orbital representation or warranty that is qualified as to
materiality shall have become untrue; or
. if any Orbital representation or warranty not so qualified as to
materiality shall have become untrue in any material respect;
provided that such breach has not been cured within 20 days of notice
to Orbital;
4. by Orbital or Lowrance:
. if the closing date of the merger shall not have occurred, other
than through a failure of any party to fulfill its obligations under
the merger agreement, on or before December 23, 1999;
. if any governmental authority shall have issued an order, decree or
ruling or taken any other action restraining, enjoining or otherwise
prohibiting the transactions contemplated by the merger
30
<PAGE>
agreement and such order, decree, ruling or other action shall have
become final and unappealable; or
. if the Lowrance stockholders shall not have approved or adopted the
merger agreement at the Lowrance stockholders' meeting or any
adjournment of that meeting;
5. by Lowrance, if the Lowrance board determines to accept a superior
proposal, as defined in the merger agreement, and withdraws its
recommendation in favor of adoption and approval of the merger
agreement because it believes in good faith that such a withdrawal is
necessary for the Lowrance board to act in a manner consistent with its
fiduciary duties;
6. by Orbital:
. if the Lowrance board shall have withdrawn or materially and
adversely modified its recommendation of the merger agreement;
. if the Lowrance board shall have recommended to the Lowrance
stockholders that they approve an acquisition proposal, as defined
in the merger agreement, other than contemplated by the merger
agreement;
. if the Lowrance board recommends that the Lowrance stockholders
tender their shares in a tender offer or exchange offer which, if
successful, would result in a person or group becoming the
beneficial owner of 50% or more of the Lowrance common stock; or
. if the Lowrance board fails to call and hold the Lowrance
stockholders meeting by December 23, 1999;
7. by Lowrance if the Orbital board shall have withdrawn or materially and
adversely modified its approval of the merger agreement.
If a termination of the merger agreement occurs because of the occurrence
of any of the events listed under paragraphs 5 or 6 above, and if Lowrance shall
have entered into an agreement with respect to an acquisition proposal, as
defined in the merger agreement, or the Lowrance board shall have withdrawn,
modified or changed its approval or recommendation of the merger agreement in a
manner adverse to Orbital, then Lowrance shall pay to Orbital a fee of
$2,600,000 within three business days after Orbital's written request.
If a termination of the merger agreement occurs because of the occurrence
of any of the events listed under paragraph 7 above, then Orbital shall pay to
Lowrance a fee of $2,600,000 within three business days after Lowrance's written
request.
Stockholder Support Agreement
As an inducement and condition to Orbital's willingness to enter into the
merger agreement, Darrell J. Lowrance, who, at the record date, beneficially
owned 1,907,423 shares, or approximately 50.6%, of Lowrance common stock, has
entered into a stockholder support agreement for the benefit of Orbital.
In the stockholder support agreement, Darrell Lowrance has agreed that,
subject to performance of his fiduciary duties as an officer, director and
majority stockholder of Lowrance, at any Lowrance stockholder meeting, however
called, and in any action by written consent of the Lowrance stockholders, he
will vote all of his shares of Lowrance common stock:
. in favor of approval and adoption of the merger agreement and any other
matter necessary to consummate the transactions contemplated by the
merger agreement; and
. against any other merger or merger agreement or similar transaction
involving Lowrance or any other acquisition proposal.
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<PAGE>
In addition, Darrell Lowrance also agreed in the stockholder support
agreement that he will not, nor will he permit any of his agents and
representatives to directly or indirectly encourage, solicit, initiate, enter
into or conduct discussions or negotiations with or provide non-public
information to any person with respect to an acquisition proposal.
The stockholder support agreement will terminate upon the earliest to occur
of the merger or any termination of the merger agreement in accordance with the
terms of the merger agreement.
Appraisal Rights
If the merger is consummated, a holder of record of shares of common stock
who objects to the terms of the merger may seek an appraisal under Section 262
of the Delaware General Corporation Law of the "fair value" of such holder's
shares. The following is a summary of the principal provisions of Section 262
and does not purport to be a complete description. A copy of Section 262 is
attached to this proxy statement as Appendix C. Failure to take any action
required by Section 262 will result in a termination or waiver of a
stockholder's rights under Section 262.
1. A stockholder electing to exercise appraisal rights must (a) deliver
to Lowrance, before the Lowrance stockholders vote on the merger
agreement, a written demand for appraisal that is made by or on behalf
of the person who is the holder of record of common stock for which
appraisal is demanded and (b) not vote in favor of adopting the merger
agreement. The demand must be delivered to Lowrance Electronics, Inc.
at 12000 East Skelly Drive, Tulsa, Oklahoma 74128, Attention: Mark
Wilmoth, Chief Financial Officer. A proxy or vote against adopting the
merger agreement does not constitute a demand. A stockholder electing
to take such action must do so by a separate written demand that
reasonably informs Lowrance of the identity of the holder of record
and of such stockholder's intention to demand appraisal of such
holder's common stock. Because a proxy left blank will, unless
revoked, be voted FOR adoption of the merger agreement, a stockholder
electing to exercise appraisal rights who votes by proxy must not
leave the proxy blank but must vote AGAINST adoption of the merger
agreement or ABSTAIN from voting for or against adoption of the merger
agreement.
2. Only the holder of record of common stock is entitled to demand
appraisal rights for common stock registered in that holder's name.
The demand must be executed by or for the holder of record, fully and
correctly, as the holder's name appears on the holder's stock
certificates. If common stock is owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, the demand
should be executed in that capacity. If common stock is owned of
record by more than one person, as in a joint tenancy or tenancy in
common, the demand should be executed by or for all owners. An
authorized agent, including one of two or more joint owners, may
execute the demand for appraisal for a holder of record; however, the
agent must identify the owner or owners of record and expressly
disclose the fact that, in executing the demand, the agent is acting
as agent for the owner or owners of record. A holder of record, such
as a broker, who holds common stock as nominee for beneficial owners
may exercise a holder's right of appraisal with respect to common
stock held for all or less than all of such beneficial owners. In such
case, the written demand should set forth the number of shares of
common stock covered by the demand. Where no number of shares of
common stock is expressly mentioned, the demand will be presumed to
cover all shares of common stock standing in the name of the holder of
record.
3. Within 10 days after the effective time of the merger, Lowrance will
send notice of the effectiveness of the merger to each person who
prior to the effective time of the merger satisfied the foregoing
conditions.
4. Within 120 days after the effective time of the merger, Lowrance or
any stockholder who has satisfied the foregoing conditions may file a
petition in the Delaware Court of Chancery demanding a determination
of the fair value of the common stock. Stockholders seeking to
exercise appraisal rights should not assume that Lowrance will file a
petition to appraise the value of their common stock or that Lowrance
will initiate any negotiations with respect to the "fair value" of
such common stock.
32
<PAGE>
Accordingly, holders of common stock should initiate all necessary
action to perfect their appraisal rights within the time periods
prescribed in Section 262.
5. Within 120 days after the effective time of the merger, any
stockholder who has complied with the requirements for exercise of
appraisal rights, as discussed above, is entitled, upon written
request, to receive from Lowrance a statement setting forth the
aggregate number of shares of common stock not voted in favor of the
merger and with respect to which demands for appraisal have been made
and the aggregate number of holders of such common stock. Lowrance is
required to mail such statement within 10 days after it receives a
written request to do so.
6. If a petition for an appraisal is timely filed, after a hearing on the
petition, the Delaware Court of Chancery will determine the
stockholders entitled to appraisal rights and will appraise the common
stock owned by such stockholders, determining its "fair value"
exclusive of any element of value arising from the accomplishment or
expectation of the merger and will determine the amount of interest,
if any, to be paid upon the value of the common stock of the
stockholders entitled to appraisal. Any such judicial determination of
the "fair value" of common stock could be based upon considerations
other than or in addition to the price paid in the merger and the
market value of common stock, including asset values, the investment
value of the common stock and any other valuation considerations
generally accepted in the investment community. The value so
determined for common stock could be more than, less than or the same
as the consideration paid pursuant to the merger agreement. The Court
may also order that all or a portion of any stockholder's expenses
incurred in connection with an appraisal proceeding, including,
without limitation, reasonable attorneys' fees and fees and expenses
of experts utilized in the appraisal proceeding, be charged pro rata
against the value of all common stock entitled to appraisal.
7. Any stockholder who has duly demanded an appraisal in compliance with
Section 262 will not, after the effective time of the merger, be
entitled to vote the shares subject to such demand for any purpose or
be entitled to dividends or other distributions on that common stock
(other than those payable or deemed to be payable to stockholders of
record as of a date prior to the effective time of the merger).
8. Holders of common stock lose the right to appraisal if no petition for
appraisal is filed within 120 days after the effective time of the
merger, or if a stockholder delivers to Lowrance a written withdrawal
of such stockholder's demand for an appraisal and an acceptance of the
merger, except that any such attempt to withdraw made more than 60
days after the effective time of the merger requires Lowrance's
written approval. If appraisal rights are not perfected or a demand
for appraisal rights is withdrawn, a stockholder will be entitled to
receive the consideration otherwise payable pursuant to the merger
agreement.
If an appraisal proceeding is timely instituted, such proceeding may not be
dismissed as to any stockholder who has perfected a right of appraisal without
the approval of the Delaware Court of Chancery.
33
<PAGE>
LOWRANCE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following table sets forth for the periods indicated the relative
percentages that certain items of income and expense bear to net sales:
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended July 31, April 30,
------------------------ -----------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(percent of net sales) (percent of net sales)
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 66.2 74.3 72.0 71.7 66.6
-------- -------- -------- -------- --------
Gross profit 33.8 25.7 28.0 28.3 33.4
Operating expenses:
Selling and administrative 24.6 25.7 23.1 21.1 22.9
Severance Costs -- -- -- -- 1.5
Research and development 3.6 3.8 2.9 3.4 2.6
-------- -------- -------- -------- --------
Operating income (loss) 5.6 (3.8) 2.0 3.8 6.4
Interest expense (2.0) (2.3) (3.8) (3.6) (3.4)
Other, net (1.3) (1.4) (1.6) (1.4) (1.3)
-------- -------- -------- -------- --------
Income (loss) before income taxes 2.3 (7.5) (3.4) (1.2) 1.7
Provision (benefit) for income taxes .5 (2.6) 1.0 (.4) --
-------- -------- -------- -------- --------
Net income (loss) 1.8 (4.9) (4.4) (.8) 1.7
======== ======== ======== ======== ========
</TABLE>
Demand for Lowrance's products is seasonal with approximately 30% to 40% of
its sales and a majority of its net income usually occurring in the third
quarter, February through April. During this period, Lowrance's customers
purchase Lowrance's products so that the products will be available to sport
fishermen and recreational boat owners for the peak fishing and boating season.
Generally, with the exception of the third quarter, quarterly results are
dependent on the timing and acceptance of new product introductions, advertising
and product availability and, as such, Lowrance does not experience any
consistent quarterly trends for those three quarters.
34
<PAGE>
The following table sets forth the quarterly results for the past 15 fiscal
quarters:
<TABLE>
<CAPTION>
Years Ended July 31, Sales Net Income (Loss)
- ----------------------------------- ------------------ --------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
1996
- -----------------------------------
First Quarter (Aug.-Oct.) $ 13,967 14.8% $(1,175) (67.4)%
Second Quarter (Nov.-Jan.) 20,692 21.9 (380) (21.8)
Third Quarter (Feb.-Apr.) 32,761 34.6 2,237 128.3
Fourth Quarter (May-July) 27,159 28.7 1,061 60.9
-------- ----- ------- -----
Total for Year $ 94,579 100.0% $ 1,743 100.0%
======== ===== ======= =====
1997
- -----------------------------------
First Quarter (Aug.-Oct.) $ 14,110 13.5% $(2,371) (45.7)%
Second Quarter (Nov.-Jan.) 20,114 19.2 (1,246) (24.0)
Third Quarter (Feb.-Apr.) 39,594 37.8 1,209 23.3
Fourth Quarter (May-July) 30,841 29.5 (2,782) (53.6)
-------- ----- ------- -----
Total for Year $104,659 100.0% $(5,190) (100.0)%
======== ===== ======= =====
1998
- -----------------------------------
First Quarter (Aug.-Oct.) $ 20,039 21.8% $ (838) (21.0)%
Second Quarter (Nov.-Jan.) 20,324 22.2 (337) (8.4)
Third Quarter (Feb.-Apr.) 28,354 30.9 619 15.5
Fourth Quarter (May-July) 22,989 25.1 (3,439) (86.1)
-------- ----- ------- -----
Total for Year $ 91,706 100.0% $(3,995) (100.0)%
======== ===== ======= =====
1999
- -----------------------------------
First Quarter (Aug.-Oct.) $ 16,208 N/A $(1,308) N/A
Second Quarter (Nov.-Jan.) 17,922 N/A (559) N/A
Third Quarter (Feb.-Apr.) 32,600 N/A 2,997 N/A
-------- ----- ------- -----
Total for Nine Months $ 66,730 N/A $ 1,130 N/A
======== ===== ======= =====
</TABLE>
Demand for Lowrance's products is affected by the rapidly changing
technological environment of consumer electronics. If Lowrance fails to
anticipate technological innovations advanced by its competitors and introduce
technologically competitive products, demand for Lowrance's products will
diminish. In each of the past three fiscal years, new product sales have
accounted for more than 10% of total sales.
Additionally, sales of Lowrance's products are affected by adverse changes
in economic conditions, increased oil prices or adverse weather conditions.
Lowrance believes that the lower-priced and easier to use liquid crystal display
sonar products available in recent years attracted an increased number of less
serious fishermen to the marketplace who are more likely to reduce their
purchase of sonar products during adverse economic conditions and/or prolonged
adverse weather conditions. Lowrance believes that the sonar market in the U.S.
and Canada is mature, with no significant growth in boating or fishing
participation in recent years. Any opportunity for growth in these markets will
rely on the ability of Lowrance to increase its market share. Some market
growth for sonar products is anticipated in the international markets as
Lowrance continues to focus efforts in these areas. International sales for
1998 decreased from 1997 by $3.1 million, or 12%. Canadian and Australian sales
were down 9%, and all other international sales decreased 16%, primarily due to
the strengthening of the U.S. dollar and the general softness in demand. The
total market for global positioning system products, both domestic and
international, is expected to continue to expand. Lowrance's future success in
global positioning systems is heavily dependent upon keeping pace with
competitors who are rapidly introducing new products and new pricing strategies
in the increasingly competitive marketplace. Accordingly, Lowrance's future
sales could be adversely affected by a reduction in consumer spending, a decline
in recreational boating and sport fishing resulting from significant increases
in oil prices or new product introductions by competitors.
35
<PAGE>
Sales of sonar products including combination sonar/global positioning
system units were down $3.4 million, or 5.4%, from fiscal 1997 to 1998,
following a decrease of approximately $5.9 million, or 9.5%, from fiscal 1996 to
1997. The decline in sonar sales when comparing 1997 to 1998 results from a
generally poor retail selling season due to adverse weather conditions, as well
as Lowrance's significantly reduced advertising expenditures and reduced
tradeshow activity, and the effects of price increases on some of Lowrance's
sonar products. Sales of global positioning system products decreased
approximately $9.6 million, or 23%, from fiscal 1997 to 1998 and increased
approximately $15.1 million, or 84%, from fiscal 1996 to 1997. The 1997
increase is primarily attributable to Lowrance's introduction of low-cost
gimbal-mount and hand-held global positioning system products. The decrease in
global positioning system sales for 1998 relates to increased competition at
lower price points, significantly reduced advertising expenses and the effects
of price increases on some of Lowrance's global positioning system products.
Lowrance's production of its products is scheduled on the basis of sales
forecasts rather than actual orders. Products are designed and manufactured and
parts are ordered in advance of the peak sales period so that products can be
shipped within days of receipt of customers' orders. Lowrance's profitability
is largely dependent upon its ability to accurately forecast and plan for market
demand for its products in advance of the peak selling season and to meet the
demand of the peak sales months with technologically acceptable products at
acceptable prices.
Lowrance begins planning for sales for the upcoming fiscal year in February
or March of the year preceding such upcoming fiscal year. The planning includes
the preparation of an annual sales forecast for the upcoming fiscal year. The
forecast is reviewed by Lowrance at least monthly and, if necessary, the
forecast is revised. The forecast of products must allow time for ordering raw
materials and parts, which may take as long as five months for delivery
following Lowrance's order, and for manufacturing so that Lowrance has a build-
up of finished goods inventory sufficient to meet demand prior to the peak sales
months. Failure by Lowrance to accurately forecast market trends, introduction
of technological advancements or the demand for particular models can result in
a build-up of raw material and finished goods inventory that is obsolete or must
be liquidated at reduced prices. The build-up of raw material and finished
goods inventory in anticipation of orders during the peak selling season, cash
outlays required to purchase tooling to manufacture new products and extended
payment terms of up to 150 days offered by Lowrance historically result in a
significant increase in working capital requirements from a low in June through
August to a high in September through December.
Lowrance uses a Material Requirements Planning system to control inventory
by eliminating stockpiling and by utilizing a continuous flow method of
manufacturing. Under the continuous flow method of manufacturing, parts and
supplies are ordered and scheduled for purchase and delivery only at such time
as they are expected to be needed in the manufacturing process. The Material
Requirements Planning system also results in a reduction of Lowrance's safety
stock and a shorter manufacturing cycle. However, extenuating circumstances can
and do occur which render a Material Requirements Planning system ineffective at
controlling inventory levels. Such circumstances were experienced during 1997
and are discussed below in "Liquidity and Capital Resources."
The following discussion and analysis relate to factors that have affected
the financial condition and operating results of Lowrance for fiscal years 1996
through 1998 and for the nine months ended April 30, 1998 and 1999 and should be
read in conjunction with the consolidated financial statements of Lowrance and
the notes thereto included elsewhere in this document.
Results of Operations
Comparison of Nine Months Ended April 30, 1998 and 1999
Net Sales
- ---------
Net sales for the nine months ended April 30, 1999 decreased 2.9% when
compared to the same period in fiscal 1998. All of the sales decrease was the
result of a decline in unit sales as the average price per unit was unchanged.
Unit sales decreased primarily in low cost permanent mount and portable global
positioning system products. The decline in low cost global positioning system
unit sales resulted from increased competition.
36
<PAGE>
Gross Profit
- ------------
Gross profit as a percentage of net sales for the nine months ended April
30, 1999 was 33.4% compared to 28.3% for the same period in fiscal 1998. This
increase results from price increases on certain models, lower manufacturing
costs resulting from improved efficiencies in Lowrance's Mexico manufacturing
facility and a shift in mix of products sold toward Lowrance's higher margin
units.
Operating Expenses
- ------------------
Operating expenses, excluding severance costs, as a percentage of net sales
for the nine months ended April 30, 1999 were 25.5% compared to 24.6% for the
same period in fiscal 1998. Total costs increased by $132,000. Lower product
return costs and research and development costs were offset by increases in
advertising and promotional expenses. During the first nine months of fiscal
1999, Lowrance recognized $982,000 in severance costs related to Tulsa workforce
reductions. The efforts are aimed at reducing costs through headcount
elimination, as well as the transferring of certain production related jobs to
Lowrance's Mexico manufacturing facility. The total number of employees
affected was 61. Through April 30, 1999, 51 employees had been terminated and
payments of approximately $461,000 had been made. Substantially all severance
benefits are anticipated to be paid during fiscal 1999.
Income Taxes
- ------------
Lowrance recorded no net income tax provision for the nine months ended
April 30, 1999, rather Lowrance reduced the $2,000,000 valuation allowance
established at the end of fiscal 1998 by the estimated 1999 year-to-date
provision of $420,000, leaving a valuation allowance at April 30, 1999 of
$1,580,000. For the nine months ended April 30, 1998, Lowrance recorded a tax
benefit of $300,000. The interim income tax provision is based on an estimate
of the full-year provision. Estimated provisions recorded during interim
periods may be periodically revised, if necessary, to reflect current estimates.
Comparison of Years Ended July 31, 1997 and 1998 and Years Ended July 31, 1996
and 1997
Net Sales
- ---------
Net sales for fiscal 1998 decreased 12.4% from fiscal 1997. Unit sales,
which includes sonar units, combination sonar/navigation units and stand alone
navigation units decreased 16.3% and the average price per unit increased 1.2%.
The decrease in unit sales resulted from a 28.4% reduction in sales of
Lowrance's navigation products coupled with a 7.6% reduction in sales of sonar
products. Reduced sales of Lowrance's low and mid cost navigation products (43%
decrease in units) was offset in part by increases in the unit sales of portable
mapping, aviation and high-end gimbal units (28% increase in units). Sales of
the Lowrance sonar products increased 2.3%, offset by a decrease of 19.2% in
sales of Eagle sonar products. The decreases in navigation sales resulted from
a significant reduction in advertising expenditures, price increases in certain
low cost models and increased competition at the lower price points. The
decreases in Eagle sonar sales resulted from generally weak market conditions
during the spring selling season caused by adverse weather conditions in certain
of Lowrance's key markets in North America. Lowrance believes that the Eagle
products are generally purchased by the less serious fishermen who are more
likely to be influenced by poor weather conditions. Additionally, reduced
advertising and consumer outdoor show exposure along with price increases on
certain models had a negative impact on Eagle sonar sales.
Net sales for fiscal 1997 increased 10.7% over fiscal 1996. Unit sales
increased 19.4% and the average price per unit decreased 7.9%.
When comparing fiscal 1997 to 1996, unit sales increased due to higher
sales of Lowrance's new low-cost hand-held global positioning system products
which are sold primarily to mass merchandisers, mail order catalog companies,
retail sporting goods stores and wholesalers. This increase was slightly offset
by decreased sales of
37
<PAGE>
Lowrance's sonar products. The increase in global positioning system sales
resulted from the continuing expansion of this market, as well as Lowrance's
introduction of the $199 Eagle Explorer and the $239 Lowrance GlobalNav 200
models which began shipping in the second and third quarters of fiscal 1997,
respectively. Also, the two new portable global positioning system products with
mapping capabilities, which began shipping in late fiscal 1996, were available
for the entire year in fiscal 1997. The decrease in the average price per unit
resulted from increased sales of the Explorer and GlobalNav units and an
increased weighting in the sonar sales mix toward low-priced sonar units. This
weighting was the result of limited availability of Lowrance's six new mid and
upper priced sonar products. Production delays resulted in several of these
products being shipped in limited quantities until late in the third quarter of
fiscal 1997. Additionally, retailers are allocating more shelf space and are
open to allocating more inventory dollars to global positioning systems at the
expense of sonar products due to the rapid growth and market potential of global
positioning systems.
Gross Profit
- ------------
The gross margin percentage increased from 25.7% to 28.0% from fiscal 1997
to fiscal 1998, due primarily to:
. the shift in mix of units sold away from Lowrance's low and mid-priced
global positioning system units which generally have a correspondingly
low profit margin;
. a continuing shift of manufacturing operations to Lowrance's Mexico
facility in fiscal 1998;
. more efficient operations offset by lower total volumes in fiscal 1998
versus fiscal 1997; and
. price increases on some of the global positioning system and sonar
models.
The gross profit margin decreased from 33.8% in fiscal 1996 to 25.7% in
fiscal 1997 due primarily to:
. the shift in mix of units sold to the low-priced global positioning
system units which generally have a correspondingly low profit margin;
. unplanned production of some of the new 1997 products in Lowrance's
Tulsa production facility versus in the new Mexico facility;
. inefficiencies in some of the production processes in the Tulsa
production facility; and
. high production labor cost and employee turnover in Tulsa due to
record low unemployment in that labor market.
Additionally, the new sonar products, which began shipping in volume in the
second and third quarters of fiscal 1997, generally carry above average margins
for Lowrance, but were not available for much of the year.
Operating Expenses
- ------------------
Operating expenses, as a percentage of net sales decreased to 26.0% in
fiscal 1998 from 29.5% in fiscal 1997. Total costs decreased by $6,960,000.
The major factors contributing to this decrease were (1) a reduction of
approximately $5.6 million in advertising, selling and marketing expenditures
and (2) reduced research and development expenditures and general and
administrative costs, offset in part by increases in other variable operating
expenses, namely, product returns costs.
Operating expenses, as a percentage of net sales increased from 28.3% in
fiscal 1996 to 29.5% in fiscal 1997. Total cost increased $4,106,000. The
major factors contributing to this increase were:
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. additional advertising and marketing expenses related to Lowrance's
push to acquire market share in the global positioning system market
and in introducing the new sonar products;
. other variable selling expenses, such as freight-out and product
returns cost, which were up approximately $700,000 due to increased
volumes; and
. research and development expenditures, which were up $500,000 due to
Lowrance's continuing efforts to develop new products.
Expense reductions in general and administrative costs partially offset the
effects of the above increases.
Interest Expense
- ----------------
Interest expense in fiscal 1998 increased by $1.1 million due to:
. increased average borrowing levels related to Lowrance's revolving
credit line, as well as new term loan borrowings of $5,000,000;
. a 0.75% increase in the interest rate under the revolving credit line;
and
. an increase in interest charged by Lowrance's suppliers due to
Lowrance's continuing inability to pay within stated terms.
Interest expense in fiscal 1997 increased by $517,000 from fiscal 1996 due
to increased borrowing levels primarily associated with Lowrance's revolving
credit line. The increased borrowings under the revolving credit line resulted
from higher working capital needs to support increased sales levels, the buildup
of inventories and support of the move of some of the manufacturing operations
to Lowrance's Mexico manufacturing facility.
Income Taxes
- ------------
The effective tax rate was 20.7% in fiscal 1996, (34.1)% in fiscal 1997 and
26.2% in fiscal 1998. For fiscal 1996, the effective tax rate is less than the
statutory federal tax rate of 34% due primarily to increases in state income tax
credits and refunds of prior years income taxes and related adjustments. For
fiscal 1998, Lowrance established a valuation allowance of $2 million against
the net deferred tax asset which resulted in a 26.2% effective income tax
expense.
Income/(Loss)
- -------------
Net income (loss) as a percentage of net sales was (4.4%) in fiscal 1998,
(4.9%) in fiscal 1997 and 1.8% in fiscal 1996.
Liquidity and Capital Resources
Lowrance's working capital needs increase in the fall and winter months as
Lowrance manufactures and stockpiles its products for the peak sales period from
January through April. Also, the days outstanding in Lowrance's accounts
receivable increase in the off-season due to favorable purchase terms offered to
customers in order to stimulate sales during these slower periods.
Lowrance's primary sources of liquidity are cash flow from operations, an
accounts receivable and inventory line of credit and lease financing, as well as
financing provided by Lowrance's vendors. The line of credit allows Lowrance to
borrow up to 85% of its qualifying accounts receivable, 30% of qualifying raw
materials inventory and 60% of qualifying finished goods inventory. Borrowings
for inventory, however, are limited to $13,000,000. A yearly lease line of
credit is usually established to finance the acquisition of qualifying equipment
and other assets.
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Traditionally, Lowrance's near-term liquidity is at its lowest during the
period August through December due to limits on borrowings against inventories,
cash outlays required to purchase tooling to manufacture new products, and
extended payment terms offered to customers to stimulate sales during the
seasonally slow period. As previously described, it is during this period that
Lowrance begins to manufacture and build-up inventory levels in anticipation of
product demands for the peak sales months. By the end of the second quarter,
sales historically increase and Lowrance's sources of liquidity begin to
improve.
In fiscal 1996, Lowrance announced plans to expand its Mexican
manufacturing operation to meet increasing demand for its products, particularly
global positioning system models. Lowrance entered into a long-term lease for a
new manufacturing facility and was responsible for funding a large portion of
the leasehold improvements necessary for the building to meet its specific
production needs. In addition to funding the leasehold improvements, it was
necessary to build additional inventory levels during the last few months of
fiscal 1996 to support expected sales during the first quarter of fiscal 1997.
During fiscal 1997, Lowrance began relocating some of its manufacturing
operations to its new plant in Mexico. The start-up of the new facility in
Mexico was substantially on schedule. However, record low unemployment rates in
Tulsa resulted in excessive turnover of production workers and an inability to
maintain sufficient trained staff to support Lowrance's substantially increased
production schedule intended to support record demand for its global positioning
system products. This problem was magnified by management's focus on the start-
up of the new Mexico facility and production delays of Lowrance's six new sonar
models. These problems caused an excessive build-up of raw material and work-in
process inventories that Lowrance could not convert to finished goods during the
fiscal year. These factors resulted in inventories remaining well above
historical levels throughout fiscal 1997. Management implemented controls to
better manage production scheduling and inventory levels. During fiscal 1998,
first and second quarter sales exceeded fiscal 1997 levels for the same periods;
however, sales unexpectedly declined during the third and fourth quarters. The
timing of the sales decline did not allow for reductions of shipments of raw
materials from vendors based on the long lead times for some of the component
parts. As a result, inventory levels during fiscal 1998 continued to be higher
than historical levels. Inventory is expected to gradually decline throughout
fiscal 1999.
Cash flows provided by financing activities during the nine months ended
April 30, 1999 were used to finance capital additions not financed by leases of
$0.3 million and to provide funds consumed in operating activities of $1.1
million. Cash flows provided by financing activities were used to finance the
net capital additions for fiscal 1998 of $0.6 million and net cash used in
operating activities of $1.6 million. Cash flows provided by financing
activities for fiscal 1997 of $2 million were used to finance capital additions
not financed by leases of $2.7 million and to provide funds consumed in
operating activities of $2.6 million. In fiscal 1996, net cash provided by
financing activities was used to finance capital additions not financed by
leases of $1.9 million and to provide funds consumed in operating activities of
$1.3 million.
At April 30, 1999, there was $18.8 million outstanding under Lowrance's
line of credit which is approximately the maximum amount allowable given the
levels of collateral, which is more fully described in note 3 to Lowrance's
consolidated financial statements.
Management expects the sources discussed above to satisfy Lowrance's
current financing needs. Because of the operating losses incurred during the
previous two fiscal years, combined with unusually high inventory levels,
Lowrance has had to delay payments to vendors beyond historical levels.
Currently, substantially all vendors are paid within terms, and Lowrance expects
to maintain payments within terms through the early fall of 1999.
Working Capital
- ---------------
Lowrance's working capital ratio was 2.5 at April 30, 1999 and 1.7 at April
30, 1998. The change in the ratio is due to a decrease in current maturities of
long-term debt resulting from an amendment to Lowrance's financing package made
in November 1998 which is discussed in note 3 to Lowrance's consolidated
financial statements. The working capital ratio was 1.9 at July 31, 1998 and
1.6 at July 31, 1997. The change in this ratio is due to the lower level of
working capital at July 31, 1998, as discussed above.
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Inventory levels at April 30, 1999 were $7.9 million lower than at the same
point in fiscal 1998. Management expects that inventories will continue to
decline during the balance of fiscal 1999. As the inventory level declines,
management also expects payments to vendors to improve correspondingly.
Lowrance does not expect substantial realization problems with this inventory.
Inventory levels at July 31, 1998 were down $2.6 million or 9.5% from July
31, 1997. This decrease resulted from lower sales levels during the third and
fourth quarters of fiscal 1998 versus fiscal 1997. The decrease in trade
payables directly relates to the decrease in inventories and the additional
borrowings discussed above.
Capital Expenditures
- --------------------
Capital expenditures were $1,304,000 in fiscal 1998, where substantially
all of this amount was related to production equipment and tooling. Capital
expenditures were $3,790,000 in fiscal 1997 and $3,968,000 in fiscal 1996, of
which $2.9 million in 1997 and $2.7 million in 1996 were related to tooling and
production equipment. Expenditures in fiscal 1996 and 1997 were unusually high
due to the addition of several new global positioning system products and an
expansion in production capacity including new production facilities in Mexico.
Capital expenditures were $353,000 during the first nine months of fiscal
1999 compared to $1,291,000 for the comparable period in fiscal 1998.
Substantially all of the expenditures in both periods were for tooling and
production equipment.
Effects of Inflation
A significant portion of Lowrance's costs and expenses consist of
materials, supplies, salaries, and wages that are affected by inflation. Due to
the intense market pressures on prices, Lowrance does not believe that it will
be able to pass on inflationary increases in its selling prices. Accordingly,
Lowrance concentrates on changes in design, manufacturing process, material
scheduling and sourcing to help contain costs. Lowrance does not expect that
the effects of inflation will have a significant impact on its profitability in
the near future. Additionally, a significant portion of Lowrance's raw material
items are sourced overseas. Significant devaluation of the dollar relative to
these currencies would not be passed on in the form of price increases to
consumers.
Recently-Issued Accounting Principles
Lowrance adopted the provision of SFAS No. 128, Earnings Per Share,
effective for the fiscal year ended July 31, 1998. This statement establishes
new standards for computing and presenting earnings per share and requires
restatement for all prior period earnings per share data. The adoption of this
statement resulted in the dual presentation of basic and diluted earnings per
share on Lowrance's income statement. In accordance with this statement,
Lowrance has applied these provisions on a retroactive basis.
Lowrance adopted the provisions of SFAS No. 129, Disclosures of Information
about Capital Structure, effective for the fiscal year ended July 31, 1998.
This Statement consolidates existing pronouncements on required disclosures
about a company's capital structure including a brief discussion of rights and
privileges for securities outstanding. The adoption of this Statement has no
material effect on Lowrance's consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument including certain derivative instruments embedded in other contracts
be recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income statement.
Companies must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 is effective for
fiscal years beginning after June 15, 2000. Lowrance has not yet quantified the
impact of adopting SFAS No. 133 on its financial statements and has not
determined the
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timing of or method of the adoption of SFAS No. 133. However, as of August 31,
1999, Lowrance had no outstanding derivative instruments.
Year 2000 Compliance
Lowrance is taking appropriate steps to ensure that its computer systems
will properly recognize date sensitive information when the year changes to 2000
or "00." Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail. Lowrance is in the process of
evaluating its computer systems to identify those that could be affected by this
issue. All significant systems have been tested and all major issues have been
addressed. Lowrance is also communicating with key suppliers and vendors to
coordinate year 2000 compliance. The costs associated with ensuring that
Lowrance's systems are year 2000 compliant are expected to approximate $500,000
and will be incurred during fiscal 1999. Lowrance believes that the year 2000
issue will not pose significant operational problems for Lowrance's computer
systems, and therefore, will not have a significant impact on the operations of
Lowrance.
The highest risk area for Lowrance related to the year 2000 issues is
noncompliance by third parties. At this time, the most reasonably likely worst
case scenario would be year 2000 noncompliance by third parties that comprised a
significant level of business conducted with Lowrance. Depending upon the level
of noncompliance, Lowrance could be adversely impacted by such things as
communication problems with third parties, including order processing, purchase
order placement and/or scheduling problems related to the manufacturing of
Lowrance's products. The major risk areas associated with third party
noncompliance have been identified. As the year 2000 compliance process
continues, Lowrance will develop contingency plans that it deems necessary based
on its evaluations of third party readiness. No such contingency plans have
been developed to date. Based upon its assessment of third party assurances at
this time, Lowrance does not anticipate any material disruptions in its business
activities as a result of third party year 2000 noncompliance, although it
cannot be certain that such disruptions will not occur.
Quantitative and Qualitative Disclosure About Market Risk
Lowrance is exposed to cash flow and interest rate risk due to changes in
interest rates with respect to its long-term debt. Lowrance has a $33.9 million
financing package consisting of a $26.5 million revolving line of credit and a
$7.4 million term loan. The financing package carries an interest rate of prime
plus 1.5%.
Outlook
During fiscal 1997 and 1998, Lowrance incurred significant operating losses
and for the last three fiscal years has had negative cash flows from operations.
In response to the operating results, Lowrance has addressed operational
problems related to the start-up of its Mexico manufacturing facility and
related manufacturing operations which are still located in Tulsa, Oklahoma.
Lowrance has refocused its sales and marketing efforts to:
. significantly expand distribution of some of its more popular products
under the Lowrance brand name; and
. increase expenditures for print advertising and boat show
participation and promotions which had decreased significantly in
fiscal 1998.
In addition, as discussed in note 3 to Lowrance's consolidated financial
statements, Lowrance and its primary lender amended the credit agreement to
provide for an additional $1.8 million advance under an existing term loan to
meet short-term vendor requirements related to past due payables.
Lowrance currently anticipates a return to profitability for fiscal 1999,
primarily as the result of:
. continuing favorable economic and market conditions;
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. market acceptance of Lowrance's 1999 product offering;
. availability of the entire product line for a full year;
. lower costs resulting from a full year of production in Lowrance's
Mexico facility;
. lower selling and administrative costs; and
. net income of $1,130,000 for the nine months ended April 30, 1999.
It should be noted that the earnings history of Lowrance has been volatile
including several years in which Lowrance incurred a net loss. Additionally,
because of the dynamic environment in which Lowrance operates, any one of
several factors, including but not limited to perceived general economic
conditions, weather conditions, raw material availability, interest rate
fluctuations, and new product introductions by competitors, could rapidly
deteriorate, any one of which would have an adverse effect on expected results
for the remainder of the year.
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INFORMATION CONCERNING LOWRANCE
General
Lowrance designs, manufactures and markets sonar, global positioning
system and aviation instruments. Lowrance's sonar products visually communicate
underwater information and are principally used by sport fishermen as fish
finders and by recreational boaters as navigational and safety devices. Boaters,
hunters, hikers, backpackers, pilots and others use global positioning system
receivers for navigation to record and return to the precise location of areas
of interest. At the close of fiscal 1998, Lowrance employed over 1,000 people
and had sales in over 65 countries around the world.
In 1957 Carl Lowrance and his two sons, Darrell and Arlen, formed
Lowrance. The founders designed the world's first high frequency transistorized
sonar for sport fishing and boating which was portable, compact, lightweight and
contained its own batteries. The first Lowrance unit sold for less than $150.
Lowrance was incorporated in 1958 and the next year Lowrance began
manufacturing its own products. In 1964, Lowrance moved its operations to
Tulsa, Oklahoma.
Lowrance was reorganized as a Delaware corporation in 1986. Lowrance
headquarters are located at 12000 East Skelly Drive, Tulsa, Oklahoma 74132.
Lowrance's telephone number is (918) 437-6881.
Products
Lowrance's products consist of sonars and related equipment, such as
water temperature gauges and global positioning system navigational products.
Sonars
Each sonar consists of a transmitter, receiver, display and
transducer. The transmitter, receiver and display are normally combined in one
housing connected by a cable to the transducer. The housing containing the
transmitter, receiver and display is normally mounted where it may be viewed by
a boat operator and the transducer is mounted under or in the hull of a boat.
The transmitter takes electrical energy and sends it through the cable to the
transducer, which converts the electrical energy to sound pulses. These sound
pulses travel through the water until they hit the bottom or an object such as
fish or a shipwreck and then bounce back as an echo. The transducer converts
echoes back to electrical impulses which are sent to the receiver, which
processes the impulses and transmits the information to the display for use by a
boater.
Lowrance's sonars are either waterproof or weatherproof and are
designed to withstand the harsh environments and shocks encountered by sport
boats. Sport boats, unlike offshore commercial boats, are usually open and
subject to shock, rain, salt spray and temperature extremes that constantly test
the durability of the sonar. Lowrance's sonars are also designed for the needs
of sport fishermen who, unlike their commercial counterparts, are sometimes more
interested in the size, depth and location of individual fish, depth of the
thermocline and underwater structures, rather than the location of large schools
of fish. Lowrance's sonars are designed for and used by both fresh and saltwater
sports fishermen and boaters. Lowrance's sonars feature a variety of transducers
manufactured by Lowrance in different sizes and shapes to fit all types of boats
and with different frequencies and angles for both deep and shallow water use.
Lowrance's sonars are distinguished by the type of display--graphic liquid
crystal displays and other sonars, including flashers and digital liquid crystal
displays.
. Graphic Liquid Crystal Display Sonars. Lowrance's liquid crystal
-------------------------------------
display products are easier to use, provide more advanced capabilities and
incorporate advanced signal processing, which allows automatic operation of
liquid crystal display sonars in a way that sets the controls for best
performance whether at trolling or high speeds. Lowrance markets 18 liquid
crystal display sonar models. All of the models utilize advanced computer
technology and are keyboard controlled. Lowrance's liquid crystal display
models graphically display the depth of the water, bottom contour, fish and
other underwater objects on a liquid crystal display and digitally display
the water depth. Ten models can also digitally display the surface
temperature of the water, boat speed and distance traveled. Liquid crystal
display sonars are easier to read and interpret than flasher sonars.
Because liquid crystal display sonars have no moving parts, they are more
durable than other sonars. The more advanced models usually retail from
$350 to $550. The other liquid crystal display models,
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with fewer features, usually retail from $99 to $300. Lowrance's various
liquid crystal display models range in maximum depth capabilities from 350
feet to 2,500 feet.
. Other Sonars. Lowrance's others sonars include flasher displays
------------
and digital displays. Flasher models were the first type of sonar products
designed and manufactured by Lowrance. The display consists of a neon bulb
affixed to a spinning disk. The bulb lights when it receives a sonar
signal, flashing next to the appropriate depth mark on a calibrated
circular dial. Digital sonars are marketed and used solely to determine
water depth which is digitally depicted on a liquid crystal display.
Lowrance's flasher and digital sonars have varying depth capabilities
ranging from 60 feet for flashers to 1,000 feet for digital sonars and
range in retail price from $140 to $300.
Global Positioning System
The global positioning system offers worldwide navigational
information for users via a constellation of 24 satellites. The system offers
precise global navigation for land, sea and air applications providing constant
updates of an individual's or object's position in latitude, longitude, and
altitude. Additionally, a global positioning system measures speed and direction
of travel. Lowrance's global positioning system navigational modules may be
attached to and used with one of Lowrance's liquid crystal display sonars and
two liquid crystal display mapping models. The combination sonar/global
positioning system models, including module, usually retail from $700 to $1000
and the stand-alone, gimbal-mounted global positioning system mapping models,
including module, retail from $600 to $900.
Lowrance's gimbal-mount Global Map 2000 product displays the user's
position on a pictorial background map in addition to providing the navigational
information and course plotter available in all Lowrance and Eagle global
positioning system products. Further, the user, at his or her option, can
purchase mapping cartridges which contain over 7,000 highly detailed nautical
charts. The Global Map 2000 retails for approximately $899 including the global
positioning system module and cartridge reader. This unit can also be made
sonar capable with the purchase of a sonar access module. During the fourth
quarter of fiscal 1998 Lowrance introduced four new gimbal-mount global
positioning system products at breakthrough retail prices ranging from $549 to
$699. These products each contain detailed built-in mapping capabilities plus
unique software which allows the user to upload up to two megabytes of
additional customized mapping detail from Lowrance's proprietary IMS MapCreate
CD ROM database which is included free. The IMS MapCreate CD ROM includes all
of Lowrance's acclaimed IMS SmartMaps, IMS WorldMaps, U.S. Navigation Aids, U.S.
Wrecks and Obstructions, plus U.S. Rural Roads and more.
In addition to gimbal-mounted global positioning system products,
Lowrance offers an extensive range of portable, hand-held global positioning
system navigation receivers. The first such product, the Eagle AccuNav Sport,
began shipping in fiscal 1994, followed by the Lowrance GlobalNav Sport in
fiscal 1995. During fiscal 1996, Lowrance began shipping its first hand-held
global positioning system mapping receiver, the Lowrance GlobalMap Sport, with
capabilities similar to that of the GlobalMap 2000. Also during fiscal 1996,
Lowrance manufactured and sold its first portable global positioning system
receivers specifically designed for use by commercial and private pilots. In
fiscal 1997, Lowrance began shipping its breakthrough 12-channel global
positioning system receivers. Currently, Lowrance has upgraded all of its hand-
held global positioning system models to include 12 parallel-channel receivers.
All of Lowrance's hand-held global positioning system products feature high
resolution displays, detailed plotting and/or mapping functions, easy zoom-
in/zoom-out operation and enhanced software which includes a unique "initialize
from map" feature, sunrise/sunset and lunar phase information, position
averaging and emergency nearest waypoint feature. The AirMap 100 and AirMap 300
also offer an horizontal situation indicator-style screen, and a detailed
database of all North and South American airports including runway diagrams,
restricted air spaces, tower and communication frequencies, obstructions and
aviation services available.
Accessories
Lowrance also has a line of accessories consisting of water
temperature gauges, cables, portable power packs, map data cartridges, map data
CD ROMS and various mounting brackets, which are used primarily with Lowrance's
sonars and global positioning system products.
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Distribution
Lowrance markets its products under three trade names, "Lowrance," "Eagle"
and "Sea." Sales of the Lowrance and Eagle brand products account for over 98%
of total sales. Sales of Eagle products, as a percentage of total sales, were
approximately 50% in 1996, 54% in 1997 and 47% in 1998.
The Lowrance line in both sonar and global positioning system products,
with its selection of 18 interchangeable transducers and its more complicated
keyboard, is intended for the more sophisticated user. The wide choice of
transducers available with the Lowrance sonars allows for greater installation
and operating flexibility through selection of a transducer of the appropriate
size, shape and frequency to meet the boater's specific needs. As a result of
recent developments in transducer design, Lowrance packages its Lowrance sonar
models with a high-performance transducer suitable for use on nearly all types
of boat hulls. Lowrance customers can exchange this transducer for credit
toward one which better meets their specialized requirements for installation or
operation. Generally, the boater will require special assistance with the
installation and operation of a Lowrance sonar. Therefore, Lowrance sells its
Lowrance line primarily to boat manufacturers, wholesalers and retailers that
Lowrance believes have basic knowledge of the installation, use and service of
the Lowrance line and can pass on such knowledge to customers. As of July 31,
1998, Lowrance had approximately 2,200 wholesalers and retailers purchasing
products in the Lowrance line. A sonar installation subsidy is offered to
authorized dealers that sell and install Lowrance products as a means of sharing
the costs of the installation. Lowrance believes that, over the past three
years, the Lowrance line has been sold primarily through dealers having the
requisite level of knowledge to sell, install and properly instruct the
fisherman and boat owner as to the product's use. Terms of payment for products
in the Lowrance line vary based on the time of the season with the longest
dating terms of 120 days being offered for shipments during the first quarter of
the fiscal year.
The Eagle line is sold primarily to mass merchandisers, mail-order catalog
companies, retail sporting goods stores and wholesalers that usually do not
provide technical assistance to the consumer regarding the installation and
operation of sonars and global positioning system products. Recognizing that
special assistance will not be available as to the selection of an appropriate
transducer or the operation of an Eagle sonar or global positioning system,
Lowrance prepackages each Eagle sonar with a universal transducer designed to
work adequately on most boats and has simplified the sonar's operating
requirements. The Eagle sonars do not have all of the installation and
operating flexibility of the Lowrance sonars but are less expensive to the
consumer. Terms of payment for products in the Eagle line are generally 30
days. However, dating terms similar to those for the Lowrance line are also
offered.
Beginning in fiscal 1995, Lowrance began marketing a third brand of sonar
and global positioning system navigational products, "Sea." These products are
marketed through select coastal dealers and sales of Sea products accounted for
less than two percent of fiscal 1998 sales.
Lowrance's products are sold in all 50 states and 65 countries
internationally. Lowrance's international sales totaled $20,000,000 in fiscal
1996, $25,000,000 in fiscal 1997 and $22,000,000 in fiscal 1998, representing
approximately 21%, 24% and 24% of total net sales in each respective fiscal
year. The two largest international markets for Lowrance's products are Canada
and Australia, where Lowrance maintains its own distribution warehouses for
sales and distribution of its products. Sales in neither of these two countries
represented 10% or more of Lowrance's total annual sales for the latest three
fiscal years.
LEI Extras, Inc., a wholly-owned subsidiary of Lowrance, allows consumers
to purchase by mail-order extended warranties for their sonar units and
accessories that otherwise would be difficult to obtain. Because LEI Extras,
Inc. is not intended to directly compete with retail outlets that carry
Lowrance's products, Lowrance does not expect revenues from its mail-order
operations to be significant.
Sales to Wal-Mart Stores, Inc. accounted for 14% of Lowrance's net sales in
fiscal 1996 and 10% in fiscal 1997. No customers accounted for 10% or more of
net sales in fiscal 1998. The top ten customers, including Wal-Mart, accounted
for approximately 34% of Lowrance's net sales in fiscal 1996, 34% in fiscal 1997
and 32% in fiscal 1998.
Inventories and Backlog
Lowrance normally manufactures its products in anticipation of, and not in
response to, customer orders and fills orders within a short period of time
after receipt. Thus, Lowrance must maintain significant inventories of
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finished goods to permit it to fill orders promptly after receipt. Lowrance's
receipt of orders generally peaks upon the introduction of a new product and
during the peak sales period from January through April. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
As of April 30, 1999, Lowrance's backlog of orders exceeded $6.4 million.
The backlog one year ago at this time was $10.2 million. Backlog is not
necessarily comparable from year to year because of the significant impact on
backlog resulting from the timing and pent-up demand for the introduction of
Lowrance's new products each year. While Lowrance believes that the present
backlog of orders is firm, the orders for its products are subject to
cancellation without further obligation by the customer at any time prior to
shipment.
Advertising and Promotion
To support the sales of its products to wholesalers, mass merchandisers,
mail-order catalog companies and others, Lowrance actively promotes and
advertises its products to fishermen, boat owners and increasingly to other
outdoor enthusiasts. The highly-technical nature of Lowrance's products makes
education of the user an important aspect of Lowrance's promotional activities.
Through educating and familiarizing the user with the practical benefits and use
of sonar and global positioning system products, Lowrance endeavors to create
demand for its products.
To satisfy this need, Lowrance utilizes a sales force of 17 full-time
employees to promote its products worldwide. Additionally, Lowrance employs six
manufacturer's representative groups to add to its sales force in various parts
of the United States. The sales personnel employed by Lowrance and the
manufacturer's representatives have the knowledge and time necessary to educate
wholesalers, dealers, fishermen and boat owners on sonar and global positioning
system products and demonstrate the practical benefits of these technologies.
The sales personnel train wholesalers and dealers to sell Lowrance's products,
give demonstrations at outdoor recreation and boat shows, and participate in
store promotions, seminars, and talks.
To supplement the sales force, Lowrance has a part-time independent sales
group known as the "pro-staff." The pro-staff consists of approximately 200
fishing professionals, tournament fishermen, serious outdoors enthusiasts and
pilots trained and equipped by Lowrance to promote Lowrance's products at
fishing tournaments, store promotions, club talks, seminars, and tackle, boat,
hunting and aviation shows.
Lowrance also advertises its products in newspapers and magazines and on
television. Within such advertising expenditures, there are separate
advertising programs designed specifically for the Lowrance line and the Eagle
line.
Public relations activities include a variety of press releases covering
new products and feature stories highlighting use of sonar and navigational
products; press trips, where products are demonstrated to members of the outdoor
media; distribution of product photos and other technical support for writers
and broadcasters.
In addition to advertising expenses and public relations activities,
Lowrance incurs promotional expenses which include sponsorship of fishing
tournaments, store promotions, and contributions to environmental groups.
Lowrance, through its Eagle brand, became an Affiliate Sponsor of the new Wal-
Mart FLW tournament trail in 1998. The Wal-Mart FLW tour offers the world's
largest cash prize for bass tournaments, including a $1,000,000 purse. The Wal-
Mart FLW tour is sponsored by Genmar Holdings, which also owns numerous boat
manufacturers including Ranger, Lund, Crestliner and Carver Yachts, to whom
Lowrance provides original equipment manufacturer sonar products. Dealer and
distributor support includes the availability of point-of-purchase displays,
posters, videos, and product simulators to assist in displaying Lowrance's
products.
Competition
Sonar and Sonar/Global Positioning System Combination Units
Lowrance encounters intense competition for its products from a number of
domestic and foreign manufacturers. More than 300 brands of sonars have been
offered to the consumer since Lowrance's formation in 1957. Presently, there
are more than 25 competitors worldwide. Historically, the sonar market,
marketed primarily to sports fishermen and recreational boat owners, has been
dominated by Lowrance and Techsonic Industries, Inc. According to independent
marketing research commissioned by Lowrance and issued in March 1998, Lowrance,
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together with this competitor, currently account for over 80% of sonar sales
within this market segment in the United States. In this study, Lowrance's
total market share, with Eagle and Lowrance brands combined, was found to be
greater than 50%. Lowrance believes that the study results reflect current
market conditions.
Competition in the sports fishing and recreational boating market for
Lowrance's products is based upon a number of factors, including quality,
technological development, performance, service and price. The primary basis
for competition is technological innovation and price. In order to maintain its
competitive position, Lowrance must continually enhance and improve its products
and anticipate rapid, major technological innovations and changes within the
industry. Further, Lowrance believes that the sonar market in the U.S. and
Canada is mature, with no significant influx of new participants to either
boating or fishing in recent years. Accordingly, Lowrance's primary opportunity
for sales growth in these markets is to take market share from its competitors.
Lowrance continues to identify and pursue significant new market opportunities
for its sonar products internationally.
Hand-held Global Positioning System Units
The hand-held global positioning system market has expanded rapidly in the
past several years, and Lowrance expects this trend to continue. Target markets
for these products include, but are not limited to boating, sportfishing,
hunting, hiking, off-road vehicles and aviation. According to independent
marketing research commissioned by Lowrance and issued in March 1998, the market
segment that Lowrance operates in approximates the size of the sonar market.
According to this same study, Lowrance's market share was found to be less than
20%. Long term growth in Lowrance's global positioning system market share will
require continued development of advanced global positioning system technologies
which can be quickly brought to market at competitive prices.
Two competing global positioning system companies currently dominate this
market, and Lowrance believes these two competitors combined continue to control
in excess of 65% of the hand-held global positioning system market. The primary
reason for their success is that both companies have introduced and marketed
several products retailing for under $200 and were the first to market hand-held
global positioning system products into the recreational market. Both companies
offer a range of higher priced products with more features than their lowest
priced models including products specifically aimed at the avionics market. In
1997, one of these competitors introduced a combined global positioning system
and sonar model and a sonar-only model. Recently the same competitor has
introduced two new sonar-only models. Lowrance does not anticipate that these
models will have a significant adverse impact on its own extensive lines of
sonar products during fiscal 1999 because neither product has begun shipping and
their distribution base is limited.
Currently, Lowrance offers five Eagle and seven Lowrance hand-held
products, which retail at prices between $169 and $799. Lowrance began shipping
its Lowrance Global Map 100 and Eagle MapGuide Pro hand-held global positioning
system products with its proprietary IMS MapCreate CD ROM database included
during the fourth quarter of fiscal 1998. These two models have exclusive
features which will allow the user to supplement the unit's built-in mapping
data with up to two megabytes of customized maps created from the CD ROM
database. All of Lowrance's global positioning system products feature 12
parallel-channel receivers, high resolution displays, and internal battery back-
up for stored information. All of Lowrance's handheld global positioning
system's also utilize rechargeable batteries that retail for as little as $49.
Lowrance's expanded line of hand-held global positioning system products
has helped Lowrance expand its presence in multiple non-marine retail markets
and outlets. These products, combined with an extensive advertising and
promotion campaign in 1997, significantly increased consumer awareness and
recognition of the Eagle and Lowrance brand names in historically non-
traditional markets. Currently, Lowrance enjoys distribution through several
new outdoor recreational outlets who serve hikers, campers, skiers, climbers and
other outdoor enthusiasts.
Lowrance has attempted to differentiate its products through quality,
technological development, performance, price, and service. Lowrance believes
its products offer a competitive advantage due to quality, technological
advancement, and the wide range of features. This advantage results from
Lowrance's long history of product innovation, including items and features such
as:
. Advanced Signal Processing;
. fully waterproof sonar/Loran-C and sonar/global positioning system
combination units;
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<PAGE>
. Grayline, interchangeable high-performance transducers and dual-
frequency capability;
. optional Broadview sonars;
. split screen sonar/navigational displays;
. digitized and CD ROM mapping capabilities; and
. programmable "windows."
Lowrance has been an industry leader in offering advanced performance
products at strategically acceptable price points. Further, Lowrance believes
that its service programs, designed to rapidly respond to the customers' needs,
along with the extended warranty programs covering the Lowrance, Eagle and Sea
product lines, are the most comprehensive services available to the customer in
the industry.
Product Research and Development
Lowrance's operations and competitive position are dependent to a large
extent upon its ability to anticipate and react to the technological innovations
inherent in its industry. Lowrance has been engaged in the development of
sonars and the refinement of its existing sonar models since its formation in
1957. See "--Patents and Trademarks." In 1957, Lowrance invented and marketed
a portable sonar capable of locating individual fish and their depths. Among
other significant sonar advancements, Lowrance developed and patented an
effective interface suppression system and interchangeable high speed
transducers which permit operation of sonar at boat speeds of up to 70 miles per
hour. Lowrance also introduced in 1979 a computer-controlled sonar with
microprocessor chip and software allowing high speed boating with accurate depth
readings and no false signals. In 1986, Lowrance introduced the industry's
first high resolution and "Supertwist" high visibility liquid crystal displays.
In 1988, Lowrance introduced the first fully waterproof sonar/navigation
combination units featuring Loran-C circuitry and software contained solely in
the antenna coupler module. Advanced Signal Processing, a breakthrough in
automatic sonar control developed in 1989, constantly evaluates the effect of
varying water conditions, boat speeds, and interference sources, adjusting the
sonar's many settings for optimum performance. Based on Lowrance's belief that
the U.S. military's global positioning system would be the preferred method of
navigation in the future, if it became affordable, Lowrance introduced six
marine global positioning system products in 1992, with most at breakthrough
price points. The SupraPro ID, a new sonar model introduced in 1993, retailed
for under $100, provided users with four times the resolution of its nearest
competitive model. Another model new in 1994, the GlobalMap 1000, represented
the first fully waterproof mapping unit with a built-in mapping database and the
capability of using highly-popular detailed mapping cartridges. The AccuNav
Sport hand-held global positioning system product, which retailed for under
$400, revolutionized the global positioning system market in 1994 by offering
users all the highly-detailed navigation plotting features previously available
only on larger and more costly gimbal-mounted global positioning system products
at less than half the price. In 1994, Lowrance introduced its latest generation
of "3D" sonar products, the ULTRA III 3D and the X-70A 3D, which provide
expansive underwater coverage and innovative "three dimensional" images of
bottom contours in addition to traditional detailed "2D" views. Six new 1994
products offered Lowrance's new "Broadview" technology. By purchasing a
"Broadview" accessory transducer, which can be installed on the transom or on a
trolling motor, users can expand their sonar coverage to search out -- left or
right -- to detect fish and cover down and outward from the boat. In 1996,
Lowrance introduced and delivered its first hand-held global positioning system
mapping products. In fiscal 1998, Lowrance introduced two new sonar products
with enhanced display screen resolution and newly designed cases, as well as
enhanced operating software in several of its sonar and global positioning
system products. Additionally, Lowrance delivered four new hand-held global
positioning system products, each utilizing new 12 parallel-channel receiver
technology and three of which offered exclusive technology which allows the user
to upload detailed customized maps from a CD ROM into the units memory. Two new
gimbal-mount products, one a global positioning system/mapping only product and
the other a global positioning system/mapping/sonar combination model, also
offered this unique CD ROM capability, and began shipping during the fourth
quarter of fiscal 1998.
Research and development expenditures of Lowrance were $3,439,000 in fiscal
1996, $3,936,000 in fiscal 1997 and $2,650,000 in fiscal 1998. Lowrance plans
additional development of its liquid crystal displays sonars to increase
performance and versatility and is conducting research and development into
other marine electronic
49
<PAGE>
equipment utilizing technology with which it is familiar. Also, Lowrance intends
to develop additional global positioning system products for use in marine and
non-marine applications.
To add to its continued investment in product research and development,
Lowrance has invested in several new manufacturing and design technologies:
Surface Mount Technology production equipment, Computer Aided Design systems,
Application Specific Integrated Circuits, Tape Automated Bonding, Tab-On-Glass,
and Liquid Crystal Display assembly. These advanced technologies, which were
essential to the development of Lowrance's new sonar and global positioning
system products, have allowed Lowrance to reduce its material and manufacturing
costs and to provide even greater product performance.
Employees
As of April 30, 1999, Lowrance employed 1,024 persons on a full-time basis.
Of these employees, 375 are employed in the United States, and 649 are employed
internationally, primarily in Lowrance's leased manufacturing facility in
Ensenada, Mexico. During the year, Lowrance utilizes temporary workers to allow
it to adjust its workforce as its production needs change. All of the temporary
workers are located in the Tulsa facility. At April 30, 1999, approximately 35
of such workers were engaged by Lowrance and are included in the above numbers.
Additionally, Lowrance retains, on a part-time basis, around 200 independent
contractors, the "pro-staff," that assist in promoting its products.
Manufacturing and Suppliers
Through fiscal 1993, Lowrance manufactured substantially all of its
products at its plant in Tulsa, Oklahoma. In fiscal 1994, Lowrance began
manufacturing most of its high volume transducer and cable assemblies in a
25,000 square foot leased manufacturing facility in Ensenada, Mexico, with the
finished assemblies shipped to Tulsa for final inspection, packaging and
shipping. During fiscal 1997, Lowrance expanded its production operation in
Mexico by consolidating its existing manufacturing operations in Ensenada,
Mexico into a newly constructed 88,000 square foot leased facility which has
been constructed to allow expansion to 108,000 square feet as Lowrance requires
more operating space. Currently, Lowrance utilizes 70,000 square feet for
manufacturing, including a 26,000 square foot clean room within the 88,000
square feet presently occupied by Lowrance. In the expanded Mexico facility,
Lowrance manufactures its transducer and cable assemblies as well as assembles
most of the liquid crystal displays used in its products. Additionally,
Lowrance performs final assembly, final testing and packing operations on all of
its products in the Mexico facility. The transfer of the final assembly and
liquid crystal display assembly operations from Lowrance's Tulsa facility began
in August 1996 and was completed in July 1997. Lowrance will continue to
assemble and test all circuit boards in its existing facility in Tulsa. The
manufacturing process primarily involves the assembly of component parts
purchased from suppliers. Quality control and functional testing, including
component testing, sub-assembly testing, and final testing of finished products,
are an integral part of Lowrance's manufacturing process. Lowrance's Tulsa
manufacturing facilities, with its expanded Mexico operation, are sufficient to
allow increased production without substantial future capital investments.
Some component parts of Lowrance's products are technologically advanced
and/or specifically designed for Lowrance's use, and thus are presently
available only through single-source suppliers, some of which are located in
foreign countries. Other component parts are available from a number of
suppliers, but Lowrance largely relies on single-source suppliers for these
parts. Purchasing from a single source in these instances allows Lowrance to
have more consistent quality in the component parts and to receive quantity
discounts and permits Lowrance to establish long-standing relationships with its
suppliers. Lowrance believes long-standing relationships lead to better
performance with suppliers by shortening delivery time, improving quality, and
fostering a better understanding of and adaptation to the nature of Lowrance's
needs and the suppliers' capabilities.
With respect to plastic component parts, such as housings for sonars,
Lowrance, because of the expense, generally maintains only one mold for each
plastic part. Although typically Lowrance owns each mold and could move it to
another supplier, Lowrance is limited to one supplier at a time.
Lowrance has never experienced a substantial interruption in product
shipment resulting in the loss of any material amount of sales due to
unavailability of or delay in receiving component parts. However, if for any
reason, critical component parts were to become unavailable or the shipment of
such parts were to be substantially delayed, such unavailability or delay could
materially and adversely affect Lowrance's ability to produce its products on a
50
<PAGE>
timely basis until an alternative source of supply or a replacement mold could
be made available. Some of the reasons that may cause such unavailability or
delay include:
. a protracted strike, war, fire, explosion or wind damage affecting
production at the supplier's manufacturing plant;
. import restrictions;
. a damaged or destroyed mold; or
. a supplier being unable to obtain particular raw materials necessary to
produce component parts.
The use of alternate components may, in some cases, require Lowrance to
redesign other components or its sub-assemblies and Lowrance could experience
manufacturing delays. The extent of the impact upon Lowrance's sales and
earnings would depend upon the products affected and the time of year of the
interruption.
To protect against interruptions and loss of sales, Lowrance maintains a
limited amount of safety inventory of component parts and some insurance
coverage against loss of supply. Lowrance limits the amount of safety stock to
avoid the cost of carrying raw material inventory and problems associated with
obsolescence. To further protect against interruptions, Lowrance is selective
of its suppliers, and with limited exceptions, relies upon those who are
substantial in size, financial strength, background and experience.
Seasonality
Demand for Lowrance's products is seasonal with approximately 30% to 40% of
its sales and a majority of its net income usually occurring in the third
quarter, which is February through April. During this period, Lowrance's
customers purchase Lowrance's products so that the products will be available to
sport fishermen and recreational boat owners for the peak fishing and boating
season. Generally, with the exception of the third quarter, quarterly results
are dependent on the timing and acceptance of new product introductions,
advertising and product availability and, as such, Lowrance does not experience
any consistent quarterly trends for those three quarters.
Product Warranty and Support Services
Substantially all of Lowrance's products are sold with a full one-year
warranty. Lowrance offers the consumer the right to extend the warranty for an
additional two years on sonar and global positioning system products by
purchasing an extended warranty package. Warranty expenses have averaged
approximately 2.2% of sales during the last three fiscal years. Lowrance
emphasizes service after the sale in connection with its products by providing a
prepaid, pre-addressed shipping label packed with each unit for use by the
consumer located in the United States electing to return the unit to Lowrance
for warranty or non-warranty repairs. Warranty and non-warranty repairs are
available from Lowrance's plant in Tulsa, Oklahoma, and from dealers and
distributors in 65 foreign countries.
Patents and Trademarks
Since 1970, Lowrance has obtained 37 patents expiring at various dates from
1987 through 2015. Since 1970, 13 design patents have also been issued. See
"--Product Research and Development." All of Lowrance's patents have been
assigned to secure Lowrance's accounts receivable and inventory line of credit
financing. Lowrance does not expect that the expiration of patents will have an
adverse impact on Lowrance's operations.
Notwithstanding the number of patents it has obtained, Lowrance believes
that its technical and proprietary expertise and continuation of technological
advances are more important factors to the protection of its ongoing proprietary
interests and markets than its patents. However, Lowrance will continue to file
patent applications as needed to insure its products remain protected from
attack from competitors.
Lowrance has registered forty-eight trademarks with the United States
Patent Office including the trademark, "Lowrance" and the trademark "Eagle,"
with an accompanying logo and has additional trademark applications filed.
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<PAGE>
Properties
Lowrance maintains its offices and manufacturing and warehouse facilities
at 12000 East Skelly Drive, Tulsa, Oklahoma, 74128. Lowrance's Tulsa facilities
are located on approximately 23 acres of land and consist primarily of a masonry
building containing approximately 116,000 square feet of floor space, of which
25,000 square feet are used for manufacturing operations, 46,000 square feet for
warehousing and 45,000 square feet for office and laboratory space.
Prior to fiscal 1997, Lowrance, through its Mexican subsidiary, leased a
25,000 square foot manufacturing facility in Ensenada, Mexico. In fiscal 1997,
Lowrance expanded its Ensenada, Mexico operations by leasing a new 88,000 square
foot manufacturing facility which has been constructed to permit Lowrance to
expand into the built out, but unfinished 20,000 square foot, second floor
affording Lowrance 108,000 square feet. Lowrance presently is using 70,000
square feet for manufacturing including a 26,000 square foot clean room of the
88,000 square feet occupied by Lowrance. During fiscal 1997, the existing
Mexican facility was eliminated and combined with operations in the new
facility.
Lowrance also leases a 79,000 square foot facility for warehousing and
shipping in Tulsa, Oklahoma and 2,500 square feet and 3,500 square feet of
warehousing, shipping and office space in Australia and Canada, respectively.
Lowrance believes that its facilities and equipment are well suited to its
needs and are properly maintained. Lowrance's current manufacturing facilities,
including the expanded Mexico facility, are sufficient to allow for increased
production without significant capital investment. The facilities and equipment
are believed to be operating in substantial compliance with all current
regulations. All the facilities and equipment are, in the opinion of Lowrance,
adequately insured.
Legal Proceedings
There are no material pending legal proceedings to which Lowrance or any of
its subsidiaries is a party or of which any of their property is the subject as
of the date of this document.
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SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS
AND MANAGEMENT OF LOWRANCE
On August 19, 1999, there were more than 400 actual holders of 3,768,796
shares of outstanding Lowrance common stock. Each share of common stock is
entitled to one vote per share, with no right of cumulative voting. Lowrance
has not paid cash dividends for over 20 years. The inventory and accounts
receivable line of credit agreement prohibits the payment of dividends without
the prior written consent of Lowrance's lender. Lowrance has no other voting
securities outstanding.
The following table describes the beneficial ownership of Lowrance common
stock as of August 19, 1999 for each stockholder known by Lowrance to be the
beneficial owner of more than five percent of Lowrance common stock, each
Lowrance director, each Lowrance executive officer, and all Lowrance directors
and executive officers as a group.
<TABLE>
<CAPTION>
Beneficial Ownership
--------------------
Name of Beneficial Owner Shares Percent
- ------------------------ ------ -------
<S> <C> <C>
Darrell J. Lowrance 1,907,423(1) 50.61%
12000 East Skelly Drive
Tulsa, OK 74128
Estate of James L. Knight 432,776 11.59%
c/o Northern Trust Bank of Florida, N.A.
700 Brickell Avenue
Miami, FL 33131-2881
Willard P. Britton 14,653 0.39%
1571 Breakwater Terrace
Hollywood, FL 33019
Ronald G. Weber 71,745(2) 1.90%
12000 East Skelly Drive
Tulsa, OK 74128
Robert F. Biolchini 95,661 2.54%
3300 First Place Tower
15 East 5th Street
Tulsa, OK 74103
Peter F. Foley, III 54,183 1.44%
Boone Bait Company
1270 Lakeview Drive
Winter Park, FL 32789
Alpo F. Crane 3,580 0.09%
8359 Providence Road
Charlotte, NC 28277
All directors, officers, and 2,169,095 57.55%
their affiliates as a group
(including those listed above,
6 persons total)
</TABLE>
______________
(1) This includes 180,500 shares held indirectly in an individual retirement
account with Mr. Lowrance having the sole voting and investment power; 143,908
shares held of record by the Trustees of the Lowrance Savings Plan and Trust for
Mr. Lowrance who is entitled to vote such shares; and 3,725 shares held
indirectly by an immediate family member.
(2) This includes 33,000 shares held of record by the Trustees of the
Lowrance Savings Plan and Trust for Mr. Weber, who is entitled to vote such
shares.
53
<PAGE>
INFORMATION CONCERNING ORBITAL
Orbital, together with its subsidiaries, is a leading space and information
systems company that designs, manufactures, operates and markets a broad range
of space-related products and services. Orbital's products and services are
grouped into three general business sectors: space and ground infrastructure
systems, satellite access products and satellite services. Space and ground
infrastructure systems include launch vehicles, satellites and related space
systems, electronics and sensor systems, transportation management systems, and
satellite ground systems and software. Satellite access products include
satellite-based navigation, positioning and communications products. Satellite
services include satellite-based two-way mobile data communications services,
satellite-based remote imaging services, and new initiatives relating to
satellite-based automotive information products and satellite-based voice
communications services.
54
<PAGE>
DECEMBER 9, 1997 ISSUANCE OF LOWRANCE COMMON STOCK
TO THE LOWRANCE DIRECTORS
Background
In November 1997, because of Lowrance's extreme cash liquidity strain,
Lowrance officers and directors determined that an additional cash infusion of
$2,500,000 was essential to Lowrance's short and long term financial viability.
At that time, Lowrance's lender, Fleet Capital, agreed that if Lowrance's
officers and directors first invested an aggregate of $1,500,000 in new equity,
Fleet would agree to increase Lowrance's loan with Fleet by an additional
$1,000,000. Because Lowrance officers had exercised options in November 1997
resulting in a cash infusion of $189,305, Fleet agreed to increase Lowrance's
loan by an additional $1,000,000 if the Lowrance directors agreed to purchase
additional Lowrance common stock for approximately $1,310,000 in cash.
As a result, Lowrance's six directors agreed to purchase 341,338 shares of
restricted and unregistered Lowrance common stock for an aggregate cash purchase
price of $1,311,000 in an attempt to help insure Lowrance's financial viability.
On December 9, 1997, Lowrance issued 341,338 shares of its unregistered common
stock in a private placement at a discounted price of 65% of the then current
Lowrance share price. The discount of 35% upon which the price per share was
based was determined by Principal Financial Securities, Inc., which based its
opinion and recommendation on the average closing price for the five days
following release of Lowrance's earnings for October 31, 1997, which occurred on
November 25, 1997, or the average closing price for November 26 and 28, and
December 1, 2 and 3, or $5.90 per share. A cash purchase price of $3.84 per
share was determined by multiplying $5.90 by the Principal Financial Securities
recommended discount of 65%.
The 341,338 unregistered common shares were issued in a private placement
to Lowrance's six directors simultaneously with Lowrance executing a new
$1,000,000 term loan with Fleet. The new cash infusion was used to assist in
partially alleviating cash flow problems and to enable Lowrance to receive
timely delivery of essential parts required to meet its budgeted demand for its
products during the period from January through April 1998.
Due to the need for immediate action to inject new cash into Lowrance to
secure the new term loan with Fleet and to help partially alleviate cash flow
problems, Lowrance issued the authorized but unregistered common shares to its
six directors without obtaining the consent of its stockholders, which consent
was not required under the Delaware General Corporation Law. The restricted
common stock issued to the directors for a cash payment of $3.84 per share in
the private placement was as follows:
Director Number of Shares
Alpo F. Crane 3,580
Willard P. Britton 14,453
Peter F. Foley III 52,083
Ronald G. Weber 3,645
Darrell J. Lowrance 172,916
Robert F. Biolchini 94,661
In late 1998, Nasdaq informed Lowrance that Nasdaq believed that Lowrance
was not in compliance with Nasdaq's stockholder approval requirements in
connection with the December 9, 1997 issuance because Lowrance had not obtained
stockholder consent or obtained a waiver of the applicable Nasdaq rules prior to
the December 9, 1997
55
<PAGE>
issuance. Rule 4460(i) requires each issuer of securities authorized for
quotation on the Nasdaq National Market to obtain stockholder approval when
shares are acquired by officers or directors pursuant to a plan or arrangement,
including stock option and stock purchase plans, in an amount exceeding the
lesser of (A) one percent of the number of shares of common stock, (B) one
percent of the voting power outstanding or (C) 25,000 shares.
After a hearing and review, the Nasdaq Listing and Hearing Review Council
in a decision issued on August 9, 1999 decided that because Lowrance did not
comply with Nasdaq's stockholder approval rules, Lowrance common stock would be
delisted from Nasdaq unless Lowrance complied with certain requirements. One
requirement is that Lowrance must obtain approval of the December 9, 1997
private placement to the Lowrance directors by a majority of the common shares
held by disinterested Lowrance stockholders (stockholders other than the six
directors who purchased stock in the private placement). A second requirement is
that each of the six directors enter into a lock-up agreement with Lowrance
whereby each director would agree that the shares issued on December 9, 1997
would not be sold or otherwise transferred until sixty days after the Lowrance
stockholders approved the December 9, 1997 issuance.
Lowrance is now seeking the Nasdaq required stockholder approval and
ratification of the December 9, 1997 issuance to the Lowrance directors in order
to continue to be listed on the Nasdaq National Market. If the proposal is not
approved and ratified by a majority vote of Lowrance stockholders other than the
six directors who purchased the unregistered stock in December 1997, Lowrance
will not be in compliance with the Nasdaq council's decision. As a result,
Lowrance will face delisting.
Additionally, Lowrance is working with Nasdaq to agree upon mutually
acceptable terms of a lock up agreement with the Lowrance directors. None of
the restricted Lowrance common stock issued on December 9, 1997 have been sold
or transferred by any director, and each of the six directors had previously
entered into a lock-up agreement with Lowrance at the request of Nasdaq in which
the shares issued on December 9, 1997 will not be transferred until after a
stockholder vote approves the issuance. Subsequent to the Nasdaq council's
decision dated August 9, 1999, Lowrance entered into an amended merger agreement
in which each and every share of Lowrance common stock would be converted into
the right to receive $7.30 in cash, without interest. (The proposed merger is
fully described in this proxy statement and is also the subject of stockholder
vote at the special meeting.) Lowrance is therefore trying to work with Nasdaq
to revise the terms of the required lock up agreement so that the current
executed lock up agreements, which do not require a sixty day holding period,
will be acceptable to the Nasdaq council. If Lowrance does not resolve the
issue of an acceptable director lock up agreement with Nasdaq, the Lowrance
common stock could be delisted.
Lowrance previously advised Nasdaq that prior to the December 9, 1997
issuance, the officers and directors of Lowrance held in excess of 50% of the
Lowrance common stock and at that time represented the majority necessary for
approval and ratification of the December 9, 1997 issuance. However, Lowrance
faces the delisting of its common stock unless it obtains the approval and
ratification of the private placement by a majority vote of the disinterested
stockholders. If Lowrance is successful in obtaining both an amended agreement
with Nasdaq regarding directors' lock up agreements and approval of the private
placement by a majority vote of disinterested Lowrance stockholders, Lowrance
believes Nasdaq will continue listing Lowrance common stock.
Recommendation of the Board of Directors of Lowrance
The Lowrance board has unanimously determined that the December 9, 1997
issuance was and is in the best interests of Lowrance and its stockholders.
Accordingly, the Lowrance board unanimously approved the December 9, 1997
issuance and recommends that Lowrance stockholders vote in favor of approval and
ratification of the December 9, 1997 issuance at the Lowrance special meeting.
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<PAGE>
STOCKHOLDER PROPOSALS
Due to the contemplated consummation of the merger, Lowrance does not
currently expect to hold a 1999 Annual Meeting of Stockholders, as Lowrance
common stock will not be publicly traded after the merger. If the merger is not
consummated and such a meeting is held, stockholder proposals for inclusion in
proxy materials for such meeting would have to have been submitted to the
Secretary of Lowrance in writing and received at the executive offices of
Lowrance by August 13, 1999. Such proposals must also meet the other
requirements of the rules of the SEC relating to stockholders' proposals.
INDEPENDENT PUBLIC ACCOUNTANTS
Representatives of Arthur Andersen LLP, independent accountants, are
expected to be present at the Lowrance special meeting with an opportunity to
make a statement if they desire to do so and such representatives are expected
to be available to respond to appropriate questions.
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<PAGE>
INDEX TO LOWRANCE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Report of Independent Public Accountants ................................. F-2
Consolidated Balance Sheets - July 31, 1997 and 1998 and
April 30, 1999 (unaudited)............................................. F-3
Consolidated Statements of Income (Loss) for the Years
Ended July 31, 1996, 1997 and 1998 and the Nine
Months ended April 30, 1998 and 1999 (unaudited)....................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended July 31, 1996 1997, and 1998 and the
Nine Months Ended April 30, 1999 (unaudited)........................... F-5
Consolidated Statements of Cash Flows for the Years
Ended July 31, 1996, 1997 and 1998 and for the Nine
Months Ended April 30, 1998 and 1999 (unaudited)....................... F-6
Notes to Consolidated Financial Statements for the Years
Ended July 31, 1996, 1997 and 1998 and the Nine
Months Ended April 30, 1998 and 1999 (unaudited)....................... F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Lowrance Electronics, Inc.:
We have audited the accompanying consolidated balance sheets of LOWRANCE
ELECTRONICS, INC. (a Delaware corporation) and subsidiaries as of July 31, 1998
and 1997, and the related consolidated statements of income (loss),
stockholders' equity and cash flows for each of the three years in the period
ended July 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lowrance Electronics, Inc. and
subsidiaries as of July 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended July 31,
1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
October 9, 1998
F-2
<PAGE>
LOWRANCE ELECTRONICS, INC.
--------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(in thousands)
<TABLE>
<CAPTION>
ASSETS
July 31, July 31, April 30,
1997 1998 1999
----------------- --------------- ----------------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalent $ 866 $ 637 $ 614
Trade accounts receivable, net of reserves of $907,000
in 1997, $683,000 in 1998 and $925,000 in 1999 16,346 13,742 17,823
Inventories (Note 2) 27,880 25,224 18,060
Current deferred income taxes 1,587 1,457 1,453
Prepaid expenses 400 610 451
Income tax refund receivable 957 - -
----------------- --------------- ----------------
Total current assets 48,036 41,670 38,401
PROPERTY, PLANT AND EQUIPMENT, net (Note 2) 11,209 9,891 8,269
OTHER ASSETS 1,106 277 209
DEFERRED INCOME TAXES 1,015 409 457
----------------- --------------- ----------------
$ 61,366 $ 52,247 $ 47,336
================= =============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 4,149 $ 3,498 $ 4,380
Accounts payable 21,496 15,026 7,081
Accrued liabilities:
Compensation and benefits 2,664 1,729 2,082
Product costs 1,076 1,130 1,175
Other 853 654 509
----------------- --------------- -----------------
Total current liabilities 30,238 22,037 15,227
----------------- --------------- -----------------
LONG-TERM DEBT, less current maturities (Note 3) 21,176 23,038 23,528
----------------- --------------- -----------------
SERIES "A" REDEEMABLE PREFERRED STOCK, $.50 par value,
70,000 shares authorized and issued (Note 5) - - -
STOCKHOLDERS' EQUITY, per accompanying statements (Note 5):
Preferred stock, no par value, 230,000 shares
authorized, none issued - - -
Common stock, $.10 par value, 10,000,000 shares
authorized, 3,352,458 shares issued in 1997 and
3,768,796 shares issued in 1998 and 1999 335 377 377
Paid-in capital 5,600 7,073 7,073
Retained earnings 4,214 219 1,349
Foreign currency translation adjustment (197) (497) (218)
----------------- --------------- -----------------
Total stockholders' equity 9,952 7,172 8,581
----------------- --------------- -----------------
$ 61,366 $ 52,247 $ 47,336
================= =============== =================
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
LOWRANCE ELECTRONICS, INC.
-------------------------
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
----------------------------------------
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
For the Years Ended July 31, April 30,
------------------------------ -------------------
(unaudited)
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET SALES $ 94,579 $104,659 $ 91,706 $ 68,717 $ 66,730
COST OF SALES 62,591 77,778 66,061 49,301 44,428
-------- -------- -------- -------- --------
Gross profit 31,988 26,881 25,645 19,416 22,302
-------- -------- -------- -------- --------
OPERATING EXPENSES:
Selling and administrative 23,285 26,894 21,220 14,515 15,307
Severance costs -- -- -- -- 982
Research and development 3,439 3,936 2,650 2,357 1,697
-------- -------- -------- -------- --------
Total operating expenses 26,724 30,830 23,870 16,872 17,986
-------- -------- -------- -------- --------
Operating income (loss) 5,264 (3,949) 1,775 2,544 4,316
-------- -------- -------- -------- --------
OTHER EXPENSES:
Interest 1,881 2,398 3,509 2,447 2,297
Other 1,184 1,530 1,432 953 889
-------- -------- -------- -------- --------
Total other expenses 3,065 3,928 4,941 3,400 3,186
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 2,199 (7,877) (3,166) (856) 1,130
PROVISION (BENEFIT) FOR INCOME TAXES (Note 7)
456 (2,687) 828 (300) --
-------- -------- -------- -------- --------
NET INCOME (LOSS) $ 1,743 $ (5,190) $ (3,995) $ (556) $ 1,130
======== ======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE (Note 5)
Basic $ .52 $ (1.55) $ (1.11) $ (.16) $ .30
======== ======== ======== ======== ========
Diluted $ .51 $ (1.55) $ (1.11) $ (.16) $ .30
======== ======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 3,352 3,352 3,608 3,582 3,768
======== ======== ======== ======== ========
Diluted 3,387 3,352 3,608 3,582 3,768
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
LOWRANCE ELECTRONICS, INC.
--------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED JULY 31, 1996, 1997 AND 1998
------------------------------------------------
AND THE NINE MONTHS ENDED APRIL 30, 1999
----------------------------------------
(in thousands)
(Note 5)
<TABLE>
<CAPTION>
Foreign
Currency
Common Stock Paid-In Retained Translation
--------------------
Shares Amount Capital Earnings Adjustment
-------- -------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance
July 31, 1995 3,352 $ 335 $ 5,600 $ 7,661 $ (144)
Net income -- -- -- 1,743 --
Foreign currency translation adjustment -- -- -- 1
-------- -------- --------- ---------- ----------
Balance
July 31, 1996 3,352 335 5,600 9,404 (143)
Net loss -- -- -- (5,190)
Foreign currency translation adjustment -- -- -- -- (54)
-------- -------- --------- ---------- ----------
Balance
July 31, 1997 3,352 335 5,600 4,214 (197)
Net loss -- -- -- (3,995) --
Exercise of common stock options 75 7 196 -- --
Issuance of common stock 341 35 1,277 -- --
Foreign currency translation adjustment -- -- -- -- (300)
-------- -------- --------- ---------- ----------
Balance
July 31, 1998 3,768 377 7,073 219 (497)
Net income (unaudited) -- -- -- 1,130 --
Foreign currency translation adjustment
(unaudited) -- -- -- -- 279
-------- -------- --------- ---------- ----------
Balance
April 30, 1999 (unaudited) 3,768 $ 377 $ 7,073 $ 1,349 $ (218)
======== ======== ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
LOWRANCE ELECTRONICS, INC.
--------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(in thousands)
(Note 8)
<TABLE>
<CAPTION>
Nine Months Ended
For the Years Ended July 31, April 30,
------------------------------- -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited)
<S> <C> <C> <C> <C> <C>
Net income (loss) $ 1,743 $ (5,190) $ (3,995) $ (556) $ 1,130
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 2,561 2,837 2,897 1,942 1,963
(Gain) loss on sale of fixed assets 55 (7) (2) (3) (12)
Foreign currency translation adjustment 1 (54) (300) (91) 279
Change in operating assets and liabilities:
(Increase) decrease in trade accounts receivable (2,156) (3,525) 2,604 (3,471) (4,081)
(Increase) decrease in inventories (2,797) (7,107) 2,656 1,938 7,164
(Increase) decrease in income tax refund
receivable -- (957) 957 957 --
(Increase) decrease in prepaid expenses and
deferred income taxes (55) (1,633) 526 (586) 115
(Increase) decrease in other assets (467) (396) 555 733 68
Increase (decrease) in accounts payable 664 13,338 (6,470) (5,705) (7,945)
(Decrease) increase in accrued liabilities (855) 129 (1,080) (1,186) 253
-------- -------- -------- -------- --------
Net cash used in operating activities (1,306) (2,565) (1,652) (6,028) (1,066)
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,942) (2,722) (583) (1,291) (353)
Proceeds from sale of property, plant and 2 -- -- -- 25
equipment -------- -------- -------- -------- --------
Net cash used in investing activities (1,940) (2,722) (583) (1,291) (328)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 96,406 104,213 93,397 68,327 61,994
Repayments of borrowings under line of credit (92,574) (97,117) (94,613) (66,207) (60,626)
Borrowings under term loan 1,507 500 5,000 5,721 1,800
Principal payments on term loan and capital lease
obligations (2,115) (2,064) (3,293) (2,128) (1,797)
Other borrowings -- -- -- 302 --
Proceeds from issuance of common stock -- -- 1,515 1,515 --
-------- -------- -------- -------- --------
Net cash provided by financing activities 3,224 5,532 2,006 7,530 1,371
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalent (22) 245 (229) 211 (23)
CASH AND CASH EQUIVALENT -- beginning of
the period 643 621 866 866 637
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENT -- end of the
period $ 621 $ 866 $ 637 $ 1,077 $ 614
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
LOWRANCE ELECTRONICS, INC.
--------------------------
NOTES TO CONSOLIDATED FINANCIAL
-------------------------------
STATEMENTS FOR THE YEARS ENDED JULY 31, 1996, 1997 and 1998
-----------------------------------------------------------
AND THE NINE MONTHS ENDED APRIL 30, 1998 AND 1999
-------------------------------------------------
(Unaudited as to information for April 30, 1998 and 1999)
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
- --------
Lowrance Electronics, Inc., and subsidiaries (the Company) design,
manufacture, market and distribute sonars (also known as depth-sounders and
fish-finders), global positioning system (GPS) navigational equipment and other
marine electronic products and various related accessories. The Company's
sonars are principally used by sports fishermen for detecting the presence of
fish and by sports fishermen and boaters as navigational and safety devices for
determining bottom depth in lakes, rivers, and coastal waters. The Company's
GPS receivers are used in a variety of marine and non-marine applications,
including aviation, hunting, hiking and backpacking.
During fiscal 1997 and 1998, the Company incurred significant operating losses
and for the last three fiscal years has had net cash outflows from operations.
In response to the operating results, the Company has addressed operational
problems related to the start-up of it's Mexico manufacturing facility and
related manufacturing operations which are still located in Tulsa, Oklahoma.
The Company has refocused its sales and marketing efforts to 1) minimize
restrictions on the distribution of some of its more popular products under the
Lowrance brand name and 2) increase expenditures for print advertising and boat
show attendance which had decreased significantly in fiscal 1998. In addition,
as discussed in Note 3, the Company and its primary lender amended the credit
agreement to provide for an additional $1.8 million advance under an existing
loan to meet short-term vendor requirements related to past due payables.
Management believes that cash provided by operations and borrowings available
under the amended credit agreement will provide the Company with adequate cash
flow to meet its obligations. However, no assurances can be given that the
operating goals will be achieved.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All material intercompany transactions and
accounts have been eliminated in consolidation.
Property and Depreciation
- -------------------------
Property, plant and equipment is stated at cost. For financial reporting
purposes, depreciation is provided on a straight-line basis over the estimated
service lives of the respective classes of property. The building is being
depreciated using an estimated useful life of thirty years, while the estimated
lives for other assets range from two to fifteen years. Fully depreciated
property and equipment with a cost of approximately $16 million is still in use
as of July 31, 1998.
When property is retired, or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and the resulting gain
or loss is credited or charged to operations.
Maintenance, repairs and renewals, including replacement of minor items of
physical properties, are charged to income; major additions and betterments to
physical properties are capitalized.
F-7
<PAGE>
Research and Development Costs
- ------------------------------
Costs associated with the development of new products and changes to existing
products are charged to expense as incurred and include an allocation of
indirect costs.
Foreign Currency Translations
- -----------------------------
Foreign currency transactions and financial statements are translated in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 52.
Assets and liabilities are translated to U.S. dollars at the current exchange
rate. Income and expense accounts are translated using the weighted average
exchange rate for the period. Adjustments arising from translation of foreign
financial statements are reflected in the cumulative translation adjustment in
the equity section of the consolidated balance sheet. Transaction gains and
losses are included in net income (loss).
Derivatives
- -----------
The Company uses forward sales contracts to hedge against losses due to
changes in foreign currencies. Gains and losses realized from the contracts are
recognized currently as other income or expense. Gains and losses resulting
from the contracts have not had a material impact on the Company's results of
operations. There are no open forward sales contracts at July 31, 1998 and
April 30, 1999.
Use of Estimates in the Preparation of Financial Statements
- -----------------------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Accrued Product Costs
- ---------------------
Product Warranties - The majority of the Company's sales are made under a one-
year product warranty. A provision is made at the time of sale for the
estimated future warranty costs.
Dealer Premium Coupons - The Company offers a sonar installation subsidy to
qualified boat and motor dealers of its Lowrance product line. At the time of
shipment, the Company provides for the estimated cost of this program.
Returns and Refurbishments - Estimated costs related to refurbishment of
returned goods are accounted for by providing a reserve based on the Company's
historical experience. These reserves are analyzed and adjusted quarterly.
Returns are recorded as a reduction of net sales at the time of receipt of the
goods.
Cash and Cash Equivalent
- ------------------------
For purposes of the Consolidated Statements of Cash Flows, the Company
considers only certificates of deposit with a maturity of three months or less
to be cash equivalents.
Advertising
- -----------
Advertising costs are expensed as incurred. The Company expensed
approximately $2,500,000, $4,200,000 and $2,700,000 during the years 1996, 1997
and 1998, respectively, for advertising. During the nine months ended April 30,
1998 and 1999, the Company expensed approximately $2,311,000 and $3,100,000 for
advertising expense.
F-8
<PAGE>
Fair Value of Financial Instruments
- -----------------------------------
Cash and cash equivalents, accounts receivable and accounts payable - The
carrying amount of these assets and liabilities approximates fair value because
of the short maturity of these instruments.
Long-Term Debt and Revolving Credit Line - The amounts outstanding under the
Company's term loan and revolving credit line bear interest at current market
rates; thus their carrying amounts approximate fair market value. Interest rates
underlying capitalized equipment leases approximate current market rates.
Principles of Preparation for Interim Reporting
- -----------------------------------------------
Portions of the 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 contained herein
are adequate to make the information presented not misleading. Accounting
policies for the nine months ended April 30, 1999 are the same as those outlined
in the Annual Report on Form 10-K filed for the year ended July 31, 1998. In
the opinion of management, all adjustments necessary for a fair presentation of
interim results of operations have been made to the interim statements. All
such adjustments were of a normal, recurring nature. The condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K filed with the Securities Exchange Commission.
Recently Issued Accounting Principles
- -------------------------------------
The Company adopted the provision of SFAS No. 128, Earnings Per Share,
effective for the year ended July 31, 1998. This Statement establishes new
standards for computing and presenting earnings per share and requires
restatement for all prior period earnings per share data. The adoption of this
Statement resulted in the dual presentation of basic and diluted earnings per
share on the Company's income statement. In accordance with this statement, the
Company has applied these provisions on a retroactive basis. The adoption of
this Statement did not cause a material difference between previously reported
and restated earnings (loss) per share information for the years ended July 31,
1996 and 1997.
The Company adopted the provisions of SFAS No. 129, Disclosures of Information
about Capital Structure, effective for the year ended July 31, 1998. This
Statement consolidates existing pronouncements on required disclosures about a
company's capital structure including a brief discussion of rights and
privileges for securities outstanding. The adoption of this Statement had no
material effect on the Company's consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income. This Statement requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 is effective
for financial statement periods beginning after December 15, 1997. Management
does not anticipate that this Statement will have a significant effect on the
Company's consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. This
Statement established standards for reporting information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. Management does
not anticipate that this Statement will have a significant effect on the
Company's consolidated financial statements.
F-9
<PAGE>
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement. Companies must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999, however,
companies may implement the statement as of the beginning of any fiscal quarter
beginning June 16, 1998. SFAS No. 133 cannot be applied retroactively and must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998). The Company has not yet quantified the impact of adopting SFAS No.
133 on its financial statements and has not determined the timing of or method
of the adoption of SFAS No. 133. However, as of July 31, 1998, the Company had
no outstanding derivative instruments.
Reclassifications
- -----------------
Certain reclassifications have been made to prior years' consolidated
financial statements to conform to the current year presentation.
F-10
<PAGE>
(2) BALANCE SHEET DETAIL
Inventories
-----------
Inventories are priced at the lower of cost (first-in, first-out) or market
and consist of the following (in thousands):
<TABLE>
<CAPTION>
July 31,
-------------------------- April 30,
1997 1998 1999
-------- -------- ----------
<S> <C> <C> <C>
Raw materials $ 9,928 $ 6,127 $ 5,873
Work-in-process 9,327 4,820 2,462
Finished goods 9,851 15,887 11,061
Excess, obsolete, and realization reserves (1,226) (1,610) (1,336)
------- ------- -------
Total inventories $27,880 $25,224 $18,060
======= ======= =======
<CAPTION>
July 31,
-------------------------- April 30,
1997 1998 1999
-------- -------- ----------
<S> <C> <C> <C>
Property, Plant and Equipment (in thousands)
- -----------------------------
Land $ 557 $ 557 $ 557
Building and improvements 4,470 4,354 4,491
Machinery and equipment 23,607 24,990 24,920
Office furniture and fixtures 5,152 5,141 3,512
------- ------- -------
33,786 35,042 33,480
Less - accumulated depreciation 22,577 25,151 25,211
------- ------- -------
Net property, plant, and equipment $11,209 $ 9,891 $ 8,269
======= ======= =======
</TABLE>
The property, plant, and equipment accounts include the following amounts for
leased property under capitalized leases (in thousands):
<TABLE>
<CAPTION>
July 31,
-------------------------- April 30,
1997 1998 1999
-------- -------- ----------
<S> <C> <C> <C>
Machinery and equipment $ 5,856 $ 5,438 $ 5,460
Office furniture and fixtures 1,086 1,007 945
------- ------- -------
6,942 6,445 6,405
Less - accumulated depreciation 2,785 3,234 3,598
------- ------- -------
Net property, plant, and equipment under capitalized
leases $ 4,157 $ 3,211 $ 2,807
======= ======= =======
<CAPTION>
July 31,
-------------------------- April 30,
1997 1998 1999
-------- -------- ----------
<S> <C> <C> <C>
Reserve for Doubtful Accounts and Sales
- ---------------------------------------
Returns (in thousands)
- -------
Balance, beginning of period $ 539 $ 907 $ 683
Charged to expense 437 329 258
Net (write-offs) recoveries (69) (553) (16)
------ ------ -------
Balance, end of period $ 907 $ 683 $ 925
====== ====== =======
Excess, Obsolete, and Realization Reserve (in thousands)
- -----------------------------------------
Balance, beginning of period $ 676 $1,226 $ 1,610
Charged to expense 773 1,190 794
Net (write-offs) recoveries (223) (806) (1,068)
------ ------ -------
Balance, end of period $1,226 $1,610 $ 1,336
====== ====== =======
</TABLE>
F-11
<PAGE>
(3) LONG-TERM DEBT AND REVOLVING CREDIT LINE
Long-term debt and the revolving credit line are summarized below (in
thousands):
<TABLE>
<CAPTION>
July 31,
-------------------------- April 30,
1997 1998 1999
-------- -------- ----------
<S> <C> <C> <C>
Revolving credit line $18,621 $17,404 $18,773
Term loans 2,487 5,410 6,561
Capitalized equipment lease obligations, payable in
monthly installments of approximately $121,000, including
interest at rates from 7% to 12%, with final payments
ranging from February 1999 through November 2001 4,217 3,722 2,574
------- ------- -------
25,325 26,536 27,908
Less - current maturities 4,149 3,498 4,380
------- ------- -------
Total long-term debt $21,176 $23,038 $23,528
======= ======= =======
</TABLE>
Future maturities of the above debt obligations at April 30, 1999 are
approximately $4,380,000, and are $23,266,000 and $262,000, for the years ending
April 30, 2000 through 2002, respectively.
At July 31, 1997, the Company had a $30 million financing package which
consisted of a $3.5 million term loan together with a $26.5 million revolving
credit line. The revolving credit line provided for borrowings up to $26.5
million based on varying percentages of qualifying categories of receivables and
inventories and carried an interest rate of prime plus .75%. Borrowing against
inventories was limited to $12 million in total.
During August and December 1997, and September and November 1998, the
Company's financing package was amended. Significant provisions of the
amendments included: 1) the due date was extended to December 2000, 2) an
additional term loan of $4,000,000 was funded with a required $800,000 principal
payment which was made in May 1998 and additional principal payments of $66,666
beginning monthly in August 1998, with an interest rate of prime plus 1.5%
(total monthly principal payments on the term loans are now $89,833), 3) an
additional $1,000,000 was funded on the term loan which was subsequently repaid
in July 1998, 4) up to an additional $3,000,000 in borrowings were made
available under the revolving line of credit secured by certain inventories and
receivables located outside the United States, 5) the interest rate on the
revolving line of credit was increased to prime plus 1.5% from prime plus .75%,
6) the total facility was increased from $30,000,000 to $33,911,000 and 7) in
November 1998, an additional advance of $1.8 million on an existing term loan
was funded. The Company has two repayment options; (A) repayment of the $1.8
million advance in February 1999, or (B) amortize the entire $4.8 million term
loan (including the $1.8 million advance) over 60 months beginning in March 1999
with a due date of December 2000. Under either option, principal payments of
$80,000 per month are required beginning in March 1999. In February 1999, the
Company chose the second option.
Current maturities for the revolving credit line are estimated based on future
results and collateral limitations. The terms of the foregoing agreement
include a commitment fee based on the unused portion of the bank credit line in
lieu of compensating balances.
The agreement requires, among other things, that the Company maintain a
minimum tangible net worth, limits the ratio of total liabilities to tangible
net worth and requires the Company to maintain a minimum fixed charge ratio.
Additionally, the agreement limits the level of operating leases, and limits
capital expenditures and capital leases. Violation of any of these provisions
would constitute an event of default which, if not cured, would empower the
lender to declare all amounts immediately payable. The agreement also contains
a provision that in the event of a defined change of ownership, the agreement
may be terminated.
F-12
<PAGE>
The Company's indebtedness is collateralized by substantially all of the
Company's assets. The Company had unfunded outstanding checks at July 31, 1997
and 1998 of $1.6 million and $1.3 million, respectively, and $2.3 million at
April 30, 1999. These outstanding checks are included in accounts payable.
Average short-term borrowings under the revolving credit line and related
interest rates shown in the following table are weighted by using the average
month-end principal balances (in thousands).
<TABLE>
<CAPTION>
Years Ended July 31, Nine Months Ended
--------------------------------------
1996 1997 1998 April 30, 1999
-------------------------------------- -------------------
(unaudited)
<S> <C> <C> <C> <C>
Highest amount borrowed $15,773 $24,095 $20,872 $19,169
Average amount borrowed $11,850 $16,202 $18,025 $17,487
Weighted average interest rate 9.2% 9.1% 10.4% 9.5%
</TABLE>
(4) LEASES
Capital Leases
- --------------
Certain equipment is leased under agreements that are structured as capital
leases. Accordingly, such equipment has been recorded as an asset, and the
discounted value of the remaining lease obligations has been recorded as a
liability in the accompanying Consolidated Balance Sheets (See Note 3).
The following is a schedule by years of future minimum lease payments under
capital leases, together with the present value of the net minimum lease
payments as of July 31, 1998, (in thousands):
Years ending July 31:
1999 $1,730
2000 1,031
2001 1,297
2002 195
------
Total minimum lease payments 4,253
Less amounts representing interest 531
------
Present value of net minimum lease payments $3,722
======
Current portion of obligations under capital
leases $1,424
Long-term portion of obligations under capital
leases $2,298
Operating Leases
- ----------------
Total rent expense for operating leases for the years ended 1996, 1997 and
1998 was approximately $1,119,000, $1,765,000 and $1,889,000, respectively, and
$1,315,000 and $1,245,000 for the nine months ended April 30, 1998 and 1999,
respectively.
At July 31, 1998, future minimum rental payments for operating leases
totaled $7,183,000. On August 30, 1996, the Company entered into a ten year non-
cancelable lease for a manufacturing facility in Ensenada, Mexico. The lease has
a fair market purchase option after three years and accordingly was accounted
for as an operating lease. Payments for this facility are approximately $46,500
per month and began November 1, 1996. The lease also includes rent escalations
of 3% per year beginning in October 1998. Total future
F-13
<PAGE>
minimum rental payments under operating leases for the years ending July 31,
1999 through July 31, 2003 (including the rental for the Mexican facility
assuming the purchase option is not exercised) are approximately $1,622,000,
$1,228,000, $813,000, $709,000 and $644,000, respectively, and $2,167,000
thereafter.
(5) STOCKHOLDERS' EQUITY AND RELATED ITEMS
The Company's 1989 Stock Option Plan provides for a maximum of 400,000
common shares available for issuance. Options and stock appreciation rights
granted cannot have terms greater than ten years. The Plan provides for non-
qualified stock options to be granted at an option price of not less than 100%
of the fair market value of the Company's Common Stock at the date of grant.
Following is a summary of outstanding and exercisable options under the
Plan as of July 31 for the respective years set forth below:
1996 1997
---- ----
Total outstanding 75,000 75,000
Average option price $ 2.71 $ 2.71
In 1998, all 75,000 outstanding common stock options were exercised at a
weighted average price of $2.71 per share. No additional options were granted.
On May 13, 1996, the Company issued 70,000 shares of Series "A" Redeemable
Preferred Stock in a private placement to five key officers of the Company. The
Series "A" Preferred Stock is a nonvoting stock paying a noncumulative dividend
of 2 1/2 cents. Each share of Series "A" Preferred Stock is convertible into
five shares of the Company's Common Stock at a cash purchase price of $5.00 per
share of Common Stock, but only if (i) the Chief Executive Officer of the
Company sells in excess of 30 percent of his Common Stock of the Company or (ii)
the Company sells substantially all of its assets and operations to a third
party. The Series "A" Preferred Stock has been issued for a term of ten years
for a purchase price of $6.875 per share. The Company financed the total
purchase price of $481,250 for the five key officers of the Company pursuant to
Promissory Notes bearing interest at Chase prime and Security Agreements where
all of such Series "A" Preferred Stock is pledged to the Company to secure the
Promissory Notes. In the event the Series "A" Preferred Stock is not converted
within the ten year term, the holder is required to surrender the Series "A"
Preferred Stock for cancellation by the Company in exchange for the Company
forgiving the principal amount of the Promissory Note. If any of the key
officers terminate their employment with the Company for any reason, except
death, they immediately forfeit ownership rights to the Series "A" Preferred
Stock which is immediately surrendered to the Company for cancellation in
exchange for cancellation of the principal amount owing on the Promissory Note,
provided all accrued interest on the Promissory Note is paid to the date of the
key employee's termination. The Promissory Notes receivables have been netted
against Preferred Stock in the Consolidated Balance Sheets.
During fiscal 1998, members of the Company's Board of Directors purchased
341,338 shares of newly issued, unregistered and restricted common stock in a
private placement for $1,310,738 in cash.
The Company adopted the disclosure-only provisions of SFAS 123 "Accounting
for Stock-Based Compensation." Accordingly, no compensation cost has been
recognized for the stock option plans. Had compensation cost for the Company's
stock option plans been determined consistent with the provisions of
F-14
<PAGE>
SFAS 123, the Company's net income (loss) and earnings (loss) per share would
have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
July 31, July 31, July 31,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
NET INCOME (LOSS):
As reported $ 1,743 $ (5,190) $ (3,995)
Pro forma 1,711 (5,344) (4,144)
EARNINGS (LOSS) PER SHARE:
Basic-as reported $ .52 $ (1.55) $ (1.11)
Diluted-as reported .51 (1.55) (1.11)
Pro forma-Basic .51 (1.59) (1.15)
Pro forma-Diluted .51 (1.59) (1.15)
</TABLE>
Because the SFAS 123 method of accounting has not been applied to options
granted prior to August 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using
the Modified Black-Scholes European option pricing model with the following
weighted average assumption: dividend yield of 0%, expected volatility of
85.84%, risk-free interest rate of 6.41% and expected life of five years.
(6) RETIREMENT PLANS
Substantially all U.S. Company employees participate in the Lowrance
Savings Plans which require the Company to contribute 3% of the participants'
qualified earnings to the Plans. Also, each participant may make contributions
of qualified earnings into the Plans which will be matched by the Company at
100% for the first $10 per pay period and 50% thereafter, not to exceed 3% of
compensation. Contributions made by the Company to the Plans for the years ended
July 31, 1996, 1997 and 1998 were approximately $586,000, $678,000 and $462,000,
respectively, and $464,000 and $421,000 for the nine months ended April 30, 1998
and 1999, respectively.
(7) INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended July 31,
------------------------------------------
1996 1997 1998
----------- --------------- ---------
(in thousands)
<S> <C> <C> <C>
Current $ 365 $ (823) $ 93
Deferred 91 (1,864) 736
----------- --------------- ---------
Total $ 456 $ (2,687) $ 829
=========== =============== =========
</TABLE>
F-15
<PAGE>
The provision (benefit) for income taxes differs from the amount calculated
by multiplying income (loss) before provision (benefit) for income taxes by the
statutory Federal income tax rate due to the following:
<TABLE>
<CAPTION>
Years Ended July 31,
-----------------------------------------------------
1996 1997 1998
--------------- --------------- -------------
<S> <C> <C> <C>
Statutory rate 34.0% (34.0)% (34.0)%
Change in valuation allowance -- -- 63.2
Foreign income taxes -- .9 2.8
State income taxes (3.8) (.9) (2.3)
Refunds of prior year taxes
and related adjustments (8.6) -- --
Research & development credits -- -- (1.4)
Other (.9) (.1) (2.1)
----------- ------------ ---------
Effective rate 20.7% (34.1)% 26.2%
=========== ============ =========
</TABLE>
The Company accounts for income taxes in accordance with Statement No. 109
of the Financial Accounting Standards Board which requires an asset and
liability approach to financial accounting and reporting for income taxes. The
difference between the financial statement and tax bases of assets and
liabilities is determined and deferred tax assets or liabilities are computed
for those differences that have future tax consequences. The Company had a net
operating loss carryforward of approximately $5.6 million and $9.3 million at
July 31, 1997 and July 31, 1998, which expires July 31, 2012 and July 31, 2013.
After the completion of the fourth quarter of fiscal 1998, the Company
determined that a valuation allowance of $2,000,000 against the net operating
loss carryforward was necessary as of July 31, 1998. Statement No. 109 requires
that deferred tax assets be reduced by a valuation allowance if it is more
likely than not that some portion or all of the deferred tax asset will not be
realized.
The tax effect of temporary differences giving rise to the Company's
consolidated deferred income taxes at July 31 are as follows:
<TABLE>
<CAPTION>
1997 1998
------------ -------------
(in thousands)
<S> <C> <C>
Deferred tax assets
Reserves for product costs $ 412 $ 466
Reserves for compensation and benefits 620 499
State tax credit carryforwards 314 286
Accounts receivable reserves 183 142
Other accruals 58 64
NOL carryforward 1,961 3,457
------------ -------------
$ 3,548 $ 4,914
Less: valuation allowance -- (2,000)
------------ -------------
Net deferred tax asset $ 3,548 $ 2,914
============ =============
Deferred tax liabilities
Depreciation $ 946 $ 1,048
============ =============
</TABLE>
F-16
<PAGE>
(8) CONSOLIDATED STATEMENTS OF CASH FLOWS
The Company acquired approximately $2,026,000, $1,068,000 and $721,000 in
equipment under capital lease obligations during 1996, 1997 and 1998. These
transactions were accounted for as non-cash investing and financing activities,
and therefore, are not included in the Consolidated Statements of Cash Flows.
Interest of approximately $1,881,000, $2,398,000 and $3,422,000 was paid for the
years ended July 31, 1996, 1997 and 1998, respectively, and $2,447,000 and
$2,234,000 for the nine months ended April 30, 1998 and 1999, respectively.
Income tax payments for 1996 were $541,000. No income tax payments were made in
1997, 1998 or 1999. An income tax refund of $957,000 was received in 1998.
(9) SALES BY GEOGRAPHIC REGION
The Company markets its products internationally through foreign
distributors, except in Canada and Australia where it has established its own
distribution operations. The following table presents a summary of domestic,
export and foreign sales at July 31:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Net sales:
Domestic $ 74,560 $ 79,217 $ 69,376
Export sales 9,598 12,010 10,116
Foreign sales 10,421 13,432 12,214
-------- -------- --------
Total $ 94,579 $104,659 $ 91,706
======== ======== ========
</TABLE>
The majority of export and foreign sales are concentrated in Canada,
Australia and Europe.
(10) SALES TO A MAJOR CUSTOMER
During 1996 and 1997, one customer accounted for approximately 14% and 10%,
respectively, of consolidated net sales in each year. No other customer
accounted for 10% or more of consolidated net sales in 1996, 1997 or 1998.
(11) CONCENTRATIONS OF CREDIT RISK
The Company extends credit to various companies in the marine and non-
marine markets in the normal course of business. Within these markets, certain
concentrations of credit risk exist. These concentrations of credit risk may be
similarly affected by changes in economic or other conditions and may,
accordingly, impact the Company's overall credit risk. However, management
believes that receivables are well diversified, thereby reducing the potential
credit risk and that allowances for doubtful accounts are adequate to absorb
estimated losses at July 31, 1998.
At July 31, 1997 and 1998, trade receivables related to these group
concentrations were:
1997 1998
---- ----
Marine 42% 45%
Non-Marine 58% 55%
F-17
<PAGE>
APPENDIX A
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
BY AND AMONG
LOWRANCE ELECTRONICS, INC.,
ORBITAL SCIENCES CORPORATION
AND
ORBITAL MERGER SUB, INC.
Effective as of March 11, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I. THE MERGER.......................................................................... 2
Section 1.1 The Merger...................................................................... 2
Section 1.2 Closing......................................................................... 2
Section 1.3 Effective Time.................................................................. 2
Section 1.4 Effects of the Merger........................................................... 2
ARTICLE II. THE SURVIVING CORPORATION.......................................................... 3
Section 2.1 Certificate of Incorporation; Bylaws............................................ 3
Section 2.2 Directors and Officers.......................................................... 3
ARTICLE III. CONVERSION OF SHARES.............................................................. 3
Section 3.1 Conversion of Securities........................................................ 3
Section 3.2 Appraisal Rights................................................................ 4
Section 3.3 Payment of Merger Consideration................................................. 4
Section 3.4 Redemption of Series "A" Preferred Stock........................................ 6
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE COMPANY...................................... 6
Section 4.1 Organization and Qualification.................................................. 6
Section 4.2 The Company's Capitalization.................................................... 7
Section 4.3 Authority Relative to the Agreement............................................. 7
Section 4.4 Consents and Approvals; No Violation............................................ 8
Section 4.5 Reports and Financial Statements................................................ 8
Section 4.6 No Material Adverse Changes..................................................... 9
Section 4.7 Litigation...................................................................... 10
Section 4.8 Taxes........................................................................... 10
Section 4.9 Tax Basis....................................................................... 12
Section 4.10 Employee Benefit Plans.......................................................... 12
Section 4.11 Employment Matters.............................................................. 14
Section 4.12 Intellectual Property........................................................... 14
Section 4.13 Environmental Matters........................................................... 15
Section 4.14 Title to Properties; Encumbrances............................................... 15
Section 4.15 Permits and Licenses............................................................ 16
Section 4.16 Material Contracts and Commitments.............................................. 16
Section 4.17 Insurance....................................................................... 17
Section 4.18 Product Warranties.............................................................. 17
Section 4.19 Certain Business Practices...................................................... 17
Section 4.20 Compliance with Laws............................................................ 17
Section 4.21 Brokers and Finders............................................................. 17
Section 4.22 Opinion of Financial Advisors................................................... 18
Section 4.23 Company Stockholders' Approval.................................................. 18
Section 4.24 Information Supplied............................................................ 18
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Section 4.25 Disclaimer of Additional and Implied Warranties................................. 18
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB............................. 18
Section 5.1 Organization and Qualification.................................................. 18
Section 5.2 Authority Relative to the Agreement............................................. 19
Section 5.3 Consents and Approvals; No Violation............................................ 19
Section 5.4 Litigation...................................................................... 20
Section 5.5 Brokers and Finders............................................................. 20
Section 5.6 Information Supplied............................................................ 20
Section 5.7 Financing....................................................................... 20
Section 5.8 Disclaimer of Additional and Implied Warranties................................. 21
ARTICLE VI. COVENANTS OF THE COMPANY, PARENT, AND MERGER SUB PRIOR TO THE EFFECTIVE TIME...... 21
Section 6.1 Conduct of Business by the Company Pending the Merger........................... 21
Section 6.2 No Shopping..................................................................... 22
Section 6.3 Conduct of Business by Parent Pending the Merger................................ 24
ARTICLE VII. ADDITIONAL AGREEMENTS............................................................. 25
Section 7.1 Obligations..................................................................... 25
Section 7.2 Proxy Statement................................................................. 25
Section 7.3 Access to Information; Confidentiality......................................... 25
Section 7.4 Indemnification of Company Directors, Officers and Employees.................... 26
Section 7.5 Certain Filings................................................................. 27
Section 7.6 Public Announcements............................................................ 28
Section 7.7 Further Assurances.............................................................. 29
Section 7.8 Notices of Certain Events....................................................... 29
Section 7.9 Company Stockholders' Meeting................................................... 30
Section 7.10 Expenses and Fees............................................................... 30
Section 7.11 Employee Benefits............................................................... 31
Section 7.12 Takeover Statute................................................................ 32
Section 7.13 Efforts to Consummate the Merger................................................ 32
Section 7.14 Assumption of Debt.............................................................. 32
ARTICLE VIII. CONDITIONS TO THE MERGER......................................................... 32
Section 8.1 Conditions to the Obligations of Each Party..................................... 32
Section 8.2 Conditions to the Obligations of Parent and Merger Sub.......................... 33
Section 8.3 Conditions to the Obligations of the Company.................................... 33
ARTICLE IX. TERMINATION; AMENDMENT; WAIVER..................................................... 34
Section 9.1 Termination..................................................................... 34
Section 9.2 Effect of Termination........................................................... 36
ARTICLE X. MISCELLANEOUS....................................................................... 36
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Section 10.1 Non-Survival of Representations and Warranties; Representation, Warranties,
Covenants and Agreements of Merger Sub......................................... 36
Section 10.2 Entire Agreement; Assignment.................................................... 36
Section 10.3 Amendment and Modification...................................................... 37
Section 10.4 Waiver; Consents................................................................ 37
Section 10.5 Severability.................................................................... 37
Section 10.6 Notices......................................................................... 37
Section 10.7 Governing Law................................................................... 38
Section 10.8 Jurisdiction.................................................................... 38
Section 10.9 Descriptive Headings............................................................ 39
Section 10.10 Parties in Interest; No Third Party Beneficiary................................. 39
Section 10.11 Counterparts.................................................................... 39
Section 10.12 Incorporation by Reference...................................................... 39
Section 10.13 Interpretation.................................................................. 39
</TABLE>
EXHIBITS
- --------
Exhibit A - Definitions
iii
<PAGE>
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this
"Agreement"), effective as of March 11, 1999, is entered into by and among
- ----------
Lowrance Electronics, Inc., a Delaware corporation (the "Company"), Orbital
-------
Sciences Corporation, a Delaware corporation ("Parent"), and Orbital Merger Sub,
------
Inc., a Delaware corporation and a wholly owned subsidiary of Parent ("Merger
------
Sub").
- ---
RECITALS
WHEREAS, the Company, Parent and Magellan Corporation, a majority
owned subsidiary of Parent ("Magellan"), entered into an Agreement and Plan of
Merger dated as of March 11, 1999 (the "Old Merger Agreement"), pursuant to
which (i) Lowrance would have merged with and into Magellan, with Magellan as
the surviving corporation and (ii) the Lowrance stockholders would have received
a certain number of shares of common stock of Parent in exchange for their
Shares (as defined in Section 3.1).
-----------
WHEREAS, Magellan has assigned to Merger Sub all of its rights and
obligations under the Old Merger Agreement, pursuant to an Assignment and
Assumption Agreement dated as of August 26, 1999 by and between Magellan and
Merger Sub.
WHEREAS, each of Parent, Merger Sub and the Company believes that it
is in its and its stockholders' best interests to amend and restate the Old
Merger Agreement to be effective as of March 11, 1999, to provide that (i)
Merger Sub shall merge with and into the Company, with the Company as the
surviving corporation (the "Merger") and (ii) the Lowrance stockholders shall
-------
receive cash in exchange for their Shares as provided in Article III below.
-----------
WHEREAS, subject to and in accordance with the terms and conditions of
this Agreement, the respective Boards of Directors of Parent, Merger Sub and the
Company have approved this Agreement and the Merger.
WHEREAS, concurrently with the execution of this Agreement and as an
inducement to Parent to enter into this Agreement, Darrell J. Lowrance
("Principal Shareholder"), who beneficially owns 1,907,423 shares of common
stock of the Company as of the date hereof, has entered into an Amended and
Restated Stockholder Support Agreement (the "Amended Support Agreement") with
-------------------------
Parent pursuant to which Principal Shareholder has agreed to vote all voting
securities of the Company beneficially owned by him in favor of approval and
adoption of this Agreement and the Merger.
WHEREAS, the parties hereto desire to set forth certain
representations, warranties and covenants made by each to the other as an
inducement to the consummation of the Merger.
WHEREAS, certain terms used herein are defined in Exhibit A attached
---------
hereto.
1
<PAGE>
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties and covenants herein contained, the parties hereto
hereby agree as follows:
ARTICLE I.
THE MERGER
Section 1.1 The Merger. Subject to and in accordance with the terms and
conditions of this Agreement and in accordance with the Delaware General
Corporation Law (the "DGCL"), at the Effective Time (as defined in Section 1.3)
---- -----------
Merger Sub shall be merged with and into the Company. As a result of the Merger,
the separate corporate existence of Merger Sub shall cease and the Company shall
continue as the surviving corporation (sometimes referred to herein as the
"Surviving Corporation").
----------------------
Section 1.2 Closing. The closing of the Merger (the "Closing") shall take
-------
place at the offices of Parent, 21700 Atlantic Boulevard, Dulles, Virginia
20166, or at such other place as Parent, Merger Sub and the Company shall agree,
as soon as practicable after the satisfaction or waiver of the conditions set
forth in Article VIII. The date on which the Closing actually occurs is referred
------------
to herein as the "Closing Date."
------------
Section 1.3 Effective Time. The Merger shall become effective at such time
(the "Effective Time") as a certificate of merger is filed with the Secretary of
--------------
State of the State of Delaware in accordance with the DGCL (the "Certificate of
--------------
Merger") or at such later time as may be agreed by Parent, Merger Sub and the
- ------
Company and specified in the Certificate of Merger in accordance with applicable
law. The Certificate of Merger shall be filed simultaneously with the Closing.
The parties acknowledge that it is their mutual desire and intent to consummate
the Merger as soon as practicable after the date hereof, and in any event within
five business days after the satisfaction, or waiver, of all conditions set
forth in Article VIII hereof, subject to the terms and conditions hereof.
------------
Accordingly, subject to the provisions hereof, the parties shall use all
reasonable efforts to consummate, as soon as practicable, the transactions
contemplated by this Agreement.
Section 1.4 Effects of the Merger. The Merger shall have the effects set
forth in the applicable provisions of the DGCL. Without limiting the generality
of the foregoing and subject thereto, at the Effective Time, all the rights,
privileges, powers, franchises and properties of the Company and Merger Sub
shall vest in the Surviving Corporation and all debts, liabilities and duties of
each of the Company and Merger Sub shall become the debts, liabilities and
duties of the Surviving Corporation.
ARTICLE II.
THE SURVIVING CORPORATION
Section 2.1 Certificate of Incorporation; Bylaws. The certificate of
incorporation and bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be the certificate of incorporation and bylaws of the
Surviving Corporation and thereafter shall continue to be its certificate of
incorporation and bylaws until amended as provided therein and under the DGCL.
2
<PAGE>
Section 2.2 Directors and Officers. The directors and officers of the
Surviving Corporation shall be as designated in Schedule 2.2, and such directors
------------
and officers shall hold office in accordance with the certificate of
incorporation and bylaws of the Surviving Corporation until their respective
successors are duly elected or appointed and qualified.
ARTICLE III.
CONVERSION OF SHARES
Section 3.1 Conversion of Securities.
(a) At the Effective Time, each share of common stock, par value
$0.1 per share, of the Company ("Share" and collectively the "Shares") issued
and outstanding immediately prior to the Effective Time (other than (i) Shares
held in the Company's treasury or by any of the Company's subsidiaries, (ii)
Shares held by Parent, Merger Sub or any other subsidiary of Parent and (iii)
Dissenting Shares (as defined in Section 3.2)) shall, by virtue of the Merger
and without any action on the part of Merger Sub, the Company or the holder
thereof, be converted into and represent the right to receive $7.30 in cash,
without interest (the "Merger Consideration"). Notwithstanding the foregoing, if
between the date of this Agreement and the Effective Time, the Shares shall have
been changed into a different number of shares or a different class by reason of
any stock dividend, subdivision, reclassification, recapitalization, split,
combination or exchange of shares, then the Merger Consideration contemplated by
the Merger shall be correspondingly adjusted to reflect such stock dividend,
subdivision, reclassification, recapitalization, split, combination or exchange
of shares.
(b) At the Effective Time, each outstanding share of the common
stock, par value $.01 per share, of Merger Sub shall be converted into one
share of common stock, par value $.01 per share, of the Surviving
Corporation.
(c) At the Effective Time, each Share held in the treasury of the
Company and each Share held by Parent, Merger Sub or any subsidiary of Parent,
Merger Sub or the Company immediately prior to the Effective Time shall, by
virtue of the Merger and without any action on the part of the Parent, Merger
Sub, the Company or the holder thereof, be canceled and cease to exist and no
payment shall be made with respect thereto.
Section 3.2 Appraisal Rights. Notwithstanding any provision of this
Agreement to the contrary, Shares with respect to which appraisal rights have
been demanded and perfected in accordance with Section 262 of the DGCL (the
"Dissenting Shares") shall not be converted into the right to receive the Merger
Consideration, and the holders thereof shall be entitled only to such rights
granted by the DGCL. Notwithstanding the preceding sentence, if any holder of
Shares who demands appraisal of such Shares under the DGCL shall effectively
withdraw such holder's demand for appraisal in accordance with Section 262 of
the DGCL or becomes ineligible for such appraisal through failure to perfect or
otherwise, then, as of the Effective Date or the occurrence of such event,
whichever last occurs, such holder's Dissenting Shares shall cease to be
Dissenting Shares and shall each be converted into and represent the right to
receive the Merger Consideration. The Company shall give Parent prompt notice of
any written demands for appraisal and any other instrument received by the
Company in connection therewith, and Parent
3
<PAGE>
shall have the right to participate in all negotiations and proceedings with
respect to such demands. The Company shall not, except with the prior written
consent of Parent, make any payment with respect to, or settle or offer to
settle, any such demands.
Section 3.3 Payment of Merger Consideration.
(a) Concurrent with the Effective Time, Parent shall deposit with
Bank Boston, N.A. or such other agent or agents as may be appointed by Parent
and Merger Sub (the "Payment Agent") for the benefit of the holders of Shares,
cash in the aggregate amount necessary to pay the Merger Consideration (such
cash is hereinafter referred to as the "Merger Fund") payable pursuant to
Section 3.1 in respect of outstanding Shares.
(b) As soon as reasonably practicable after the Effective Time,
the Payment Agent shall mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding Shares (the "Certificates") whose Shares were converted into the
------------
right to receive the Merger Consideration pursuant to Section 3.1: (i) a letter
of transmittal (which shall specify that delivery shall be effected and risk of
loss and title to the Certificates shall pass only upon delivery of the
Certificates to the Payment Agent and shall be in such form and have such other
provisions as Parent may reasonably specify) and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for the Merger
Consideration.
(c) Upon surrender of a Certificate for cancellation to the
Payment Agent together with such letter of transmittal duly executed, the holder
of such Certificate shall be entitled to receive in exchange therefor a check
representing the Merger Consideration which such holder has the right to receive
pursuant to the provisions of this Article III and the Certificate so
surrendered shall forthwith be canceled. In the event of a transfer of ownership
of Shares which is not registered in the transfer records of the Company,
payment of the Merger Consideration may be made to a transferee if the
Certificate representing such Shares is presented to the Payment Agent
accompanied by all documents required to evidence and effect such transfer and
by evidence that any applicable stock transfer taxes have been paid. Until
surrendered as contemplated by this Section 3.3, each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender the Merger Consideration as contemplated by this
Section 3.3.
(d) In the event that any Certificate shall have been lost, stolen
or destroyed, the Payment Agent shall issue in exchange therefor, upon the
making of an affidavit of that fact by the holder thereof, such Merger
Consideration as may be required pursuant to this Agreement; provided, however,
that Parent or the Payment Agent may also, in its discretion, require the
delivery of a suitable bond or indemnity.
(e) All Merger Consideration paid upon the surrender for exchange
of Shares in accordance with the terms hereof shall be deemed to have been paid
in full satisfaction of all rights pertaining to such Shares, and there shall be
no further registration of transfers on the stock transfer books of the
Surviving Corporation of the Shares which were outstanding immediately prior to
the Effective Time. If after the Effective Time Certificates are presented to
the Surviving Corporation for any reason they shall be canceled and exchanged as
provided in this Article III.
4
<PAGE>
(f) Any portion of the Merger Fund that remains unclaimed by the
holders of Shares six months after the Effective Time shall be returned to
Parent, upon demand, and any such holder who has not exchanged such holder's
Shares for the Merger Consideration in accordance with this Section 3.3 prior to
that time shall thereafter look only to Parent for payment of the Merger
Consideration in respect of such holder's Shares. Notwithstanding the foregoing,
Parent shall not be liable to any holder of Shares for any amount paid to a
public official pursuant to applicable abandoned property laws. Any amounts
remaining unclaimed by holders of Shares two years after the Effective Time (or
such earlier date immediately prior to such time as such amounts would otherwise
escheat to or become property of any Governmental Authority) shall, to the
extent permitted by applicable law, become the property of Parent free and clear
of any claims or interest of any Person previously entitled thereto.
(g) Parent shall have the right to demand that the Payment Agent
return to Parent such portion of the Merger Fund that represents the Merger
Consideration payable for Shares for which appraisal rights have been perfected
and for which payment has been made pursuant to Section 262 of the DGCL.
(h) Surviving Corporation shall be entitled to deduct and withhold
from the Merger Consideration otherwise payable pursuant to this Agreement to
any holder of the Shares such amounts as it is required by regulations to deduct
and withhold with respect to the making of such payment under the Code, or any
provision of state, local or foreign law. To the extent that amounts are so
withheld by Surviving Corporation, such withheld amounts shall be treated for
all purposes of this Agreement as having been paid to the holder of the Shares
in respect of which such deduction and withholding was made.
(i) The Payment Agent shall invest any cash included in the
Exchange Fund, as directed by Parent, on a daily basis. Any interest and other
income resulting from such investments shall be paid to Parent.
Section 3.4 Redemption of Series "A" Preferred Stock. Immediately prior to
the Effective Time, the Company will redeem for cash all shares of the Series
"A" Preferred Stock, par value $0.50 per share, of the Company (the "Series "A"
----------
Preferred Stock") issued and outstanding immediately prior to the Effective
- ---------------
Time, upon delivery of the certificates(s) representing shares of the Series "A"
Preferred Stock and such other documents as may reasonably be required by the
Company and Parent. The holders of Series "A" Preferred Stock have agreed to
surrender their Series "A" Preferred Stock to the Company for $4.625 per share
of Series "A" Preferred Stock.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Merger Sub as
follows:
Section 4.1 Organization and Qualification.
5
<PAGE>
(a) The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware. The
Company has all requisite corporate power and authority to carry on its business
as it is now being conducted, and to own, lease and operate its properties and
assets. The Company is duly qualified to do business as a foreign corporation
and is in good standing under the laws of each state or other jurisdiction in
which the properties and assets owned, leased or operated by it or the nature of
the business conducted by it make such qualification necessary, except in such
jurisdictions where the failure to be duly qualified or in good standing does
not and would not reasonably be expected to result in a Material Adverse Effect
on the Company. Each such jurisdiction in which the Company is so qualified is
set forth on Schedule 4.1(a).
--------------
(b) Schedule 4.1(b) contains a list of all Subsidiaries of the
---------------
Company, indicating in each case the name, type of entity, jurisdiction of
organization and other jurisdictions in which it is authorized to do business
and the owners of its capital stock. Each Subsidiary of the Company which is a
corporation is duly incorporated, validly existing and in good standing under
the laws of the state or jurisdiction of its incorporation and has all requisite
corporate power and authority to carry on its business as it is now being
conducted and to own, lease and operate its properties and assets. Each
Subsidiary of the Company which is not a corporation is duly organized and
validly existing under all applicable laws and has all necessary power and
authority to carry on its business as it is now being conducted and to own,
lease and operate its properties and assets. Each Subsidiary of the Company is
duly qualified to do business as a foreign entity and is in good standing under
the laws of each state or other jurisdiction in which the properties and assets
owned, leased or operated by it or the nature of the business conducted by it
make such qualification necessary, except in such jurisdictions where the
failure to be duly qualified or in good standing does not and would not result
in a Material Adverse Effect on the Company. Except for the capital stock of the
Subsidiaries of the Company, the Company does not own, directly or indirectly,
any capital stock or other ownership interest in any Person.
(c) True, correct and complete copies of the Company's
Organizational Documents as of the date hereof and the Organizational Documents
of each Subsidiary of the Company as of the date hereof have been delivered by
the Company to Parent.
Section 4.2 The Company's Capitalization. The authorized capital stock of
the Company consists of (i) 10,000,000 Shares, and (ii) 300,000 shares of
preferred stock of the Company, of which 230,000 shares are no par value per
share (the "Company Preferred Stock"), and 70,000 shares are the Series "A"
Preferred Stock. As of March 5, 1999, (i) 3,768,796 shares of the Shares were
issued and outstanding, (ii) no shares of the Company Preferred Stock were
issued and outstanding, and (iii) 70,000 shares of the Series "A" Preferred
Stock were issued and outstanding (as of the Effective Time, such shares of
Series "A" Preferred Stock will have been redeemed in accordance with Section
-------
3.4). As of March 5, 1999, no Shares were held in the treasury of the Company
- ---
and (ii) no shares of the Company Preferred Stock or the Series "A" Preferred
Stock were held in the treasury of the Company. Except as set forth on Schedule
--------
4.2, there are no outstanding subscriptions, options, phantom stock, convertible
- ---
securities, rights, warrants, calls, irrevocable proxies or other agreements or
commitments of any kind directly or
6
<PAGE>
indirectly obligating the Company to issue any security of or equity interest in
the Company, or irrevocable proxies or any agreements restricting the voting or
transfer of or otherwise relating to any security or equity interest in the
Company or an agreement to do any of the foregoing. Except as set forth in this
Section 4.2, no shares of capital stock or other equity or voting securities of
- -----------
the Company are issued, reserved for issuance or outstanding. As of the date of
this Agreement, no bonds, debentures, notes or other indebtedness of the Company
having the right to vote on any matters on which stockholders may vote are
issued or outstanding. As of the date of this Agreement, there are no
outstanding obligations of the Company or the Subsidiaries of the Company to
repurchase, redeem or otherwise acquire any shares of capital stock of the
Company or the Subsidiaries of the Company. All of the outstanding shares of
capital stock of the Company and all outstanding shares of capital stock of each
Subsidiary of the Company have been duly authorized, validly issued and are
fully paid and non-assessable, and are free of preemptive rights. All dividends
declared prior to the date hereof have been paid.
Section 4.3 Authority Relative to the Agreement. The Company has full
corporate power and authority to execute and deliver this Agreement, to perform
its obligations hereunder and to consummate the transactions contemplated
hereby, subject to the Company Required Statutory Approvals (as defined in
Section 4.4) and the approval of the stockholders of the Company ("Company
- ----------- -------
Stockholders' Approval") at a special meeting of the stockholders of the Company
- ----------------------
pursuant to the DGCL ("Company Stockholders' Meeting"). The execution and
-----------------------------
delivery of this Agreement, the performance of its obligations hereunder and the
consummation of the transactions contemplated hereby have been duly and validly
authorized and approved by the Board of Directors of the Company, and no further
corporate actions or proceedings on the part of the Company are necessary to
authorize the execution and delivery of this Agreement, the performance of the
obligations hereunder or the consummation of the transactions contemplated
hereby, except for the Company Stockholders' Approval. This Agreement has been
duly and validly executed and delivered by the Company and, assuming the due
authorization, execution and delivery by Parent and Merger Sub, constitutes the
valid and binding obligation of the Company, enforceable against the Company in
accordance with its terms, subject to the effect of bankruptcy, insolvency,
reorganization, moratorium, or other similar laws relating to creditors' rights
generally and general equitable principles.
Section 4.4 Consents and Approvals; No Violation.
(a) Except for (i) filings as may be required by the HSR Act, (ii)
the filing of the Proxy Statement (as defined in Section 7.2) with the SEC
-----------
pursuant to the Exchange Act, (iii) the filing of the Certificate of Merger with
the Secretary of State of the State of Delaware (the filings and approvals
referred to in clauses (i) through (iii) are collectively referred to as the
"Company Required Statutory Approvals"), and (iv) as otherwise set forth on
- -------------------------------------
Schedule 4.4, no filing or registration with, no notice to, or consent or
- ------------
approval of any third party, including but not limited to, any Governmental
Authority, creditor or other Person in a contractual relationship with the
Company or any Subsidiary of the Company, is necessary in connection with the
execution and delivery of this Agreement by the Company, the performance of its
obligations hereunder, or the consummation of the transactions contemplated
hereby.
7
<PAGE>
(b) Except as set forth on Schedule 4.4, the execution an
------------
delivery of this Agreement, the consummation of the transactions contemplated
hereby, or the compliance by the Company with the provisions hereof will not (i)
conflict with or violate any provision of any Organizational Document of the
Company or any Subsidiary of the Company; (ii) result in a violation or breach
of, or constitute (with or without due notice or lapse of time or both) a
default (or give rise to any right of termination, amendment, cancellation or
acceleration) under, any of the terms, conditions or provisions of any note,
contract, agreement, commitment, bond, mortgage, indenture, license, lease,
pledge agreement or other instrument or obligation to which the Company or any
Subsidiary of the Company is a party or by which the Company or any Subsidiary
of the Company or any of their respective properties or assets may be bound;
(iii) violate or conflict with any provision of any Governmental Authorization
or Legal Requirement binding upon the Company or any Subsidiary of the Company;
or (iv) result in, or require, the creation or imposition of, any lien,
mortgage, pledge, security interest or other encumbrance upon or with respect to
any of the properties or assets now owned or used by the Company or any
Subsidiary of the Company, except in the instances of clauses (ii), (iii) and
(iv) as would not have a Material Adverse Effect on the Company or materially
impair the ability of the Company to consummate the transactions contemplated by
this Agreement.
Section 4.5 Reports and Financial Statements.
(a) The Company has made available to Parent copies of its (a)
Annual Reports on Form 10-K for the fiscal year ended July 31, 1998 and for each
of the two immediately preceding fiscal years, as filed with the SEC, (b) proxy
and information statements relating to (i) all meetings of its stockholders
(whether annual or special) since January 1, 1996 and (ii) any actions by
written consent in lieu of a stockholders' meeting since January 1, 1996, until
the date hereof, if any, and (c) all other reports, including quarterly reports,
or registration statements filed by the Company with the SEC since January 1,
1996 (other than Registration Statements filed on Form S-8) (the documents
referred to in clauses (a), (b) and (c), including the exhibits filed therewith,
are collectively referred to as the "Company SEC Reports").
-------------------
(b) The Company has filed all forms, reports, statements and other
documents required to be filed by it with the SEC since January 1, 1996. No
Subsidiary of the Company is required to file any report, form or other document
with the SEC. As of their respective dates, the Company SEC Reports complied in
all material respects with all applicable requirements of the Securities Act or
the Exchange Act, as the case may be, and the rules and regulations thereunder
applicable to such Company SEC Reports.
(c) As of their respective dates (and as of the effective date of
any registration statement as amended or supplemented filed by the Company), the
Company SEC Reports did not contain any untrue statement of any material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading.
(d) The audited consolidated financial statements and unaudited
interim consolidated financial statements of the Company included in such
Company SEC Reports
8
<PAGE>
(collectively, the "Company Financial Statements") have been prepared in
----------------------------
accordance with GAAP (except as may be indicated therein or in the notes
thereto) and fairly present in all material respects the consolidated financial
position of the Company and its Subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended, subject, in the case of the unaudited interim financial statements, to
normal year-end and audit adjustments and any other adjustments described
therein that are not material in amount or effect.
(e) Neither the Company nor any of its Subsidiaries has any debts,
liabilities or obligations of any nature (whether accrued, absolute, contingent
o otherwise) that would be required to be reflected on, or disclosed or reserved
against in, a consolidated balance sheet of the Company and its Subsidiaries or
in the notes thereto, prepared in accordance with GAAP consistently applied,
except for (a) debts, liabilities and obligations that were so reserved on, or
disclosed or reflected in, the consolidated balance sheet of the Company and its
Subsidiaries as of October 31, 1998 and the notes thereto, included in the
Quarterly Report on Form 10-Q of the Company for the quarter then ended, or the
consolidated balance sheet of the Company and its Subsidiaries as of July 31,
1998 and the notes thereto, included in the Annual Report on Form 10-K of the
Company for the year then ended, and (b) debts, liabilities or obligations
arising in the ordinary course of business since October 31, 1998.
Section 4.6 No Material Adverse Changes. Except as set forth on Schedule
--------
4.6 or as disclosed in the Company SEC Reports, since July 31, 1998 neither the
- ---
Company nor any Subsidiary has (i) issued or sold any of its respective capital
stock or corporate debt obligations (other than checks, drafts, bills and notes
issued in the ordinary course of its business consistent with past practice);
(ii) sold or granted any option, warrant or other right to purchase any of its
respective capital stock; (iii) declared or set aside or paid any dividend or
made any other distribution in respect of its respective capital stock, or,
directly or indirectly, purchased, redeemed or otherwise acquired any shares of
such stock; (iv) made any payments or distributions pursuant to any tax sharing
agreements or arrangements, except in the ordinary course of business consistent
with past practices; (v) acquired, transferred or disposed of, or agreed to
acquire, transfer or dispose of, any assets except in the ordinary course of
business consistent with past practice; (vi) subjected any assets to any liens,
other than liens for taxes not yet due and payable; (vii) suffered any damage,
destruction or casualty loss that has caused or could reasonably be expected to
cause a Material Adverse Effect on the Company, whether or not covered by
insurance; (viii) suffered any strike, labor dispute or threatened labor
dispute; (ix) guaranteed or assumed responsibility for any indebtedness or the
performance of any other obligations other than those of the Company or its
Subsidiaries; (x) operated the business of the Company or its Subsidiaries other
than in, or entered into any material transactions or arrangements (including
those effected for tax purposes) outside, the ordinary course of business
consistent with past practice; (xi) made any material change in their accounting
methods, principles or practices (except such change required by a concurrent
change in GAAP); (xii) revalued any assets thereof in any material respect;
(xiii) entered into any material transaction with any director, officer or 5%
shareholder of the Company or any Affiliate thereof other than in respect of
compensation for services rendered; (xiv) increased or established any bonus,
insurance, welfare, benefit, severance, pension, profit sharing retirement or
other employee
9
<PAGE>
benefit plan or increased the compensation payable or to become payable to any
employees, officers, directors or consultants of the Company or any of its
Subsidiaries, which increase or establishment, individually or in the aggregate
will result in a material liability; or (xv) made any loan, contribution or
investment in any Person other than loans, contributions or investments in
wholly-owned Subsidiaries made in the ordinary course of business, consistent
with past practice. Since July 31, 1998 there has not been any event, occurrence
or development which has had or reasonably could be expected to have a Material
Adverse Effect with respect to the Company.
Section 4.7 Litigation. Except as set forth on Schedule 4.7 or as
------------
disclosed in the Company SEC Reports, there are no Proceedings pending or, to
the Knowledge of the Company, threatened against the Company or any Subsidiary
of the Company or involving any of the properties or assets of the Company or
any Subsidiary of the Company which would, if determined or resolved adversely
to the Company or any Subsidiary in accordance with the plaintiff's demands, or
would reasonably be expected to, have a Material Adverse Effect on the Company.
Section 4.8 Taxes. Except as set forth on Schedule 4.8 or as disclosed in
------------
the Company SEC Reports:
(a) The Company and its Subsidiaries have timely filed (or there
has been filed on their behalf) with the appropriate Governmental Authorities
all Tax Returns that each of them was required to file on or before the Closing
Date. All such Tax Returns were correct and complete in all material respects,
and all such Tax Returns properly reflected the respective liabilities of the
Company and its Subsidiaries for Taxes for the periods covered thereby. All
Taxes shown as due on the heretofore described Tax Returns have been timely
paid. Neither the Company nor any Subsidiary of the Company is currently the
beneficiary of any extension of time within which to file any Tax Return.
(b) Neither the Company nor any Subsidiary of the Company has
received any notice of deficiency or assessment or proposed deficiency or
assessment in connection with any Tax Return, and there are not any pending Tax
examinations of, or claims served against, the Company or any Subsidiary of the
Company. There is no material dispute or claim concerning any Tax liability of
the Company or any Subsidiary of the Company either claimed or raised by any
authority in writing and there is no material dispute or claim concerning any
Tax liability of the Company or any Subsidiary of the Company proposed or
threatened (whether orally or in writing) by any Governmental Authority. The
Company has made available to Parent true and correct copies of all federal and
state Tax Returns, examination reports and statements of deficiencies assessed
against or agreed to by the Company or any Subsidiary of the Company for all
open Tax years. Neither the Company nor any Subsidiary of the Company has
extended, or waived the application of, any statute of limitations of any
jurisdiction regarding the assessment or collection of any Taxes; neither the
Company nor any Subsidiary of the Company has requested any extension of time
within which to file any Tax Return which is currently pending and neither the
Company nor any Subsidiary of the Company has waived any statute of limitations
in respect of Taxes or agreed to any extension of time with respect to a Tax
10
<PAGE>
assessment or deficiency. No material claim has ever been made by a Governmental
Authority in a jurisdiction where either the Company or a Subsidiary of the
Company does not file Tax Returns that the Company or a Subsidiary of the
Company is or may be subject to taxation by that jurisdiction. None of the
assets of the Company or a Subsidiary of the Company (i) are required to be
treated as being owned by another Person pursuant to the so-called safe harbor
lease provisions of former Section 168(f)(8) of the Code, (ii) secures any debt
the interest on which is tax-exempt under Code Section 103(a) or (iii) is tax-
exempt use property within the meaning of Code Section 168(h).
(c) Neither the Company nor any Subsidiary of the Company has
filed a consent under Section 341(f) of the Code concerning collapsible
corporations. Neither the Company nor any Subsidiary of the Company 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. Neither the Company nor any Subsidiary of the
Company is party to any Tax allocation or sharing agreement. Neither the Company
nor any Subsidiary of the Company has agreed or is required to make any
adjustment pursuant to Code Section 481(a) by reason of a change in accounting
method initiated by either the Company or any Subsidiary of the Company and the
Internal Revenue Service has not proposed any such adjustment or change in
accounting method. Neither the Company nor any Subsidiary of the Company has
made any payments, nor is any of them obligated to make any payments, nor is any
of them a party to any agreement that could obligate one or more of them to make
any payments that will not be deductible under Section 280G of the Code. Neither
the Company nor any Subsidiary of the Company (i) has been a member of an
affiliated group filing a consolidated federal income tax return (other than a
group the common parent of which was the Company) or (ii) has any liability for
the Taxes of any Person under Treas. Reg. (S) 1.1502-6 (or any similar provision
of state, local, or foreign law), as a transferee or successor, by contract, or
otherwise.
(d) The unpaid Taxes of the Company and its Subsidiaries (i) did
not, as of the most recent fiscal month end, exceed by any material amount the
reserve for Tax liability (other than any reserve for deferred taxes established
to reflect timing differences between book and tax income) set forth on the face
of the most recent balance sheet (rather than in any notes thereto) and (ii)
will not exceed by any material amount that reserve as adjusted for operations
and transactions through the Closing Date in accordance with the past custom and
practice of the Company in filing its Tax Returns.
Section 4.9 Tax Basis. The adjusted tax basis of the Company's assets
exceed the amount of the Company's liabilities.
Section 4.10 Employee Benefit Plans.
(a) Schedule 4.10(a) contains a list of all "employee pension
----------------
benefit plans" (as defined in Section 3(2) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) (sometimes referred to herein as the
-----
"Company Pension Plans"), "employee welfare benefit plans" (as defined in
----------------------
Section 3(1) of ERISA, hereinafter a "Company Welfare Plan"), "employee
--------------------
benefit plans" (as defined in Section 3(3) of ERISA, hereinafter an
"Employee
--------
11
<PAGE>
Benefit Plan," employment, consulting, severance, stock option, stock purchase,
- ------------
incentive, deferred compensation plans or arrangements, vacation, change in
control, stay-on bonus plans or arrangements, and other material employee
compensation and fringe benefit plans or agreements, whether oral or in writing,
which is entered into, maintained or contributed to or required to be
contributed to by the Company or an "ERISA Affiliate" (as hereinafter defined)
or under which the Company or any ERISA Affiliate may incur any liability
(collectively, the "Company Benefit Plans"). The Company upon request has made
---------------------
available to Parent true, complete, and correct copies of (i) each Company
Benefit Plan and any subsequently adopted amendments thereto, (ii) for the three
most recent plan years, annual reports on Form 5500 required to be filed with
respect to each Company Benefit Plan, (iii) the most recent summary plan
description for each Company Benefit Plan for which such a summary plan
description is required (with all summaries of material modifications provided
after the most recent summary plan description was distributed), (iv) each trust
agreement and group annuity contract relating to any Company Benefit Plan and
(v) each favorable determination letter from the Internal Revenue Service with
respect to each Company Benefit Plan that is intended to be qualified under
Section 401(a) of the Code. For purposes of this Section 4.10, "ERISA Affiliate"
---------------
shall mean any entity which is (or at any relevant time was) a member of a
"controlled group of corporations" with or under "common control" with the
Company as defined in Code Section 414(b), (c) or (m).
(b) All Company Benefit Plans are and have been administered in
material compliance with their terms and all applicable Legal Requirements,
including, without limitation, ERISA and the Code. No event has occurred and, to
the Knowledge of the Company, there exists no condition or set of circumstances,
in connection with which the Company or any of its Subsidiaries could be subject
to any liability under the terms of such Company Benefit Plans, ERISA, the Code
or any other applicable law which would have a Material Adverse Effect on the
Company. There are no pending or, to the Company's or any of its Subsidiary's
Knowledge, threatened investigations by any Governmental Authority, termination
proceedings, or other claims (except claims for benefits payable in the normal
operation of the Company Benefit Plans), Proceedings against or involving any
Company Benefit Plan or asserting any rights or claims to benefits under any
Company Benefit Plan.
(c) No Company Benefit Plan is a "multiemployer plan" within the
meaning of Section 4001(a)(3) of ERISA (hereinafter, a "Multiemployer Plan").
------------------
Neither the Company nor any ERISA Affiliate has, at any time, withdrawn from a
Multiemployer Plan in a "complete withdrawal" or a "partial withdrawal" as
defined in Sections 4203 and 4205 of ERISA, respectively, so as to result in a
liability contingent or otherwise (including, but not limited to, the obligation
pursuant to an agreement entered into in accordance with Section 4204 of ERISA)
of the Company or any ERISA Affiliate. If, as of the Closing Date, the Company
(and all ERISA Affiliates) were to withdraw from all Multiemployer Plans to
which it (or any of them) has contributed or been obligated to contribute, it
(and they) would incur no liabilities to such plans under Title IV of ERISA.
(d) Each of the Company Benefit Plans that is an "employee pension
benefit plan" within the meaning of Section 3(2) of ERISA and each related trust
agreement, annuity contract or other funding instrument related thereto that is
intended to be qualified and tax
12
<PAGE>
exempt under Sections 401(a) (or 403(a), as appropriate) and 501(a) of the Code
is qualified and tax-exempt under the provisions of Code Sections 401(a) (or
403(a), as appropriate) and 501(a) and has been so qualified during the period
from its adoption to date.
(e) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) except as set
forth on Schedule 4.10(e), result in any payment under any Company Benefit Plan
----------------
(including, without limitation, severance or unemployment compensation) becoming
due to any Person; (ii) result in the creation of a right or the acceleration of
vesting under any Company Benefit Plans; or (iii) materially increase any
benefits otherwise payable under any Company Benefit Plan.
(f) There is no contract, agreement, plan or arrangement covering
any employee or former employee of the Company or any ERISA Affiliate that,
individually or collectively, provides for the payment of any amount (i) that is
not deductible under Code Sections 162(a)(1) or 404 or (ii) that is an "excess
parachute payment" pursuant to Code Section 280G.
(g) Neither the Company nor any plan fiduciary of any Company
Benefit Plan has engaged in any transaction in violation of Sections 404 or 406
of ERISA or any "prohibited transaction" as defined in Code Section 4975(c)(1),
for which no exemption exists under Section 408 of ERISA or Code Section
4975(c)(2) or (d), or has otherwise violated the provisions of Part 4 of Title
I, Subtitle B of ERISA. The Company has not knowingly participated in a
violation of Part 4 of Title I, Subtitle B of ERISA by any plan fiduciary of any
Company Benefit Plan (or other employee benefit plan subject to ERISA) and has
not been assessed any civil penalty under Sections 502(1) of ERISA.
Section 4.11 Employment Matters. Except as set forth on Schedule 4.11 or
-------------
as disclosed in the Company SEC Reports, there are no agreements with labor
unions or associations representing employees of the Company or any Subsidiary
of the Company. No material work stoppage against the Company or any Subsidiary
of the Company is pending or, to the Knowledge of the Company, threatened.
Neither the Company nor any Subsidiary of the Company is involved in or, to the
Knowledge of the Company, is threatened with any material labor dispute or
similar material Proceeding relating to labor matters involving the employees of
the Company or any Subsidiary of the Company (excluding routine workers'
compensation claims). There is no pending, or to the Knowledge of the Company,
threatened, charge or complaint against the Company or any Subsidiary of the
Company by the National Labor Relations Board or any comparable state agency,
except where such unfair labor practice, charge or complaint would not have a
Material Adverse Effect on the Company.
Section 4.12 Intellectual Property. Schedule 4.12(a) sets forth with
----------------
respect to the proprietary rights of the Company and each Subsidiary of the
Company: (i) for each patent and patent application, as applicable, the number
and normal expiration date, or the application number and date of filing, (ii)
for each registered trademark, tradename or service mark, the application serial
number or registration number, the application or issue date, the next renewal
date (if applicable), and the class of goods covered, and a listing of all
unregistered trademarks,
13
<PAGE>
(iii) for each registered copyright, the year of creation or date of first
publication of the work, the number of registration for each country in which a
copyright application has been registered, (iv) for each registered mask work,
the registration number and date of registration and (v) all such proprietary
rights in the form of licenses. True and correct copies of all such listed
proprietary rights (including all pending applications and application related
documents and materials) owned, controlled or used by or on behalf of Company or
any Subsidiary of the Company or in which the Company or any Subsidiary of the
Company has any interest whatsoever have been provided or made available to
Parent.
(a) The Company and/or each of its Subsidiaries owns, or is
licensed or otherwise possesses legally enforceable rights to use all patents,
trademarks, trade names, service marks, copyrights, and any applications
therefor, technology, know-how, computer software programs or applications, and
tangible or intangible proprietary information or material that are used in the
business of the Company and its Subsidiaries as currently conducted, except as
would not have a Material Adverse Effect on the Company.
(b) Except as disclosed in Schedule 4.12(b) or as would not have
----------------
a Material Adverse Effect on the Company: (i) the Company is not, nor will it be
as a result of the execution and delivery of this Agreement or the performance
of its obligations hereunder, in violation of any licenses, sublicenses and
other agreements as to which the Company is a party and pursuant to which the
Company is authorized to use any third-party patents, trademarks, service marks
and copyrights ("Third-Party Intellectual Property Rights"); (ii) no claims with
----------------------------------------
respect to the patents, registered and material unregistered trademarks and
service marks, registered copyrights, trade names and any applications therefor
owned by the Company and its Subsidiaries (the "Company Intellectual Property
-----------------------------
Rights"), any trade secret material to the Company, or Third-Party Intellectual
- ------
Property Rights to the extent arising out of any use, reproduction or
distribution of such Third-Party Intellectual Property Rights by or through the
Company or any of its Subsidiaries, are currently pending or, to the Knowledge
of the Company, threatened by any Person; and (iii) the Company has no Knowledge
of any valid grounds for any bona fide claims (1) to the effect that the
manufacture, sale, licensing or use of any products as now used, sold or
licensed or proposed for use, sale or license by the Company or any of its
Subsidiaries, infringes on any copyright, patent, trademark, service mark or
trade secret; (2) against the use by the Company or any of its Subsidiaries, of
any trademarks, trade names, trade secrets, copyrights, patents, technology,
know-how or computer software programs and applications used in the business of
the Company or any of its Subsidiaries as currently conducted or as proposed to
be conducted; (3) challenging the ownership, validity or effectiveness of any of
the Company Intellectual Property Rights or other trade secret material to the
Company; or (4) challenging the license or legal enforceable right to use of the
Third-Party Intellectual Rights by the Company or any of its Subsidiaries.
Section 4.13 Environmental Matters. Except as set forth on Schedule 4.13
-------------
or as disclosed in the Company SEC Reports, (i) the Company has not received any
notice of violation relating to the failure of any Company Business Facility to
comply with Environmental Laws, other than violations that would not reasonably
be expected to have a Material Adverse Effect and (ii) there are no existing or
pending Proceedings asserted by any Governmental Authority or
14
<PAGE>
other third party relating to any Environmental Laws at any Company Business
Facility, except that which would not have a Material Adverse Effect. The
properties, assets and operations of the Company and its Subsidiaries are in
compliance in all material respects with all applicable Environmental Laws.
Except as disclosed on Schedule 4.13, there are no present or past Environmental
Conditions in any way relating to the business of the Company or any of its
Subsidiaries, any properties or facilities currently or formerly managed by the
Company or any of its Subsidiaries.
Section 4.14 Title to Properties; Encumbrances. Schedule 4.14 lists all
-------------
real properties owned or leased by the Company or any of its Subsidiaries. The
Company and its Subsidiaries have good and valid title to all of the properties,
assets, real and personal, reflected as owned in the books and records of the
Company and the Company Financial Statements and all properties and assets
purchased or otherwise acquired by the Company or any Subsidiary of the Company
since July 31, 1998, except for those properties and assets disposed of in the
ordinary course of business since July 31, 1998. None of the properties or
assets owned by the Company or its Subsidiaries is subject to any lien,
mortgage, pledge, security interest or other encumbrance arising by, through or
under the Company or its Subsidiaries, except (i) liens, mortgages, pledges,
security interests or other encumbrances securing liabilities or obligations
shown on the Company Financial Statements, with respect to which no default (or
circumstance which with notice or lapse of time or both would constitute a
default) presently exists, (ii) liens, mortgages, pledges, security interests or
other encumbrances incurred in connection with the purchase of property or
assets after July 31, 1998, with respect to which no default (or circumstance
which with notice or lapse of time or both would constitute a default) exists,
(iii) liens, mortgages, pledges, security interests or other encumbrances
described in Schedule 4.14, (iv) liens for taxes, assessments or governmental
-------------
charges or levies which are not delinquent, and (v) liens, mortgages, pledges,
security interests or other encumbrances that do not materially interfere with
the Company's and its Subsidiaries' use and enjoyment of the assets encumbered
thereby. There are no pending or to the Knowledge of the Company, threatened
condemnation proceedings against or affecting any material properties or assets
of the Company or any of its Subsidiaries is subject to any commitment or other
arrangement for its sale to a third party outside of the ordinary course of
business. All leases under which the Company or its Subsidiaries lease any real
property have been made available to Parent and are in good standing, valid and
effective in accordance with their respective terms, and there is not, under any
such leases, any existing default or event which with notice or lapse of time or
both would become a default by or on behalf of the Company or its Subsidiaries,
except for any default which would not have a Material Adverse Effect on the
Company.
Section 4.15 Permits and Licenses. Except as set forth in Schedule 4.15,
-------------
the Company and each Subsidiary of the Company have all material permits,
licenses, certificates and authorities including all Governmental Authorizations
(collectively, "Permits") from Governmental Authorities required to own, lease
-------
and operate their properties and conduct their businesses as they are now being
conducted, except for Permits the failure of which to obtain would not
reasonably be expected to have a Material Adverse Effect. Such Permits (i) are
in full force and effect unimpaired by any act or omission of the Company or any
Subsidiary of the Company, or their employees or agents, and (ii) have not been
suspended or revoked. The
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Company and each Subsidiary of the Company have complied with, and will continue
to comply with, the terms of the Permits until Closing, except for any failure
to comply which would not reasonably be expected to result in a Material Adverse
Effect on the Company.
Section 4.16 Material Contracts and Commitments. Except as set forth on
Schedule 4.16 or disclosed in the Company SEC Reports, neither the Company nor
- -------------
any of its Subsidiaries is a party to, or is bound by (a) any material
agreement, indenture, or other instrument relating to the borrowing of money by
the Company or any of its Subsidiaries or the guarantee by the Company or any of
its Subsidiaries of any such obligation or (b) any other contract or agreement
or amendment thereto that (i) is required to be filed by the Company with the
SEC pursuant to Item 601 of Regulation S-K, (ii) places any material
restrictions on the right of the Company or any of its Subsidiaries to engage in
any material business activity currently conducted, or (iii) is otherwise
material to the financial condition, results of operations or business of the
Company and its Subsidiaries, taken as a whole (collectively, the "Company
-------
Contracts"). Except as set forth on Schedule 4.16, neither the Company nor any
- --------- -------------
of its Subsidiaries is in default under any Company Contract, 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, other than defaults which in the aggregate
would not reasonably be expected to have a Material Adverse Effect on the
Company.
Section 4.17 Insurance. Schedule 4.17 sets forth a list of all insurance
-------------
policies issued in favor of the Company or its Subsidiaries which relate to the
business of the Company or its Subsidiaries, and all such policies are currently
in force and effect.
Section 4.18 Product Warranties. As of January 31, 1999, the Company's
reserve for its obligations under its express warranties covering its products
sold was $1,010,000.
Section 4.19 Certain Business Practices. Neither the Company, any of its
Subsidiaries, nor, to the Company's Knowledge, any directors, officers, agents
or employees of the Company or any of its Subsidiaries, (i) has used any funds
for unlawful contributions, gifts, entertainment or other unlawful expenses
related to political activity; (ii) has made any unlawful payment to foreign or
domestic government officials or employees or to foreign or domestic political
parties or campaigns or violated any provision of the Foreign Corrupt Practices
Act of 1977, as amended; (iii) has made any other payment prohibited by
applicable law; or (iv) in the case of the Company, any of its Subsidiaries or
any of its officers or key employees, is a party to or bound by any
noncompetition or similar agreement or obligation with any third party, which
restricts its or his or her business practices.
Section 4.20 Compliance with Laws. The conduct of the business of the
Company and its Subsidiaries complies with all applicable Legal Requirements
(other than Environmental Laws which are governed solely by Section 4.13),
------------
except for violations or failures to so comply, if any, that would not
reasonably be expected to have a Material Adverse Effect on the Company.
Section 4.21 Brokers and Finders. Except for the fees and expenses
payable to Chase Securities Inc. ("Chase Securities"), which fees are reflected
----------------
in its agreement with the Company (a copy of which has been delivered to
Parent), the Company has not entered into any contract,
16
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arrangement or understanding with any Person or firm which may result in the
obligation of the Company to pay any finder's fees, brokerage or agent
commissions or other like payments in connection with the transactions
contemplated hereby. Except for the fees and expenses paid or payable to Chase
Securities, there is no claim for payment by the Company of any investment
banking fees, finder's fees, brokerage or agent commissions or other like
payments in connection with the negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby.
Section 4.22 Opinion of Financial Advisors. The Company has received the
opinion of American Appraisal Associates dated the date of this Agreement, to
the effect that, as of such date, the consideration to be received in the Merger
by the Company's stockholders is fair to the Company's stockholders from a
financial point of view, and a copy of the written opinion will be delivered to
Parent and Merger Sub promptly after its receipt by the Company, but in any
event not later than three business days after the date of this Agreement.
Section 4.23 Company Stockholders' Approval. The affirmative vote of
stockholders of the Company required for approval and adoption of this Agreement
and the Merger is 63 1/3% of the outstanding shares of the Shares.
Section 4.24 Information Supplied. None of the information supplied or to
be supplied by the Company for inclusion in the Proxy Statement will, at the
date mailed to stockholders and at the times of the meeting or meetings of
stockholders of the Company to be held in connection with the Merger, 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.
The Proxy Statement will comply as to form in all material respects with the
provisions of the Exchange Act and the rules and regulations thereunder.
Section 4.25 Disclaimer of Additional and Implied Warranties. The Company
is making no representations or warranties, express or implied, of any nature
whatsoever except as specifically set forth in Article IV of this Agreement.
----------
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to the Company as follows:
Section 5.1 Organization and Qualification. Each of Parent and Merger Sub
is a corporation duly incorporated, validly existing and in good standing under
the laws of the State of Delaware. Each of Parent and Merger Sub has all
requisite corporate power and authority to carry on its business as it is now
being conducted, and to own, lease and operate its properties and assets. Each
of Parent and Merger Sub is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each state or other
jurisdiction in which the properties and assets owned, leased or operated by it
or the nature of the business conducted by it make such qualification necessary,
except in such jurisdictions where the failure to be duly
17
<PAGE>
qualified or in good standing does not and would not reasonably be expected to
result in a Material Adverse Effect on Parent. Each such jurisdiction in which
Parent is so qualified is listed on Schedule 5.1.
------------
Section 5.2 Authority Relative to the Agreement. Each of Parent and
Merger Sub has full corporate power and authority to execute and deliver this
Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby, subject to the Parent Required Statutory
Approvals (as defined in Section 5.3). The execution and delivery of this
-----------
Agreement, the performance of the obligations hereunder and the consummation of
the transactions contemplated hereby have been duly and validly authorized and
approved by the Board of Directors of Parent and Merger Sub and by Parent, as
the sole stockholder of Merger Sub and no further corporate actions or
proceedings on the part of Parent or Merger Sub are necessary to authorize the
execution and delivery of this Agreement, the performance of the obligations
hereunder or the consummation of the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by Parent and Merger
Sub and, assuming the due authorization, execution and delivery hereof by the
Company, this Agreement constitutes the valid and binding obligation of each of
Parent and Merger Sub, enforceable against it in accordance with its terms,
subject to the effect of bankruptcy, insolvency, reorganization, moratorium, or
other similar laws relating to creditors' rights generally and general equitable
principles.
Section 5.3 Consents and Approvals; No Violation.
(a) Except for (i) filings as may be required by the HSR Act, (ii)
filings required pursuant to federal and state securities laws and regulations
of the New York Stock Exchange, Inc., (iii) the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware (the filings and
approvals referred to in clauses (i) through (iii) are collectively referred to
as the "Parent Required Statutory Approvals"), and (iv) as otherwise set forth
-----------------------------------
on Schedule 5.3, no filing or registration with, no notice to, or consent or
------------
approval of any third party, including, but not limited to, any Governmental
Authority, creditor or other Person in a contractual relationship with Parent or
Merger Sub, is necessary in connection with the execution and delivery of this
Agreement by Parent or Merger Sub, the performance of its obligations hereunder,
or the consummation of the transactions contemplated hereby.
(b) Except as set forth on Schedule 5.3, the execution and
------------
delivery of this Agreement, the consummation of the transactions contemplated
hereby, or the compliance by Parent and Merger Sub with any of the provisions
hereof will not (i) conflict with or violate any provision of the respective
Organizational Document of Parent and Merger Sub; (ii) result in a violation or
breach of, or constitute (with or without due notice or lapse of time or both) a
default (or give rise to any right of termination, amendment, cancellation or
acceleration) under, any of the terms, conditions or provisions of any note,
contract, agreement, commitment, bond, mortgage, indenture, license, lease,
pledge agreement or other instrument or obligation to which Parent or any
Subsidiary of Parent is a party or by which Parent or any Subsidiary of Parent
or any of their respective properties or assets may be bound; (iii) violate or
conflict with any provision of any Governmental Authorization or Legal
Requirement binding upon Parent or any
18
<PAGE>
Subsidiary of Parent; or (iv) result in, or require, the creation or imposition
of, any lien, mortgage, pledge, security interest or other encumbrance upon or
with respect to any of the properties or assets now owned or used by Parent or
any Subsidiary of Parent, except as may be required in connection with the
assumption by a Subsidiary of Parent of the indebtedness of the Company, and
except in the instances of clauses (ii), (iii) and (iv) as would not reasonably
be expected to have a Material Adverse Effect on Parent or materially impair the
ability of Parent to consummate the transactions contemplated by this Agreement.
Section 5.4 Litigation. Except as set forth on Schedule 5.4 or as
------------
disclosed in all forms, reports and documents filed by Parent with the SEC since
January 1, 1996, there are no Proceedings pending or, to the Knowledge of
Parent, threatened against Parent or any Subsidiary of Parent or involving any
of the properties or assets of Parent or any Subsidiary of the Parent that seek
to restrain or enjoin the consummation of the Merger or which would, if
determined or resolved adversely to the Parent or any Subsidiary in accordance
with the plaintiff's demands, reasonably be expected to have a Material Adverse
Effect on the Parent.
Section 5.5 Brokers and Finders. Neither Parent nor Merger Sub has
entered into any contract, arrangement or understanding with any Person or firm
which may result in the obligation of Parent or Merger Sub to pay any finder's
fees, brokerage or agent commissions or other like payments in connection with
the transactions contemplated hereby. There is no claim for payment by Parent or
Merger Sub of any investment banking fees, finder's fees, brokerage or agent
commissions or other like payments in connection with the negotiations leading
to this Agreement or the consummation of the transactions contemplated hereby.
Section 5.6 Information Supplied. None of the information supplied or to
be supplied by Parent or Merger Sub for inclusion or incorporated by reference
in the Proxy Statement will, at the date mailed to stockholders and at the times
of the meeting or meetings of stockholders of the Company to be held in
connection with the Merger, 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.
Section 5.7 Financing. Parent or Merger Sub has sufficient capital
resources to enable Merger Sub to effect the Merger as contemplated herein at
the Effective Time.
Section 5.8 Disclaimer of Additional and Implied Warranties. Each of
Parent and Merger Sub is making no representations or warranties, express or
implied, of any nature whatsoever except as specifically set forth in Article V
---------
of this Agreement.
ARTICLE VI.
COVENANTS OF THE COMPANY, PARENT, AND MERGER SUB
PRIOR TO THE EFFECTIVE TIME
Section 6.1 Conduct of Business by the Company Pending the Merger. The
Company covenants and agrees that, from the date of this Agreement until the
Effective Time,
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<PAGE>
unless Parent and Merger Sub shall otherwise agree in writing or as otherwise
expressly contemplated by this Agreement:
(a) The business of the Company and its Subsidiaries shall be
conducted only in, and the Company and its Subsidiaries shall not take any
action except in, the ordinary course of business consistent with past practice
and in compliance in all material respects with all applicable Legal
Requirements;
(b) The Company shall not directly or indirectly do any of the
following: (i) issue, sell, pledge, dispose of or encumber, or permit any
Subsidiary of the Company to issue, sell, pledge, dispose of or encumber, (A)
any capital stock of the Company or any of its Subsidiaries except for the
redemption of the shares of Series "A" Preferred Stock outstanding as set forth
in Section 3.4 or (B) other than in the ordinary course of business and
-----------
consistent with past practice and not relating to the borrowing of money, any
assets of the Company or any of its Subsidiaries; (ii) amend or propose to amend
the respective Organizational Documents of the Company or any of its
Subsidiaries; (iii) split, combine or reclassify any outstanding capital stock,
or declare, set aside or pay any dividend payable in cash, stock, property or
otherwise with respect to its capital stock whether now or hereafter
outstanding, except for dividends by the Company's Subsidiaries to the Company;
(iv) redeem, purchase or acquire or offer to acquire, or permit any of its
Subsidiaries to redeem, purchase or acquire or offer to acquire, any of its or
their capital stock except for the redemption of the Series "A" Preferred Stock
as set forth in Section 3.4; or (v) except in the ordinary course of business
and consistent with past practice, enter into any contract, agreement,
commitment or arrangement with respect to any of the matters set forth in this
Section 6.1(b);
- --------------
(c) The Company shall not, and shall not permit any Subsidiary of the
Company to, (i) incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or warrants or rights to
acquire any debt securities of the Company or any Subsidiary of the Company or
guarantee any debt securities of other Persons other than indebtedness of the
Company or any Subsidiary of the Company to the Company or any Subsidiary of the
Company and other than in the ordinary course of business, (ii) make any loans,
advances or capital contributions to, or investments in, any other Person, other
than by the Company or any Subsidiary of the Company to or in the Company or any
Subsidiary of the Company or (iii) pay, discharge or satisfy any claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than in the case of clauses (ii) and (iii),
loans, advances, capital contributions, investments, payments, discharges or
satisfactions incurred or committed to in the ordinary course of business
consistent with past practice.
(d) Except as disclosed on Schedule 4.16, the Company shall not, and
-------------
shall not permit any Subsidiary of the Company to, (i) increase the compensation
payable or to become payable to any of its executive officers or employees or
(ii) take any action with respect to the grant of any severance or termination
pay, or stay, bonus or other incentive arrangement (other than pursuant to
benefit plans and policies in effect on the date of this Agreement), except any
such increases or grants made in the ordinary course of business and in
accordance with past practice.
20
<PAGE>
(e) The Company shall use reasonable efforts (i) to preserve intact
the business organization of the Company and each of its Subsidiaries; (ii) to
maintain in effect any franchises, authorizations or similar rights of the
Company and each of its Subsidiaries; (iii) to keep available the services of
its and their current officers and key employees; (iv) to preserve the goodwill
of those having business relationships with it and its Subsidiaries; (v) to
maintain and keep its properties and the properties of its Subsidiaries in as
good a repair and condition as presently exists, except for deterioration due to
ordinary wear and tear and damage due to casualty; and (vi) to maintain in full
force and effect insurance comparable in amount and scope of coverage to that
currently maintained by it and its Subsidiaries;
(f) The Company shall not make or agree to make, or permit any of its
Subsidiaries to make or agree to make, any new capital expenditure other than
those made in accordance with the 1999 Operating and Capital Budget approved by
the Company's Board of Directors;
(g) The Company shall and shall cause its Subsidiaries to perform in
all material respects their respective obligations under any contracts and
agreements to which any of them is a party or to which any of their assets is
subject, except to the extent such failure to perform would not result in a
Material Adverse Effect, and except for such obligations as the Company or its
Subsidiaries in good faith may dispute; and
(h) The Company shall not, and shall not permit any Subsidiary of the
Company to, take any action that could reasonably be expected to result in (i)
any of the representations or warranties of the Company set forth in this
Agreement that are qualified as to materiality becoming untrue, (ii) any of such
representations and warranties that are not so qualified becoming untrue in any
material respect or (iii) any of the conditions to the Merger set forth in
Article VIII not being satisfied.
- ------------
Section 6.2 No Shopping.
(a) The Company represents and warrants to and covenants and agrees
with Parent and Merger Sub that neither the Company nor any of the Subsidiaries
has any agreement, arrangement or understanding with any potential acquiror
that, directly or indirectly, would be violated, or require any payments, by
reason of the execution, delivery and/or consummation of this Agreement.
(b) The Company shall, and shall cause its Subsidiaries and its and
their officers, employees, investment bankers, attorneys and other agents and
representatives to, immediately cease any existing discussions or negotiations
with any Person other than Parent and Merger Sub (a "Third Party") heretofore
-----------
conducted with respect to any Company Acquisition Proposal (as defined below).
The Company shall not, and shall cause its Subsidiaries and its and their
respective officers, directors, employees, investment bankers, attorneys and
other agents and representatives not to, directly or indirectly (x) solicit,
initiate, continue, facilitate or encourage (including by way of furnishing or
disclosing non-public information) any inquiries, proposals or offers from any
Third Party with respect to, or that could reasonably be expected to lead to,
any acquisition or purchase of a material portion of the assets or business or a
25% or
21
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more voting equity interest in (including by way of a tender offer) or any
amalgamation, merger, consolidation or business combination with, or any
recapitalization or restructuring, or any similar transaction involving, the
Company or any of its Subsidiaries (the foregoing being referred to as a
"Company Acquisition Proposal") or (y) negotiate, explore or otherwise
----------------------------
communicate in any way with any Third Party with respect to any Company
Acquisition Proposal, or enter into, approve or recommend any agreement,
arrangement or understanding requiring the Company to abandon or fail to
consummate the Merger or any other transaction contemplated hereby.
(c) Notwithstanding anything to the contrary in the foregoing clause
(b), the Company may in response to an unsolicited written proposal with respect
to a Company Acquisition Proposal, from a Third Party (i) furnish or disclose
non-public information to such Third Party and (ii) negotiate, explore or
otherwise communicate with such Third Party, in each case only if (A) the Board
of Directors of the Company by majority vote determines in good faith upon
considering the advice of outside counsel that failing to take such action would
constitute a breach of the fiduciary duties of the Board of Directors of the
Company under applicable law (the Company Acquisition Proposal meeting the
requirements of this clause (A), a "Superior Proposal"), (B) prior to furnishing
-----------------
or disclosing any non-public information to, or entering into discussions or
negotiations with, such Third Party, the Company receives from such Third Party
an executed confidentiality agreement with terms no less favorable in the
aggregate to the Company than those contained in the Confidentiality Agreement
between the Company and Parent (the "Confidentiality Agreement"), but which
-------------------------
confidentiality agreement shall not provide for any exclusive right to negotiate
with the Company or any payments by the Company and (C) the Company advises
Parent and Merger Sub of all such non-public information delivered to such Third
Party concurrently with such delivery; provided however, that the Company shall
not, and shall cause its Affiliates not to, enter into a definitive agreement
with respect to a Superior Proposal unless (w) the Company has given Parent and
Merger Sub five business days notice of its intention to enter into such
definitive agreement, (x) if Parent and Merger Sub make a counter-proposal
within such five business day period, the Board of Directors of the Company
shall have determined, in light of any such counter-proposal, that the Third
Party's proposal is still a Superior Proposal, (y) the Company concurrently
terminates this Agreement in accordance with the terms hereof and pays any
termination fees required under Section 7.10 and agrees to pay any other amounts
------------
required under such Section and (z) such agreement permits the Company to
terminate it if it receives a Superior Proposal, such termination and related
provisions to be on terms no less favorable to the Company, including as to fees
and reimbursement of expenses, as those contained herein.
(d) The Company shall promptly (but in any event within one day of
the Company becoming aware of same) advise Parent and Merger Sub of the receipt
by the Company, any of its Subsidiaries or any of its bankers, attorneys or
other agents or representatives of any inquiries or proposals relating to a
Company Acquisition Proposal and any actions taken pursuant to subsection (c)
above. The Company shall promptly (but in any event within one day of the
Company becoming aware of same) provide Parent and Merger Sub with a copy of any
such inquiry or proposal in writing and a written statement with respect to any
such inquiries or proposals not in writing, which statement shall include the
identity of the parties
22
<PAGE>
making such inquiries or proposal and the material terms thereof. The Company
shall, from time to time, promptly (but in any event within one day of the
Company becoming aware of same) inform Parent and Merger Sub of the status and
content of and development with respect to any discussions regarding any Company
Acquisition Proposal with a third party, including (i) the calling of meetings
of the Board of Directors of the Company to take action with respect to such
Company Acquisition Proposal, (ii) the execution of any letters of intent,
memoranda of understanding or similar non-binding agreements with respect to
such Company Acquisition Proposal, (iii) the waiver of any standstill agreement
to which the Company is or becomes a party, (iv) the determination by the Board
of Directors of the Company to recommend to the stockholders of the Company that
they approve or accept a Superior Proposal or withdraw or modify in a manner
adverse to Parent or Merger Sub its approval or recommendation of this Agreement
or the Merger, (v) the determination by the Company to publicly disclose receipt
of a Superior Proposal and (vi) the waiver by the Company of any confidentiality
agreement with a Person proposing a Superior Proposal. For the avoidance of
doubt, the Company agrees that it will not enter into any definitive agreement
with respect to a Superior Proposal unless and until Parent and Merger Sub have
been given notice of the identity of the party making such Superior Proposal,
the terms thereof and developments referred to in the preceding sentence and the
intent to enter into such a definitive agreement at least five business days
prior to the entering into such agreement.
Section 6.3 Conduct of Business by Parent Pending the Merger. Parent
covenants and agrees that, from the date of this Agreement until the Effective
Time, unless the Company shall otherwise agree in writing or as otherwise
expressly contemplated by this Agreement, Parent shall not, and shall not permit
any of its Subsidiaries to, take any action that could reasonably be expected to
result in (i) any of the respective representations or warranties of the Parent
and Merger Sub set forth in this Agreement that are qualified as to materiality
becoming untrue, (ii) any of such representations and warranties that are not so
qualified becoming untrue in any material respect or (iii) any of the conditions
to the Merger set forth in Article VIII not being satisfied.
ARTICLE VII.
ADDITIONAL AGREEMENTS
Section 7.1 Obligations. The Company, Merger Sub and Parent will take all
reasonable action necessary to perform their respective obligations under this
Agreement and to consummate the Merger on the terms and conditions set forth in
this Agreement. None of the Company, Parent or Merger Sub shall take any action
that would reasonably be expected to render them unable to perform their
respective obligations under this Agreement and to consummate the Merger on the
terms and conditions set forth in this Agreement.
Section 7.2 Proxy Statement. The Company shall promptly prepare and file
with the SEC preliminary proxy materials with appropriate requests for
confidential treatment, which shall constitute the Company's proxy statement
(the "Proxy Statement"). Parent and Merger Sub agree to cooperate in such
---------------
preparation and to provide promptly to the Company all information with respect
to Parent, Merger Sub and the transactions contemplated by this Agreement
required
23
<PAGE>
to be included or incorporated by reference therein. The Company will use its
reasonable best efforts to have cleared by the SEC and thereafter mail to its
stockholders as promptly as practicable the Proxy Statement and all other proxy
materials for the meeting of its stockholders to consider and vote upon this
Agreement. Parent shall have a right to review and comment on the Company Proxy
Statement and other proxy materials before filing with the SEC. Each of the
Company and Parent shall notify each other after the receipt by it of any
written or oral comments of the SEC and shall promptly supply the other with
copies of all correspondence between it or any of its representatives and the
SEC with respect to any of the foregoing filings. The Proxy Statement shall
contain the recommendation of the Board of Directors of the Company that the
stockholders of the Company vote to approve and adopt the Merger and this
Agreement, unless the Board of Directors of the Company concludes in good faith
upon considering the advice of outside counsel that such recommendation would
constitute a breach by the Board of Directors of the Company of its fiduciary
duty under applicable law.
Section 7.3 Access to Information; Confidentiality. From the date hereof
to the Effective Time, the Company shall, and shall cause its Subsidiaries and
its and their officers, directors, employees and representatives to, afford the
representatives of Parent and Merger Sub reasonable access during normal
business hours to its officers, employees, representatives, books and records,
and shall furnish Parent and Merger Sub all financial data as Parent and Merger
Sub, through their representatives, reasonably may request; provided, however,
that the Company shall not be so obligated if, based upon written advice of its
counsel, providing such access would reasonably likely violate applicable law.
Parent and Merger Sub agree to hold in strictest confidence all, and not to
disclose to others for any reason whatsoever, any non-public information
received by it, any Subsidiary of Parent or Merger Sub or its or their
representatives in connection with the transactions contemplated hereby except
(i) as required by law; (ii) for disclosure to officers, directors, employees
and representatives of Parent and the Subsidiaries of Parent as necessary in
connection with the transactions and filings contemplated hereby; and (iii) for
information which becomes publicly available other than through Parent or Merger
Sub. In the event the Merger is not consummated, Parent and Merger Sub shall
return to the Company all non-public information (no matter where contained) and
other material obtained from the Company, the Subsidiaries of the Company or
their representatives in connection with the transactions contemplated hereby,
or shall certify to the Company that such information has been destroyed.
Without limiting in any manner the obligations of Parent and Merger Sub under
the foregoing provisions of this Section 7.3, during the period between the date
hereof and the Effective Time, or in the event that this Agreement is terminated
for any reason by Parent, Merger Sub or the Company, all information disclosed
by the Company to either Parent or Merger Sub relating in any manner to the
Company's business, operations, prospects, financial position or results of
operations shall not be used, employed or misappropriated in any manner by
Parent, Merger Sub or any of their Affiliates, successors or assigns that would
be detrimental, harmful or adverse to the business, operations, prospects,
financial position or results of operations of the Company.
Section 7.4 Indemnification of Company Directors, Officers and Employees.
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(a) The Company shall, and from and after the Effective Time, Parent
and the Surviving Corporation shall, to the fullest extent permitted under
applicable law, defend, indemnify and hold harmless each person who is now, or
has been at any time prior to the date hereof or who becomes prior to the
Effective Time, an officer, director or employee of the Company or any of the
Company's Subsidiaries (each, an "Indemnified Party" and, collectively, the
-----------------
"Indemnified Parties") against (i) all costs or expenses (including reasonable
-------------------
attorneys' fees), judgments, fines, losses, claims, damages, liabilities and
amounts paid in settlement in connection with any claim, action, suit,
proceeding or investigation, whether civil, criminal, administrative or
investigative, based in whole or in part on, or arising in whole or in part out
of, the fact that such person is or was an officer, director or employee,
whether pertaining to any matter existing or occurring at or prior to the
Effective Time and whether asserted or claimed prior to, or at or after, the
Effective Time (collectively, the "Indemnified Liabilities"); and (ii) all
-----------------------
Indemnified Liabilities based in whole or in part on, or arising in whole or in
part out of, or pertaining to, this Agreement, the Merger or the transactions
contemplated hereby. The Company (or after the Effective Time, Parent and the
Surviving Corporation) shall be entitled to participate in and, to the extent
that it may wish, to assume the defense of any action, with counsel reasonably
satisfactory to the Indemnified Party but, if any Indemnified Party believes
that by reason of an actual or potential conflict of interest it is advisable
for such Indemnified Party to be represented by separate counsel, or if the
Company (or after the Effective Time, Parent and the Surviving Corporation)
shall fail to assume responsibility for such defense, such Indemnified Party may
retain counsel reasonably satisfactory to the Company (or after the Effective
Time, Parent and the Surviving Corporation) who will represent such Indemnified
Party, and the Company (or after the Effective Time, Parent and the Surviving
Corporation) shall pay all reasonable fees and disbursements of such counsel
promptly as statements therefor are received to the full extent permitted by
applicable law upon receipt of any undertaking contemplated by the DGCL. The
Indemnified Party and the Company (or after the Effective Time, Parent and the
Surviving Corporation) will cooperate with each other and use all reasonable
efforts to assist each other in the vigorous defense of any such matter;
provided, however, that neither the Company, Parent nor the Surviving
Corporation shall be liable for any settlement of any claim effected without its
written consent. Any Indemnified Party wishing to claim indemnification under
this Section 7.4, upon learning of any such claim, action, suit, proceeding or
-----------
investigation, shall promptly notify the Company, Parent or the Surviving
Corporation, as applicable (but the failure to be so notified by an Indemnified
Party shall not relieve it from any liability which it may have under this
Section 7.4 except to the extent such failure prejudices such party). The
- -----------
indemnifying parties shall be required to pay for only one law firm, in addition
to local counsel, in each applicable jurisdiction selected by the Indemnified
Parties as a group in accordance with the foregoing provisions with respect to
each such matter unless there is, under applicable standards of professional
conduct, a conflict in any significant issue between the positions of any two or
more Indemnified Parties.
(b) The Company does not currently maintain in effect policies of
directors' and officers' liability insurance. Parent shall use its reasonable
efforts to obtain coverage for the Company's officers and directors with respect
to claims arising from facts or events which occurred after January 1, 1999
under policies of directors' and officers' liability insurance currently
maintained in effect by Parent, such coverage to be effective as of the Closing
Date.
25
<PAGE>
(c) In the event Parent, the Surviving Corporation or any of their
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 or conveys all or substantially all of
its properties and assets to any Person, then, and in each such case, to the
extent necessary, proper provision shall be made so that the successors and
assigns of Parent and the Surviving Corporation assume the obligations set forth
in this Section 7.4.
-----------
(d) The provisions of this Section 7.4 (i) are intended to be for
-----------
the benefit of, and shall be enforceable by, each Indemnified Party, his heirs
and his representatives and (ii) are in addition to, and not in substitution
for, any other rights to indemnification or contribution that any such Person
may have under the Company's certificate of incorporation, bylaws, by contract
or otherwise.
(e) In the event of any action, suit, proceeding or investigation
with respect to which any Indemnified Party is entitled to indemnification under
this Section 7.4, the parties hereto agree to cooperate and use their respective
-----------
reasonable efforts to vigorously defend against and respond thereto.
Section 7.5 Certain Filings.
(a) The Company, Merger Sub and Parent shall cooperate with one
another (i) in connection with the preparation of the Proxy Statement, (ii) in
determining whether any action by or in respect of, or filing with, any
Governmental Authority is required, or any actions, consents, approvals, or
waivers are required to be obtained from parties to any material agreements, in
connection with the consummation of the transactions contemplated by this
Agreement, and (iii) in taking such actions or making such filings, furnishing
information required in connection therewith and seeking to obtain such actions,
consents, approvals, or waivers in a timely manner.
(b) If not previously filed by Parent, Merger Sub and the Company,
Parent, Merger Sub and the Company will, by April 30, 1999, make such filings as
may be required by the HSR Act with respect to the consummation of the
transactions contemplated by this Agreement and will use all reasonable efforts
to obtain early termination of any waiting period under the HSR Act. Parent,
Merger Sub and the Company will file or cause to be filed as promptly as
practicable with the United States Federal Trade Commission ("FTC") and the
----
United States Department of Justice ("Justice Department") any supplemental
------------------
information which may be requested during the initial waiting period pursuant to
the HSR Act. All filings referred to in this Section 7.5(b) will comply in all
--------------
material respects with the requirements of the respective laws pursuant to which
they are made.
(c) Without limiting the generality or effect of Section 7.5(b) and
--------------
notwithstanding any provision herein to the contrary, each of the parties will
(i) use commercially reasonable best efforts to comply as expeditiously as
possible with all lawful requests of Governmental Authorities for additional
information and documents during the initial waiting period pursuant to the HSR
Act, (ii) not (A) extend any waiting period under the HSR Act or (B) enter into
any voluntary agreement with any Governmental Authorities not to
26
<PAGE>
consummate the transactions contemplated by this Agreement, except with the
prior consent of the other, and (iii) cooperate with each other and use
reasonable efforts to obtain the requisite approval of the FTC and Justice
Department.
Section 7.6 Public Announcements. So long as this Agreement is in effect,
Parent, Merger Sub, and the Company agree to consult with each other in issuing
any press release or otherwise making any public statement with respect to the
transactions contemplated by this Agreement. Without the prior consent of the
other parties hereto, which consent shall not be unreasonably withheld, Parent,
Merger Sub and the Company will not issue, or permit any of its agents or
Affiliates to issue, any press releases or otherwise make or permit any of its
agents or Affiliates to make, public statements with respect to this Agreement
or the transactions contemplated by this Agreement, except as may be required by
law, stock exchange requirements or by obligations pursuant to any listing
agreement under which the Shares is quoted on the NASDAQ National Market System.
The commencement of litigation relating to this Agreement or the transactions
contemplated hereby or any proceedings in connection therewith shall not be
deemed a violation of this Section 7.6.
-----------
Section 7.7 Further Assurances. At and after the Effective Time, the
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of the Company or Merger Sub, any
deeds, bills of sale, assignments, or assurances and to take and do, in the name
and on behalf of the Company or Merger Sub, any other actions and things to
vest, perfect, or confirm of record or otherwise in the Surviving Corporation
any and all right, title, and interest in, to, and under any of the rights,
properties, or assets of the Company acquired or to be acquired by the Surviving
Corporation as a result of, or in connection with, the Merger.
Section 7.8 Notices of Certain Events. Each of the Company, Parent and
Merger Sub shall promptly notify the other party hereto of:
(a) any notice or other communication from any Person alleging that
the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement;
(b) any notice or other communication from any Governmental Authority
in connection with the transactions contemplated by this Agreement. If any party
or any Affiliate thereof receives a request for additional information or
documentary material from any such Governmental Authority with respect to the
transactions contemplated by this Agreement, then such party will endeavor in
good faith to make, or cause to be made, as soon as reasonably practicable and
after consultation with the other party, an appropriate response in compliance
with such request. Parent, Merger Sub and the Company will consult and cooperate
with one another with respect to (and prior to) any understandings, undertakings
or agreements (oral or written) which are proposed to be made or entered into
with any Governmental Authority in connection with the transactions contemplated
by this Agreement, and no such understanding, undertaking, or agreement shall be
made or entered into without the mutual agreement of Parent, Merger Sub and the
Company;
27
<PAGE>
(c) any Proceedings commenced or, to its Knowledge, threatened
against, relating to, or involving or otherwise affecting such party that, if
pending on the date of this Agreement, would have been required to have been
disclosed pursuant to this Agreement or that relate to the consummation of the
transactions contemplated by this Agreement; and
(d) (i) the discovery by such party that any representation or
warranty contained in this Agreement is untrue or inaccurate in any material
respect (or in any respect in the case of any representation or warranty
containing any materiality qualification), (ii) the occurrence or failure to
occur of any event which occurrence or failure to occur would be likely to cause
any of the representations or warranties in this Agreement to be untrue or
incorrect in any material respect (or in any respect in the case of any
representation or warranty containing any materiality qualification) at the
Effective Time, except for representations and warranties that speak as of a
specified date, which need only be true and correct as of the specified date,
and (iii) any material failure (or any failure in the case of any covenant,
condition or agreement containing any materiality qualification) on its part to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by it hereunder; provided, however, that the delivery of any notice
pursuant to this Section 7.8(d) shall not limit or otherwise affect the remedies
--------------
available hereunder to the party receiving such notice.
Section 7.9 Company Stockholders' Meeting. The Company shall promptly take
all action reasonably necessary in accordance with the DGCL and its certificate
of incorporation and bylaws to convene the Company Stockholders' Meeting. The
Board of Directors of the Company (i) shall recommend at such meeting that the
stockholders of the Company vote to adopt and approve the Merger and this
Agreement; (ii) shall use its reasonable efforts to solicit from stockholders of
the Company proxies in favor of such adoption and approval; and (iii) shall take
all other action reasonably necessary to secure a vote of its stockholders in
favor of the adoption and approval of the Merger and this Agreement; provided,
however, that the Board of Directors of the Company may withdraw, modify or
change such recommendation, decline to solicit from the stockholders of the
Company such proxies, and decline to take any such other action necessary to
secure such a vote of the Company's stockholders, if it determines in good
faith, upon considering the advice of outside counsel, that making such
recommendation, soliciting from the stockholders of the Company such proxies,
and taking such other action necessary to secure such a vote of the Company's
stockholders, or the failure to so withdraw, modify or change such
recommendation, or the failure to decline to solicit from the stockholders of
the Company such proxies, or the failure to decline to take any such other
action necessary to secure such a vote of the Company's stockholders, or the
failure to recommend any other offer or proposal, could reasonably be deemed to
cause the members of the Board of Directors to breach their fiduciary duties
under applicable law. At such meeting, all Shares then owned by Parent, Merger
Sub, or any other Affiliate of Parent, or with respect to which Parent, Merger
Sub, or any other Affiliate of Parent holds the power to direct the voting,
shall be voted in favor of the adoption and approval of the Merger and this
Agreement.
Section 7.10 Expenses and Fees.
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<PAGE>
(a) Whether or not the Merger is consummated, all costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses, including, without
limitation, (i) the filing fee and expenses incurred in connection with the
filing under the HSR Act with Parent as the acquiring person shall be paid by
Parent, and (ii) all filing fees and expenses and printing and mailing expenses
incurred in connection with the Proxy Statement shall be paid by the Company.
Notwithstanding anything to the contrary in this paragraph, $250,000 of fees and
expenses of the Company shall be reimbursed by Parent or Merger Sub to the
Company if the Merger is not consummated due to the failure to obtain the
requisite approval from the FTC and the Justice Department as a result of
Parent's acts or omissions.
(b) Notwithstanding the provisions of Section 7.10(a), if this
---------------
Agreement is terminated in accordance with Section 9.1(g) or Section 9.1(h),
-------------- --------------
the Company shall promptly, but in no event later than three business days after
written request by Parent, pay to Parent an amount equal to $2,600,000 in
immediately available funds, if, and only if, a Triggering Event (as defined
below) shall have occurred prior to termination of this Agreement in accordance
with Section 9.1(g) or Section 9.1(h). As used herein, "Triggering Event" shall
-------------- -------------- ----------------
mean the occurrence of any of the following events: (i) the Company shall have
entered into an agreement with respect to any Company Acquisition Proposal; or
(ii) the Company Board of Directors shall have withdrawn, modified or changed
its approval or recommendation of this Agreement or the Merger in a manner
adverse to Parent or Merger Sub.
(c) Notwithstanding the provisions of Section 7.10(a), if this
---------------
Agreement is terminated in accordance with Section 9.1(i), Parent shall
--------------
promptly, but in no event later than three business days after written request
by the Company, pay to the Company an amount equal to $2,600,000 in immediately
available funds.
Section 7.11 Employee Benefits. Parent shall cause, as promptly as
practicable after the Effective Time, the participation of all employees of the
Company as of the Effective Time in the various benefit plans and programs
maintained for Magellan employees or, at Parent's discretion, Parent employees,
or in substantially similar programs, including any of the following benefit
plans maintained as of the Effective Time, in each case to the extent a
similarly situated Magellan or Parent employee is entitled to participate
therein: medical/dental/vision care, life insurance, disability income, sick
pay, holiday and vacation pay, 401(k) plan coverage, Section 125 benefit
arrangements, bonus, profit-sharing or other incentive plans, dependent care
assistance and severance benefits, to the extent the Company employees meet the
eligibility requirements for each such plan or program and their participation
therein is consistent with the terms of such plan or program and all applicable
laws or regulations and for so long as such plans and programs are provided to
the employees of Magellan or Parent (as applicable); provided, however, that any
preexisting condition exclusion applicable under plans and programs pursuant to
which such employee benefits are provided to employees of the Company and the
Company Subsidiaries shall be waived; and provided, further, that Parent shall,
or shall cause Magellan to (as applicable) credit each employee of the Company
and the Company Subsidiaries with any deductibles already incurred during the
year such coverage under the Magellan or Parent (as applicable) benefit plans
begins.
29
<PAGE>
(a) With respect to any "employee benefit plan" as defined in Section
3(3) of ERISA maintained by Magellan or Parent and in which Company employees
are allowed to participate pursuant to Section 7.11(a), for all purposes,
including, but not limited to, determining eligibility to participate, level of
benefits and vesting, service with the Company or any Company Subsidiary shall
be treated as service with Magellan or Parent, as applicable; provided, however,
that such service need not be recognized to the extent that such recognition
would result in any duplication of benefits.
(b) On or before, but effective as of the Effective Time, the Company
and the Company Subsidiaries shall take such actions as may be necessary to
cause each individual employed by the Company and any Company Subsidiaries
immediately prior to the Effective Time to have a fully vested and
nonforfeitable interest in such employee's account balance under the 401(k) plan
sponsored by the Company and the Company Subsidiaries as of the Effective Time.
Section 7.12 Takeover Statute. If Section 203 of the DGCL or any other
takeover statute ("Takeover Statute") shall become applicable to the
----------------
transactions contemplated hereby, the Company and the members of the Board of
Directors of the Company, subject to their fiduciary duties, shall grant such
approvals and take such actions as are necessary so that the transactions
contemplated hereby may be consummated as promptly as practicable on the terms
contemplated hereby and otherwise act to eliminate or minimize the effects of
such Takeover Statute on the transactions contemplated hereby.
Section 7.13 Efforts to Consummate the Merger. Parent, Merger Sub and the
Company each agree to use their commercially reasonable best efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper, or advisable under the terms of this Agreement or applicable
Legal Requirements to consummate the Merger as soon as practicable after the
date hereof, including, without limitation, securing all consents and
authorizations of third parties and giving all notices to third parties which
may be necessary or reasonably required in order to consummate the Merger, and
Parent, Merger Sub and the Company shall use their reasonable efforts to
promptly cooperate to obtain all necessary Governmental Authorizations necessary
to consummate the Merger.
Section 7.14 Assumption of Debt. The Company shall use its reasonable
efforts to obtain an agreement from Company's lender that the Company's
indebtedness will be assumable by Merger Sub or another Subsidiary of Parent.
ARTICLE VIII.
CONDITIONS TO THE MERGER
Section 8.1 Conditions to the Obligations of Each Party. The obligations
of the Company, Parent and Merger Sub to consummate the Merger are subject to
the prior satisfaction of the following conditions:
(a) this Agreement shall have been approved and adopted by the
stockholders of the Company in accordance with the applicable provisions of the
DGCL;
30
<PAGE>
(b) any applicable waiting period under the HSR Act relating to the
Merger shall have expired or been terminated;
(c) all authorizations, consents, orders and approvals of, and
declarations and filings with, and all expirations of waiting periods imposed
by, any Governmental Authority which, if not obtained in connection with the
consummation of the transactions contemplated hereby, could reasonably be
expected to have a Material Adverse Effect on the Company (collectively,
"Required Regulatory Approvals"), shall have been obtained, have been declared
-----------------------------
or filed or have occurred, as the case may be, and all such Required Regulatory
Approvals shall be in full force and effect; and
(d) no provision of any applicable Legal Requirement and no judgment,
injunction, order or decree shall prohibit the consummation of the Merger.
Section 8.2 Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to consummate the Merger are subject to the
prior satisfaction or waiver of the following further conditions:
(a) Each of the representations and warranties of the Company
contained in this Agreement (without giving effect to any qualification
contained therein as to materiality, including, without limitation, the phrases
"material," "in all material respects," "substantial," or "substantially," and
"Material Adverse Effect"), shall be true and correct on and as of the Closing
Date except (i) that those representations and warranties which address matters
only as of a particular date shall remain true and correct as of such particular
date and (ii) where the failure to be so true and correct would not,
individually or in the aggregate, have or be reasonably likely to have a
Material Adverse Effect on the Company. The Company shall have performed or
complied with all agreements and covenants required to be performed by it under
this Agreement at or prior to the Closing Date that are qualified as to
materiality and shall have performed or complied in all material respects with
all other agreements and covenants required to be performed by it under this
Agreement at or prior to the Closing Date that are not so qualified as to
materiality. Since July 31, 1998, there has not been any event, occurrence or
development which has had or reasonably could be expected to have a Material
Adverse Effect with respect to the Company. Parent and Merger Sub shall have
received at the Effective Time a certificate, dated the day of the Effective
Time and validly executed by or on behalf of the Company, to the effect that the
conditions set forth in preceding three sentences have been so satisfied.
(b) All consents, approvals and waivers from any Person necessary to
the consummation of the transactions contemplated hereby shall have been
obtained, including, without limitation, consents from the Company's lender of
the redemption of the Series "A" Preferred Stock as provided in Section 3.4.
(c) Holders of not more than 10% of the total outstanding Shares shall
have demanded appraisal rights for their Shares in accordance with DGCL.
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<PAGE>
Section 8.3 Conditions to the Obligations of the Company. The obligations
of the Company to consummate the Merger are subject to the prior satisfaction or
waiver of the following further conditions:
Each of the representations and warranties of Parent and Merger Sub
contained in this Agreement (without giving effect to any qualification
contained therein as to materiality, including, without limitation, the phrases
"material," "in all material respects," "substantial," or "substantially," and
"Material Adverse Effect"), shall be true and correct on and as of the Closing
Date except (i) that those representations and warranties which address matters
only as of a particular date shall remain true and correct as of such particular
date and (ii) where the failure to be so true and correct would not,
individually or in the aggregate, have or be reasonably likely to have a
Material Adverse Effect on Parent. Parent and Merger Sub shall have performed
or complied with all agreements and covenants required to be performed by it
under this Agreement at or prior to the Closing Date that are qualified as to
materiality and shall have performed or complied in all material respects with
all agreements and covenants required to be performed by it under this Agreement
at or prior to the Closing Date that are not so qualified as to materiality.
The Company shall have received at the Effective Time certificates, dated the
day of the Effective Time and validly executed by or on behalf of Parent and
Merger Sub, to the effect that the conditions set forth in preceding two
sentences have been so satisfied.
ARTICLE IX.
TERMINATION; AMENDMENT; WAIVER
Section 9.1 Termination. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time prior to the
Closing Date, by action taken or authorized by the Board of Directors of the
terminating party or parties, whether before or after approval of the matters
presented in connection with the Merger by the stockholders of the Company in
accordance with one or more of the following:
(a) by mutual written consent executed by the Company, Merger Sub and
Parent and duly authorized by the respective Board of Directors of the Company,
Merger Sub and Parent;
(b) By Parent or Merger Sub if there is a material breach of any
covenant or agreement on the part of the Company set forth in this Agreement, or
if (i) any representation or warranty of the Company that is qualified as to
materiality shall have become untrue or (ii) any representation or warranty of
the Company that is not so qualified shall have become untrue in any material
respect, in each case such that the conditions set forth in Section 8.2 would
-----------
not be satisfied (a "Terminating Company Breach"); provided, however, that, if
such Terminating Company Breach is capable of being cured by the Company prior
to the Effective Time through the exercise of its best efforts, Parent and
Merger Sub shall promptly give notice of such Terminating Company Breach to the
Company and if such Terminating Company Breach is cured within 20 days after
giving notice to the Company of such breach, neither Parent nor Merger Sub may
terminate this Agreement under this Section 9.1(b);
--------------
32
<PAGE>
(c) By the Company, if there is a material breach of any covenant or
agreement on the part of the Parent or Merger Sub set forth in this Agreement,
or if (i) any representation or warranty of Parent or Merger Sub that is
qualified as to materiality shall have become untrue or (ii) any representation
or warranty of Parent or Merger Sub that is not so qualified shall have become
untrue in any material respect, in each case such that the conditions set forth
in Section 8.3 would not be satisfied ("Terminating Parent Breach"); provided,
----------- -------------------------
however, that, if such Terminating Parent Breach is capable of being cured by
Parent or Merger Sub prior to the Effective Time through the exercise of its
best efforts, the Company shall promptly give notice of such Terminating Parent
Breach to Parent and Merger Sub and if such Terminating Parent Breach is cured
within 20 days after giving written notice to Parent and Merger Sub of such
breach, the Company may not terminate this Agreement under this Section 9.1(c);
--------------
(d) by Parent, Merger Sub or the Company if the Closing Date shall not
have occurred, other than through the failure of any such party to fulfill its
obligations hereunder, on or before December 23, 1999 (assuming that Parent,
Merger Sub and the Company have caused their respective filing(s) required by
the HSR Act to be made on or before April 30, 1999, and it being understood that
Parent, Merger Sub and the Company are each obligated hereunder to use their
respective commercially reasonable best efforts to comply with any later
request(s) for information made by any Governmental Authority having
jurisdiction under the HSR Act) or such later date agreed to in writing by
Parent, Merger Sub and the Company; provided, that none of Parent, Merger Sub or
the Company shall be entitled to terminate this Agreement pursuant to this
Section 9.1(d), if the Merger has not been consummated as a result of such
- --------------
party's (or its Affiliates') material breach of any representation, warranty or
covenant set forth in this Agreement;
(e) by Parent, Merger Sub or the Company if any court of competent
jurisdiction in the United States of America or other (federal or state)
Governmental Authority shall have issued an order, decree or ruling or taken any
other action restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have been final and nonappealable;
(f) by Parent, Merger Sub or the Company if this Agreement shall not
have been approved or adopted by the stockholders of the Company after the
matter shall have been presented to them for a vote at the Company Stockholders'
Meeting (including any adjournment thereof);
(g) by the Company if the Board of Directors of the Company determines
to accept a Superior Proposal and withdraws its recommendation in favor of
adoption and approval of the Merger and this Agreement because the Company's
Board of Directors believes in good faith that such a withdrawal is necessary
for the Company's Board of Directors to act in a manner which is consistent with
its fiduciary duties to the stockholders of the Company; or
(h) by Parent or Merger Sub if (i) the Board of Directors of the
Company shall have withdrawn or materially and adversely modified its
recommendation of the Merger or this Agreement; (ii) the Board of Directors of
the Company shall have recommended to the
33
<PAGE>
stockholders of the Company that they approve a Company Acquisition Proposal
other than contemplated by this Agreement; (iii) a tender offer or exchange
offer that, if successful, would result in any Person or "group" (such term
having the meaning in this Section 9.1(h) as is ascribed under Regulation 13D
--------------
under the Exchange Act) becoming a Beneficial Owner of 50% or more of the
outstanding Shares is commenced (other than by Parent, Merger Sub or any of
their Affiliates) and the Board of Directors of the Company recommends that the
stockholders of the Company tender their shares in such tender or exchange
offer; or (iv) for any reason the Company fails to call and hold the Company
Stockholders Meeting by December 23, 1999 (provided that Parent's right to
terminate this Agreement under such clause (iv) shall not be available if at
such time the Company would be entitled to terminate this Agreement under
Section 9.1(c)); or
(i) By the Company if the Board of Directors of Parent or Merger Sub
shall have withdrawn or materially and adversely modified its approval of the
Merger or this Agreement.
Section 9.2 Effect of Termination. In the event of the termination and
abandonment of this Agreement pursuant to Section 9.1 hereof, this Agreement
-----------
shall thereafter become void and have no effect, without any liability on the
part of any party or its directors, other than the provisions of Sections 7.3
------------
(to the extent regarding confidentiality and the obligation not to use the
Company's information to its detriment or harm), 7.10, and Article X; provided,
---- ---------
however, that nothing contained in this Section 9.2 shall relieve any party from
-----------
liability for any breach or violation of this Agreement.
ARTICLE X.
MISCELLANEOUS
Section 10.1 Non-Survival of Representations and Warranties;
Representation, Warranties, Covenants and Agreements of Merger Sub. All
representations warranties, covenants and other agreements in this Agreement
shall not survive the Merger, and after the Effective Time neither the Company,
Parent, Merger Sub or their respective officers or directors shall have any
further obligation with respect thereto. This Section 10.1 shall not limit any
------------
covenant or agreement of the parties hereto which by its terms contemplates
performance after the Effective Time. Notwithstanding anything to the contrary
in this Agreement, all representations, warranties, covenants and agreements of
Merger Sub shall be made as of August 26, 1999.
Section 10.2 Entire Agreement; Assignment. This Agreement (a) constitutes
the entire agreement among the parties with respect to the subject matter hereof
and supersedes all other prior agreements and understandings, including, without
limitation, the Old Agreement, both written and oral, among the parties or any
of them with respect to the subject matter hereof, and (b) shall not be assigned
by operation of law or otherwise. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.
34
<PAGE>
Section 10.3 Amendment and Modification. This Agreement may be amended,
modified, terminated, rescinded or supplemented only by written agreement of the
parties hereto at any time before or after approval hereof by the stockholders
of the Company, but after such approval, any amendment shall be made in
accordance with applicable Legal Requirements.
Section 10.4 Waiver; Consents. At any time prior to the Effective Time,
the parties hereto may (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
documents delivered pursuant hereto, and (iii) waive compliance with any of the
agreements or conditions contained herein; provided, however, that any such
waiver that affects the rights of the stockholders of the Company shall be in
accordance with applicable Legal Requirements. Any failure of a party to comply
with any obligation, covenant, agreement or condition herein may be waived by
the party affected thereby only by a written instrument signed by the party
granting such waiver. No waiver, or failure to insist upon strict compliance, by
any party of any condition or any breach of any obligation, term, covenant,
representation, warranty or agreement contained in this Agreement, in any one or
more instances, shall be construed to be a waiver of, or estoppel with respect
to, any other condition or any other breach of the same or any other obligation,
term, covenant, representation, warranty or agreement. Whenever this Agreement
requires or permits consent by or on behalf of any party hereto, such consent
shall be given in writing in a manner consistent with the requirements for a
waiver.
Section 10.5 Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
Section 10.6 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed duly given (a) on the date of delivery if
delivered personally, (b) on the first business day following the date of
dispatch if delivered by a nationally recognized next-day courier service, (c)
on the next Business Day following the date of mailing if delivered by
registered or certified mail, return receipt requested, postage prepaid or (d)
if sent by facsimile transmission, with a copy mailed on the same day in the
manner provided in (a) or (b) above, when transmitted and receipt is confirmed
by telephone. All notices hereunder shall be delivered as set forth below, or
pursuant to such other instructions as may be designated in writing by the party
to receive such notice to the respective parties as follows:
if to Parent or Merger Sub to:
Orbital Sciences Corporation
21700 Atlantic Boulevard
Dulles, VA 20166
Telecopy No. 703-406-5572
Attention: Legal Department
with a copy (which shall not constitute notice) to:
Latham & Watkins
35
<PAGE>
135 Commonwealth Drive
Menlo Park, CA 94025
Telecopy No. 650-463-2600
Attention: Ora Fisher
if to the Company to:
Lowrance Electronics, Inc.
12000 East Skelly Drive
Tulsa, OK 74128
Telecopy No. 918-234-1714
Attention: Mr. Darrell J. Lowrance
with a copy (which shall not constitute notice) to:
Stuart, Biolchini, Turner & Givray
Suite 3300
First Place Tower
Fifteen East Fifth Street
Tulsa, OK 74103
Telecopy No. (918) 582-3033
Attention: Robert F. Biolchini, Esq.
or to such other address as the Person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof).
Section 10.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
Section 10.8 Jurisdiction. Any process against Parent, Merger Sub or the
Company in, or in connection with, any suit, action or proceeding arising out of
or relating to this Agreement or any of the transactions contemplated by this
Agreement may be served personally or by certified mail at the address set forth
in Section 10.6 with the same effect as though served on it personally.
------------
Section 10.9 Descriptive Headings. The descriptive headings and table of
contents are inserted for convenience of reference only and are not intended to
be part of or to affect the meaning or interpretation of this Agreement.
Section 10.10 Parties in Interest; No Third Party Beneficiary. Except as
set forth in Section 7.4, this Agreement shall be binding upon and inure solely
-----------
to the benefit of each party hereto, and nothing in this Agreement, express or
implied, is intended to confer upon any other Person any rights or remedies of
any nature whatsoever under or by reason of this Agreement.
36
<PAGE>
Section 10.11 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
Section 10.12 Incorporation by Reference. Any and all schedules, exhibits,
annexes, statements, reports, certificates or other documents or instruments
referred to herein or attached hereto are incorporated herein by reference
hereto as though fully set forth at the point referred to in the Agreement.
Section 10.13 Interpretation. When a reference is made in this Agreement
to Sections, Exhibits or Schedules, such reference shall be to a Section of or
Exhibit or Schedule to this Agreement unless otherwise indicated. Whenever the
words "include", "includes" or "including" are used in this Agreement, they
shall be deemed to be followed by the words "without limitation." The parties
have participated jointly in the negotiation and drafting of this Agreement. In
the event an ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the parties and no
presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of the authorship of any of the provisions of this Agreement. Any
reference to any federal, state, local or foreign statute or law shall be deemed
also to refer to all rules and regulations promulgated thereunder, unless the
content requires otherwise.
[SIGNATURES ON FOLLOWING PAGE(S)]
37
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to
be executed on its behalf by its officers thereunto duly authorized, all as of
the day and year first above written.
ORBITAL SCIENCES CORPORATION
By: /s/ David W. Thompson
-------------------------------------
Name: David W. Thompson
Title: President and Chief Executive
Officer
ORBITAL MERGER SUB, INC.
By: /s/ Jeffrey V. Pirone
-------------------------------------
Name: Jeffrey V. Pirone
Title: Vice President and Secretary
LOWRANCE ELECTRONICS, INC.
By: /s/ Darrell J. Lowrance
-------------------------------------
Name: Darrell J. Lowrance
Title: President and Chief Executive
Officer
38
<PAGE>
EXHIBIT A
DEFINITIONS
For the purposes of this Agreement, the following terms shall have the meanings
specified or referred to below whether or not capitalized when used in this
Agreement.
"Affiliate" means, with respect to a specified Person, (a) any Entity
---------
of which such Person is an executive officer, director, partner, trustee or
other fiduciary or is directly or indirectly the Beneficial Owner of 10% or more
of any class of equity security thereof or other financial interest therein; (b)
if such Person is an individual, any relative or spouse of such individual, or
any relative of such spouse (such relative being related to the individual in
question within the second degree) and any Entity of which any such relative,
spouse, or relative of spouse is an executive officer, director, partner,
trustee or other fiduciary or is directly or indirectly the Beneficial Owner of
10% or more of any class of equity security thereof or other financial interest
therein; (c) if such Person is an Entity, any director, executive officer,
partner, trustee or other fiduciary or any direct or indirect Beneficial Owner
of 10% or more of any class of equity security of, or other financial interest
in, such Entity; (d) any Person that directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with the
Person specified, or (e) with respect to the Company, any stockholder. For
purposes of this definition, "executive officer" means the president, any vice
president in charge of a principal business unit, division or function such as
sales, administration, research and development, or finance, and any other
officer, employee or other Person who performs a policy making function or has
the same duties as those of a president or vice president. For purposes of this
definition, "control" (including "controlling", "controlled by" and "under
common control with") means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise.
"Beneficial Owner" shall have the meaning set forth in Rule 13d-3 of
----------------
the General Rules and Regulations promulgated under the Exchange Act as in
effect as of the date of this Agreement.
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Company Business Facility" means any land, building or structure
-------------------------
owned or leased by the Company and/or any Subsidiary of the Company.
"Entity" means any corporation (including any non-profit corporation),
------
general partnership, limited partnership, limited liability company, joint
venture, joint stock association, estate, trust, cooperative, foundation, union,
syndicate, league, consortium, coalition, committee, society, firm, company or
other enterprise, association, organization or entity of any nature.
"Environmental Conditions" means the introduction into the environment
------------------------
of any Hazardous Substance (whether or not upon any Company Business Facility or
other property) as a result of which the Company or any of its Subsidiaries has
or may become liable to any Person
A-1
<PAGE>
or by reason of which any Company Business Facility or any of the assets of the
Company or its Subsidiaries may suffer or be subject to any lien.
"Environmental Laws" means any and all Legal Requirements that relate
------------------
to public and worker health and safety and pollution, contamination,
preservation, protection, or clean-up of the air, surface water, ground water,
soil or wetlands and activities or conditions relating thereto.
"Environmental Permit" means all permits, licenses, certificates,
--------------------
registrations, identification numbers, applications, consents, approvals,
variances, notices of intent, and exemptions necessary for the ownership, use
and/or operation of any current Company Business Facility to comply with
Requirements of Environmental Laws.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
and the rules and regulations promulgated thereunder.
"GAAP" means generally accepted United States accounting principles,
----
consistently applied.
"Governmental Authority" means any governmental authority, including,
----------------------
but not limited to, any foreign governmental authority, the United States of
America, any State of the United States, any local authority and any political
subdivision of any of the foregoing, any multi-national organization or body,
any agency, department, commission, board, bureau, court or other authority of
any of the foregoing, or any quasi-governmental or private body exercising, or
purporting to exercise, any executive, legislative, judicial, administrative,
police, regulatory or taxing authority or power of any nature.
"Governmental Authorization" means any permit (including, but not
--------------------------
limited to, any Environmental Permit), license, franchise, approval (including
clearance under the HSR Act), certificate, consent, ratification, permission,
confirmation, endorsement, waiver, certification, registration, qualification or
other authorization issued, granted, given or otherwise made available by or
under the authority of any Governmental Authority or pursuant to any Legal
Requirement.
"Hazardous Substance" shall mean any pollutant, contaminant, chemical,
-------------------
and any toxic, infectious, carcinogenic, reactive, corrosive, ignitable or
flammable chemical or chemical compound or hazardous substance, material or
waste, whether solid, liquid or gas, including, without limitation, any quantity
of asbestos in any form, urea formaldehyde, PCB's, radon gas, crude oil or any
fraction thereof, all forms of natural gas, petroleum products or by-products or
derivatives, radioactive substance or material, pesticide waste waters, sludges,
and slag, that is subject to regulation, control or remediation under any
Environmental Laws; and any other substance, material or waste that is subject
to regulation, control or remediation under any Environmental Laws.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
-------
of 1976, as amended, and the rules and regulations promulgated thereunder.
A-2
<PAGE>
"Knowledge"; unless otherwise specifically defined in the text of the
---------
Agreement with respect to one or more Sections, the Company or Parent, as
appropriate, shall be deemed to have "knowledge" of a particular fact or other
matter if any director or executive officer of the Company or Parent, as
appropriate, has current, actual knowledge of such fact or other matter or if
such director or executive officer would have such knowledge through the conduct
of his duties in a reasonable manner in accordance with generally accepted
industry standards.
"Legal Requirement" shall mean any applicable law (including, but not
-----------------
limited to, Environmental Laws), statute, ordinance, decree, requirement, order,
treaty, proclamation, convention, rule or regulation (or interpretation of any
of the foregoing) of, and the terms of any Governmental Authorization issued by,
any Governmental Authority which exists on the date of this Agreement and/or
exists up to and including the Closing Date.
"Material Adverse Effect," when used in this Agreement in connection
-----------------------
with the Company and its Subsidiaries, or Parent and its Subsidiaries, as the
case may be, means any event, circumstances, effect, fact or condition that
individually or in the aggregate with all other events, facts, circumstances,
effects or conditions is or could reasonably be anticipated to be materially
adverse to the business, assets (including intangible assets), liabilities,
financial condition or results of operations of the Company and all of its
Subsidiaries or Parent and all of its Subsidiaries, as applicable, taken as a
whole, excluding specifically any such event, fact or condition resulting from
or relating to (a) changes in general economic or political conditions or (b)
changes arising out of the effects of the seasonality and volatility of the
Company's and its Subsidiaries' businesses consistent with the historic
seasonality and volatility of the Company's and its Subsidiaries' businesses.
"Organizational Documents" means, with respect to a corporation, the
------------------------
certificate of incorporation, articles of incorporation and bylaws of such
corporation; with respect to a general partnership, the partnership agreement
establishing such partnership; with respect to a joint venture, the joint
venture agreement establishing such joint venture; with respect to a limited
partnership, the limited partnership agreement and the certificate of limited
partnership of such limited partnership; with respect to a trust, the instrument
establishing such trust; and with respect to any other Entity, any charter
document or other document or agreement executed, adopted, approved, ratified or
filed in connection with the formation, creation, constitution, governance or
organization of such Entity, in each case including any and all amendments or
modifications thereof.
"Person" means any individual, Entity or Governmental Authority.
------
"Proceeding" means any action, suit, litigation, arbitration, lawsuit,
----------
claim, proceeding (including any civil, criminal, administrative, investigative
or appellate proceeding and any informal proceeding), review, prosecution,
contest, hearing, inquiry, inquest, audit, examination, investigation,
challenge, controversy or dispute commenced, brought, conducted or heard by or
before, or otherwise involving, any Governmental Authority or any arbitrator.
A-3
<PAGE>
"Requirement(s) of Environmental Law(s)" means all requirements,
--------------------------------------
conditions, restrictions or stipulations of Environmental Laws applicable to the
Company, its Subsidiaries or the assets and/or the business of the Company or
any of its Subsidiaries.
"SEC" means the Securities and Exchange Commission.
---
"Securities Act" means the Securities Act of 1933, as amended, and the
--------------
rules and regulations promulgated thereunder.
"Subsidiary" means, with respect to any Person, any corporation,
----------
partnership, joint venture, joint stock association, business trust or other
Entity of which such Person or another Subsidiary of such Person directly or
indirectly owns more than 20% of the outstanding capital stock or other equity
interest.
"Tax" or "Taxes" means any federal, state, local or foreign net or
--- -----
gross income, gross receipts, sales, use, ad valorem, transfer, franchise,
license, withholding, payroll, employment, excise, severance, stamped,
occupation, premium, personal property, real property, capital stock, profits,
social security, unemployment, disability, registration, value added, estimated,
alternative or add-on minimum taxes, customs duties or other taxes, fees,
assessments or charges of any kind whatsoever, together with any interest and
penalties, additions to tax or additional amounts imposed by any Governmental
Authority.
"Tax Return" means any return, declaration, report, claim for refund,
----------
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
A-4
<PAGE>
APPENDIX B
August 26, 1999
Board of Directors
Lowrance Electronics, Inc.
12000 East Skelly Drive
Tulsa, Oklahoma 74128
Dear Members of the Board:
American Appraisal Associates, Inc. ("American Appraisal") has been retained to
provide a fairness opinion to the Board of Directors ("Board") of Lowrance
Electronics, Inc., a Delaware corporation ("Lowrance" or the "Company"), in
connection with an offer from Orbital Sciences Corporation, a Delaware
corporation ("Orbital"), to purchase all the outstanding shares of Lowrance
common stock for $7.30 per share through a merger of the Company with a wholly
owned subsidiary of Orbital (the "Merger").
Terms of Merger
The Merger, which is subject to approval by shareholders of the Company,
includes the following terms and conditions:
. Orbital Merger Sub, Inc., a Delaware corporation and wholly owned
subsidiary of Orbital ("Merger Sub"), shall be merged with and into the
Company and as a result, the separate corporate existence of Merger Sub
shall cease and Company shall continue as the surviving corporation (the
"Surviving Company");
. Each share of common stock of the Company, par value $0.10 per share
("Company Common Stock") issued and outstanding immediately prior to the
Merger (other then (i) shares held in the Company's treasury or by any of
the Company's subsidiaries, (ii) shares held by Orbital, Merger Sub or any
other subsidiary of Orbital and (iii) dissenting shares) shall, by virtue
of the Merger and without any action on the part of Merger Sub, the Company
or the holder thereof, be converted into and represent the right to receive
$7.30 in cash without interest (the "Merger Consideration"); and
. Prior to the Merger, the Company will redeem for cash all of the Series "A"
Preferred Stock, par value $0.50 per share, of the Company issued and
outstanding for an amount of $4.625 per share.
Role of American Appraisal
We have been retained to review the terms and conditions of the Merger for the
purpose of providing an opinion as to whether the Merger Consideration and other
terms and conditions of the Merger are, in our opinion, fair, from a financial
point of view, to the unaffiliated common stock shareholders of Lowrance (the
"Opinion").
<PAGE>
American Appraisal Credentials
Through its Financial and Valuation Advisory Services Group, American Appraisal
is regularly and continually engaged in the valuation of businesses and
securities in connection with restructurings and reorganizations, mergers and
acquisitions, private placements and other corporate purposes. Prior to the
engagement, American Appraisal had not provided financial or valuation advice to
Orbital.
Due Diligence
In connection with our analysis leading to the opinions set forth below, we
have, among other things:
(i) reviewed the Amended and Restated Agreement and Plan of Merger by and
among Lowrance, Orbital and Merger Sub, executed August 26, 1999;
(ii) reviewed Lowrance's Annual Reports on Form 10-K and Proxy Statements for
the fiscal years ended July 31, 1996 through 1998 and its Quarterly
Report on Form 10-Q for the quarterly period ended April 30, 1999 and
other publicly available financial and operating information relating to
Lowrance that American Appraisal considered relevant;
(iii) reviewed and analyzed the internal unaudited operating results reported
by Lowrance for the twelve months ended July 31, 1999 and financial
projections for Lowrance for fiscal years 2000-2003 provided to American
Appraisal by Lowrance management;
(iv) considered Lowrance's operating history, financial condition and
prospects prior to, and after, the Merger, including (a) Lowrance's
inability without the Merger to independently raise capital needed to
fund working capital, achieve its operating goals and to remain as a
going concern and (b) the strategic alternatives available to Lowrance
other than the Merger;
(v) reviewed and discussed with Chase Securities, Inc. ("Chase") the
discussions Chase and the Board had with other potential acquirers,
partners or investors, such review and discussion including (a) analysis
of the terms of other merger and recapitalization proposals received by
Lowrance and (b) analysis of written presentations prepared by Chase to
the Board dated December 30, 1998, January 28, 1999, March 10, 1999 and
August 26, 1999;
(vi) analyzed available information, public and private, concerning other
companies that (a) have sufficient similarities to Lowrance for purposes
of comparing their market capitalizations to Lowrance and (b) have
sufficient similarities to Lowrance and have been recently acquired by,
or merged into, other companies;
(vii) reviewed the public stock market price and trading volume history of
Lowrance's common stock on NASDAQ; and
<PAGE>
(viii) conducted other financial analyses and studies as American Appraisal
deemed appropriate for purposed of delivering its opinion as to the
fairness, from a financial point of view, of the Merger Consideration
and other terms and conditions of the Merger.
Conditions of Opinion
We have relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by us for
purposes of this opinion. With respect to the financial forecasts and
projections of Lowrance we examined, we have assumed that they have been
reasonably prepared and reflect the best currently available estimates and
judgments of Lowrance management.
We were not authorized by Lowrance's Board of Directors to solicit, nor have we
solicited, other potential merger candidates for Lowrance. Our opinion is
necessarily based on market, economic and other conditions as they existed on,
and can be evaluated as of, the date of this letter.
It is understood that this letter is for the information of the Board of
Directors of Lowrance only and is not to be quoted or referred to in whole, or
in part, without the prior written approval of American Appraisal other than in
the Proxy Statement to be filed by Lowrance with the Securities and Exchange
Commission in connection with the Merger.
Fairness Conclusion
Based upon, and subject to, the foregoing, it is our opinion that as of the date
hereof, the Merger Consideration and other terms and conditions of the proposed
Merger are fair, from a financial point of view, to the unaffiliated common
stockholders of Lowrance.
Very truly yours,
AMERICAN APPRAISAL ASSOCIATES, INC.
<PAGE>
APPENDIX C
Delaware General Corporation Law
(S) 262. Appraisal rights.
(a) Any stockholder of a corporation of this State who holds shares of stock on
the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to (S)(S) 228 of this
title shall be entitled to an appraisal by the Court of Chancery of the fair
value of the stockholder's shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or series of
stock of a constituent corporation in a merger or consolidation to be effected
pursuant to (S)(S) 251 (other than a merger effected pursuant to (S)(S) 251(g)
of this title), (S)(S) 252, (S)(S) 254, (S)(S) 257, (S)(S) 258, (S)(S) 263 or
(S)(S) 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of (S)(S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
(S)(S)(S)(S) 251, 252, 254, 257, 258, 263 and 264 of this title to accept
for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph;
or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
<PAGE>
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S)(S) 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsection (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of such stockholder's shares shall deliver
to the corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of such stockholder's shares.
Such demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of such stockholder's shares. A proxy or vote against
the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall
notify each stockholder of each constituent corporation who has complied
with this subsection and has not voted in favor of or consented to the
merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to (S)(S) 228 or
(S)(S) 253 of this title, each consitutent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constitutent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constitutent corporation shall send a second notice before
the effective date of the merger or consolidation notifying each of the
holders of any class or series of stock of such constitutent corporation
that are entitled to appraisal rights of the effective date of the merger
or consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
<PAGE>
determining the stockholders entitled to receive either notice, each
constitutent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation, the
surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the stockholders
who have complied with this section and who have become entitled to appraisal
rights. The Court may require the stockholders who have demanded an appraisal
for their shares and who hold stock represented by certificates to submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court shall
appraise the shares, determining their fair value exclusive of any element of
value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
<PAGE>
(i) The Court shall direct the payment of the fair value of the shares, together
with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a stockholder, the Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all the shares entitled to
an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the shares of
such objecting stockholders would have been converted had they assented to the
merger or consolidation shall have the status of authorized and unissued shares
of the surviving or resulting corporation.
(8 Del. C. 1953, (S)(S) 262; 56 Del. Laws, c. 50; 56 Del. Laws, c. 186, (S)(S)
24; 57 Del. Laws, c. 148, (S)(S)(S)(S) 27-29; 59 Del. Laws, c. 106, (S)(S) 12;
60 Del. Laws, c. 371, (S)(S)(S)(S) 3-12; 63 Del. Laws, c. 25, (S)(S) 14; 63 Del.
Laws, c. 152, (S)(S)(S)(S) 1, 2; 64 Del. Laws, c. 112, (S)(S)(S)(S) 46-54; 66
Del. Laws, c. 136, (S)(S)(S)(S) 30-32; 66 Del. Laws, c. 352, (S)(S) 9; 67 Del.
Laws, c. 376, (S)(S)(S)(S) 19, 20; 68 Del. Laws, c. 337, (S)(S)(S)(S) 3, 4; 69
Del. Laws, c. 61, (S)(S) 10; 69 Del. Laws, c. 262, (S)(S)(S)(S) 1-9; 70 Del.
Laws, c. 79, (S)(S) 16; 70 Del. Laws, c. 186, (S)(S) 1; 70 Del. Laws, c. 299,
(S)(S)(S)(S) 2, 3; 70 Del. Laws, c. 349, (S)(S) 22; 71 Del. Laws, c. 120, (S)(S)
15; 71 Del. Laws, c. 339, (S)(S)(S)(S) 49-52.)
<PAGE>
APPENDIX D
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
included in this proxy statement dated September 11, 1999 and to all references
to our Firm included in this proxy statement.
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
August 31, 1999
<PAGE>
PROXY
LOWRANCE ELECTRONICS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE
HELD ON OCTOBER 12, 1999
The undersigned hereby (a) acknowledges receipt of the Notice of the Special
Meeting of Stockholders to be held in the Directors Room, Adam's Mark Hotel, 100
East Second Street, Tulsa, Oklahoma, on October 12, 1999, at 10:00 a.m., local
time, and the Proxy Statement relating thereto and (b) appoints Darrell J.
Lowrance and Robert F. Biolchini, or either of them, as proxies and attorneys
with full power of substitution, hereby revoking any prior proxy, and hereby
authorizes them or either of them to represent the undersigned and to vote as
designated on the reverse side, all the shares of common stock of Lowrance
Electronics, Inc. held of record by the undersigned on August 19, 1999 at the
Special Meeting of Stockholders and at any adjournment or postponement thereof.
If no designation is made, this proxy will be voted for the proposals set forth
on the reverse side.
(Continued on reverse side)
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1 AND 2.
1. Proposal to approve and adopt the Amended and Restated Agreement and Plan
of Merger, effective as of March 11, 1999, by and among Orbital Sciences
Corporation, Orbital Merger Sub, Inc., a wholly owned subsidiary of
Orbital, and Lowrance.
FOR AGAINST ABSTAIN
2. Proposal to approve and ratify the December 9, 1997 issuance of 341,338
shares of restricted Lowrance Common Stock, for a cash purchase price of
$3.84 per share, in a private placement, to the Lowrance directors.
FOR AGAINST ABSTAIN
3. The undersigned directs that this Proxy be voted in such manner as the
proxies named herein, or either of them, may direct, in their discretion,
on any other matter that may properly come before the Special Meeting or
any adjournment or postponement thereof.
Dated:________________, 1999
___________________________
Signature of Stockholder
___________________________
Signature of Stockholder
NOTE: Please sign exactly as the name or
names appear on this proxy. In the case of
joint ownership, each such owner should
sign. Executor, administrators, guardian,
trustees, etc. should add their title as
such and where more than one executor, etc.
is named, a majority must sign. If the
signer is a corporation please sign full
corporate name by duly authorized officer.
